Macro-economic impact on China methanol market

In recent weeks, China methanol market has been hit by the macro-economic impact on the cost, supply and demand for methanol. Trading in the market slips into a stalemate with mixed impacts from the economy, with methanol price keeping range bound last week. Then, whether would the economic impact continue?

1. LPR cuts could bolster commodity futures

On Aug 22, China’s Central Bank cut 1-year LPR by 5 basis points to 3.65% and lowered 5-year or longer tenure LPR by 15 basis points to 4.3%. Earlier on Aug 15, the MLF was reduced by 10 basis points, releasing signals for LPR cuts. And then, LPR was lowered as expected, in a response to weak economic data China recorded in Jul. The cuts is anticipated to lend support to commodity futures. However, there’s still uncertainty whether the cuts could drive up real estate market and social demand.

2. China rations electricity amid worst heatwave in 61 years

Last week, heavy rains wept over Inner Mongolia and Shaanxi Province. Ordos of Inner Mongolia issued notice to shut coal mines and suspend selling coal. As a result, mine-mouth coal price in interior regions rose to 860-950yuan/mt. With firm cost, the losses in methanol production based on coal aggravated in Northwest China and central and southern Shanxi. Some methanol plants in Central China earlier shut due to poor economics, have postponed the restarts once again.

However, as the rain does not last long, coal supply is expected to soon recover and the price could move lower after the peak consumption season.

China is hit by an enduring heatwave recently. With increasing consumption of electricity, some regions such as Sichuan, Chongqing, Jiangsu, Zhejiang and Anhui step up power rationing. The scope of impact on manufacturing enlarges, with power restrictions to plant operations.

However, according to the weather forecast, the temperature in several regions could move down with the cold air arriving this week, and then the power crunch could get alleviated. As a result, with methanol supply expected to recover and coal cost to soften, methanol fundamentals could weaken.

3. Downstream plant operating rate slips

On demand side, methanol’s downstream plant operating rate has been hovering low since the slack demand season. Some MTO plants in East China lowered run rates due to poor economics, and are unlikely to recover in the near term. As of Aug 19, the composite operating rate of methanol’s downstream plants dropped to 59.48%, down 1.77 percentage points from a week earlier.

Both supply and demand growth is anemic in the short term, but in the longer run, methanol market could keep weak under unfavorable impact.