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Insight | Time:Aug 8 2018 11:20AM
Bullish methanol market sees unsustainable momentum
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Methanol futures on Zhengzhou Commodity Exchange surged in the beginning of August, with the most actively traded contract for September delivery rising from 2,956yuan/mt Aug 1 to 3,295yuan/mt as of Aug 6, new high since Dec 2017.

There are some macroeconomic news behind the rise in methanol futures.

1. Depreciation of Chinese yuan
The central parity rate of Chinese currency renminbi, or yuan, strengthened 351 basis points to 6.7942 against the U.S. dollar on Aug 2. On the next day, yuan weakened with USD to offshore yuan (CNH) exchange rate to 6.91.

The depreciation of yuan affects methanol imports, whose price was thus raised. However, yuan price of methanol cargoes in domestic market increased at the same time, and the premium of CFR China cargoes to domestic yuan cargoes in East China has decreased. As of Aug 3, CFR China price could be converted to 3,360yuan/mt, compared with prevailing trading price at 3,270yuan/mt in domestic market. As the price spread narrowed, there would be less cargo for re-exporting.

2. US-China trade friction
On Aug 2, US threatened raising tariffs to 25% on $200 billion of Chinese goods. On Aug 3, China said it will retaliate with tariffs on $60 billion in US goods. The highest 25% levy would be applied to 2,493 items, including liquefied natural gas, coffee beans and other agricultural products, as well as metal processing machinery. Among the items targeted with a 25% tariff is methanol.

Once the 25% tariff is imposed, the price of US-originated methanol imports will be higher. However, according to global trading flow, only a small part of China’s methanol imports are from the US prior to the trade war (3% and 1% of methanol imports were from US in 2016 and 2017 respectively), so the impact will be limited.

In terms of fundamentals, methanol inventory does not increase as expected and profits of downstream derivatives are recovering, which drive methanol price higher.

Storage tank inventory in China’s coastal regions have been low in recent months, as CFR China price has long been higher than domestic yuan price due to overseas plant maintenance coupled with depreciation of yuan, and also methanol cargoes were re-exported from East and South China to Southeast China due to the premium on CFR Southeast Asian methanol cargoes. Merchant methanol stocks available are quite low in coastal regions.

In addition, methanol inventory in domestic plants remains low this year. Though July-August is slack demand season in downstream industry, product inventory in inland plants does not increase, as materials are sold to coastal regions due to the high price spread.

Among methanol’s downstream derivatives, acetic acid is most profitable, with margins at as high as 1500yuan/mt. Other products, like formaldehyde and DME are still at around break-even level. In methanol-to-olefins industry, producers were at a loss in Apr-May, but started to make profits in June and July. The price change in downstream sectors could be easily fed through to feedstock methanol.

Bullish macroeconomic news combined with strong fundamentals have driven methanol price higher, however, the market is now turning reasonable with bullish news fizzling out. The exchange rate is stabilizing. The central parity rate of yuan strengthened 191 basis points on Aug 6, to 6.8513 against US dollar. The hike in tariff on US goods may not bring much impact on methanol market. In addition, domestic plants are restarting, and methanol supply is expected to increase. After the rise in methanol price, downstream derivatives could see lower profits. In a conclusion, methanol market is under pressure.
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