Methanol          

*Millions of gallons per year. Commercial production based on synthesis gas mixtures (carbon monoxide and hydrogen) derived primarily from natural gas.

In recent years a major shift in regional methanol production has occurred. Countries with large natural gas reserves and limited domestic consumption have built world-scale methanol facilities and export most of this product. One result has been a restructuring of the North American methanol market. This rationalization was exacerbated in 2000 and early 2001 with the run-up in natural gas prices at that time.

Last month Methanex announced it will take an $86 million after-tax charge on its fourth quarter earnings on the write-off of its 190 million-gallon methanol plant in Fortier, La. The plant was mothballed in the spring of 1999. In July 2000, Methanex closed its 370 million-gallon plant at Medicine Hat, Alberta.

In July 2000, BP Chemicals and Sterling Chemicals closed their 150 million-gallon plant in Texas City, Tex., and on January 1, 2001, Borden Chemicals and Plastics took down its 330 million-gallon plant in Geismar, La. That same month, Enron closed its 125 million-gallon plant in Pasadena Tex.

Clear Lake Methanol was idled in April 2001 when it became cheaper for its owners to purchase market methanol rather than manufacture it themselves. The plant was restarted in May of this year, when lower natural gas prices made it economical to operate the plant again. Clear Lake Methanol is a Celanese-Valero joint venture.

Beaumont Methanol is 100 percent owned by Terra Industries. The 285 million-gallon plant in Beaumont Tex. was idled in December 2000 and later restarted in September 2001. Terra’s 40 million-gallon plant in Woodward, Okla., was closed in January 2001.

In February, 2001 Coastal Corporation merged with El Paso Energy. The Coastal Chem division still operates under the Coastal name.

Profile last published 7/31/00; this revision 12/16/02.

DEMAND
2000: 2,920 million gallons; 2001: 2,838 million gallons; 2005: 2,700 million gallons with MBTE phaseout, or 3,110 million gallons without MBTE phaseout, projected. Demand equals production plus imports (2000: 1,421 million gallons; 2001: 1,816 million gallons) less exports (2000: 32 million gallons; 2001: 52 million gallons).

GROWTH
Historical (1996 - 2001): 2.5 percent per year; future: -1.2 (negative) percent per year with MBTE phaseout, or 2.3 percent per year without MBTE phaseout through 2005.

PRICE
Historical (1996 - 2001): High, $0.81 contract/$0.77 spot per gallon, syn. barges, f.o.b. producing point, Gulf Coast; low, $0.28 contract/$0.24 spot per gallon, same basis. Current: $0.51 contract/$0.62 spot per gallon, same basis.

USES
MTBE, 37 percent; formaldehyde, 23 percent; acetic acid, 12 percent; chloromethanes, 6 percent; methyl methacrylate, 3 percent; methylamines, 2 percent; dimethyl terephthalate, 2 percent; miscellaneous, including solvents, glycol methyl ethers, antifreeze and fuels, 15 percent.

STRENGTH
Over the past four years facilities in the US and Canada have methodically opted to cease operation, lowering their aggregate capacity from 3.3 billion gallons in 1997 to about 1.8 billion gallons in 2001 – a 45 percent decrease in production capacity. The result is that the market for methanol is currently well balanced, and producers expect it to remain so through the first quarter of 2003. Although the possibility of an increase in natural gas costs remains a threat, natural gas prices will have to increase significantly before they impact methanol pricing.

The best performing methanol derivative has been methyl tertiary butyl ether (MTBE), which is the largest single end use for methanol, accounting for 37 percent of domestic demand. MTBE is performing better than anticipated a couple of years ago, as California was expected to have already begun switching from MTBE to ethanol for gasoline oxygenation as per a mandate from Governor Gray Davis, but the state is still consuming the same volumes.

In the long term, methanol may become a source of hydrogen for fuel cells used in transportation, stationary power generation and portable power applications. To help foster methanol’s acceptance in the new technology, Methanex has formed alliances with many of the leaders of fuel cell technology. These include, BP, DaimlerChrysler, Ballard, BASF, Statoil, Petro Canada, Mitsubishi, Mitsui, Xcellsis, IdaTech and the California Fuel Cell Partnership.

WEAKNESS
In addition to MTBE, other leading end uses for methanol include the production of formaldehyde and acetic acid. The two largest formaldehyde markets, accounting for about 40 percent of demand, are urea-formaldehyde resins and phenol-formaldehyde resins. They are mostly used as adhesives and bonding agents in particleboard, plywood and fibrous wood panels. These outlets have been hurt by the slowed economy, and contributed to the decline in methanol’s growth last year. From 1996 through 2000, methanol's main derivatives, led by MTBE, grew at GDP rates or faster. Last year was the first year since 1982 in which US methanol demand failed to grow.

Natural gas prices are currently just below $4 per million BTU. If prices dramatically increase again this winter, US methanol units could be forced to curtail or stop production. At the same time, there is considerable uncertainty in the methanol market while producers and consumers sort out their supply contracts for 2003. Some producers are considering a larger spot selling role for 2003.

The big cloud on methanol's horizon is the likely phaseout of MTBE as an oxygenate in reformulated gasoline. There is doubt in the market about when and how the California MTBE ban will be fully implemented.

OUTLOOK
The methanol industry is benefiting from the lack of new capacity in the market place along with the rationalization, which took place during the past four years. Methanex and BP are currently constructing their 570 million-gallon methanol facility in Trinidad and assessing a 280 million-gallon expansion of the facility in Chile and the construction of a 670 million-gallon methanol plant in Western Australia. The companies expect to make a decision on both projects next year. The methanol industry is expected to remain relatively tight until an influx of new capacity in 2004 and 2005 comes on-line.

The prospects for the construction industry look good for 2003 and translate into growth expectations for the methanol derivatives formaldehyde and acetic acid. Domestic consumption of formaldehyde is expected to grow at an average annual rate of 3 percent through 2005, requiring 773 million gallons of methanol. Acetic acid, the next leading end use for methanol, is expected to grow at an average annual rate of 2 percent through 2005, requiring roughly 400 million gallons of methanol.

The delay of the MTBE phaseout in California has slowed similar planned moves in other states. This has given considerable uncertainty in projecting future demand for methanol. Demand growth with an MBTE phaseout is forecast to be -1.2 (negative) percent per year through 2005. Without an MBTE phaseout, however, anticipated growth would be 2.3 percent per year.