China's methanol market has seen a period of high volatility in recent weeks with a surge in the CFR China methanol price to seven-month highs, driven by concerns over Iran supply restrictions, quickly followed by plunging prices on macroeconomic concerns.
Prices rose over 9% from the start of April to early May, to be assessed at $416/mt on May 4, the highest level since October 18 last year, ahead of the looming deadline for the ramp up of sanctions on Iran.
On May 1 it became illegal for European Union-based insurers to cover Iranian petrochemical shipments to non-EU countries, dealing a blow to the logistical arrangements for Iran sellers and foreign buyers of petrochemicals.
Yet a lack of support from methanol's downstream industries in China saw prices quickly lost ground over the next 11 working days falling to $393/mt CFR China on 21 May on general economic weakness.
EXPECTED DROP IN IRAN SUPPLY PUSHES PRICES UP
Iran is typically China's top methanol supplier, and this year has been no different so far with Iran supplying 41-55% of China's monthly methanol requirements over the first four months of 2012.
At worst, therefore, a severe reduction in supply from Iran could place over half of China's supply at risk.
In April, Iran delivered 55% of China's methanol needs, at 273,817 mt, the largest volume seen this year and not unexpected given the May 1 deadline for vessels calling on Iran to lift methanol. May's imports volume is widely expected to be a significant dip from April's.
Due to the uncertainty over vessels calling on Iran and the resulting supply situation, CFR China prices spiraled upwards as May 1 approached, and rose even higher after to peak on May 4, amid a rash of market talk about the possible impact.
Traders took long positions and held onto product, reducing the domestic supply of methanol and propping up domestic prices. In the belief that prices would surge once supply tightened after the May 1 freeze, sellers with cargo on hand were seen offering volumes at $420-430/mt in the week of May 4.
POOR OUTLOOK, INCREASED CHINA PRODUCTION COOLED GAINS
The days of heady prices passed quickly, however, as cautiousness emerged over the next two weeks, amid macroeconomic woes and a ramp up of domestic methanol production.
Falling crude oil prices and eurozone issues shook stock and futures markets in China, dampening the buying appetite of domestic traders.
The most frequently traded September methanol contract on the Zhengzhou Commodity Exchange, or ZCE, fell by the daily limit of 4% early May 14.
It was the first time the ZCE methanol contract hit the daily limit since it started trading on October 28 last year. The September methanol contract fell by Yuan 122/mt to Yuan 2,927/mt ($464.96/mt), and traders in China attributed the fall to a bearish tone in the market on problems in the eurozone and falling crude prices.
Meanwhile, traders noted that another reason for the lower price was an increase in domestic production, especially from methanol producers which use coal as feedstock. Two major methanol traders in China estimated that domestic methanol plants are now operating at 50-60% of their capacity, rising from 30-40% previously.
"It costs coal-to-methanol makers in Inner Mongolia about Yuan 2,800/mt to make methanol. Including freight cost to Jiangsu in East China of about Yuan 200/mt, the deal price can be around Yuan 3,050-3,100/mt," said a Hong Kong-based trader.
Another trader based in China said that typically, once the East China methanol price rises beyond Yuan 3,000/mt, "domestic producers will make an effort to produce more."
OTHER REGIONS FEEL PAIN TOO
While China is Asia's largest and most liquid methanol market, others in the region have been affected too. Higher prices in China drew volumes to the country, and reduced available supply to regions like Southeast Asia, South Korea, and Taiwan.
South Korean companies also reduced their imports from Iran to avoid US sanctions that would exclude any company or country dealing with Iran's central bank from the US financial system.
The resulting tightness in supply saw some traders in South Korea being offered Iranian methanol with the option to mask its origin by changing the bill of lading to reflect a load port that is non-Iranian. However, no such deal was heard done.
Meanwhile, Taiwan's Formosa faced uncertainty over its term supply contract as the supplier cannot "ship any more Iran cargoes from now on," said a company source earlier.
"They are not sure if the contract will be suspended or terminated," said the source, who did not say who the supplier was.
Formosa would have taken about 60,000 mt from this supplier in 2012. The company has received 20,000 mt so far. As a result, the company could be short by 40,000 mt this year if a solution is not found.
Two major acetic acid plants operators, including Formosa, said they could face run cuts should the CFR Taiwan methanol price continue at current high levels.
"The more we produce, the more we will lose," one producer said.
SHIPPING SITUATION CONTINUES TO BE UNSTABLE
All eyes are now on how Iran will deal with the shipping situation. Currently, Chinese shipowners who are willing to load cargoes from Iran have hiked the Iran to China freight rate to more than $100/mt, compared with $70-75/mt in late April, market sources said.
Before the sanctions were imposed, the cost of moving methanol from Iran to China was around $45-55/mt. Market sources said that at least three to as many as eight Chinese-owned vessels of around 13,000-19,000 dwt could be plying the route in May and June.
Iranian producers are currently absorbing the freight cost, which at $100/mt comes to around 25% of the CFR China price, compared to around 14% previously.
An Iran trader told Platts last week on the sidelines of APIC in Kuala Lumpur that at least one oil tanker is two to three months from being fully converted into a chemical tanker in Iran.
An Iranian polymer producer added that that talks are underway for the establishment of an Iran P&I Club backed by the government, to provide protection and indemnity cover for product shipments. However, no further details or timeline was available.
The Iranian trader did not disclose the size of a vessel that could be converted, but earlier this year a trader based in India said he was trying to place a cargo on a 60,000 mt oil tanker that was being converted into a chemical tanker. However, that attempt was unsuccessful as the vessel conversion did not take place.
Meanwhile, one shipbroker said the current freight level is extremely attractive to owners in a weak chemical tanker market, and this would serve as a good motivation for certain owners to attempt to resolve P&I issues to sail to Iran.
