China an opportunity and challenge for methanol giant

As chief executive of methanol supplier Methanex Corp., Bruce Aitken has spent years talking up the uses of his product in everything from plastic and paint to pharmaceuticals.

Lately, though, Mr. Aitken’s pitch is more about his liquid petrochemical’s resurgence as a source of alternative fuel.

As with most commodity sellers today, Methanex’s target market is China, which has become the world’s largest producer and consumer of methanol, both as a chemical used in building and consumer products and, increasingly, as an energy source.

China also recently passed new national standards for blending methanol with gasoline, and is about to commercialize its first methanol-fuelled vehicle. Demand for methanol is expected to soar.

“China has revolutionized the market,” Mr. Aitken said in a recent interview at his company’s head office in downtown Vancouver.

For Methanex, China presents both an opportunity and a challenge.

The company’s market dominance is an advantage. Through its production and distribution facilities in Chile, Trinidad and New Zealand, Methanex is the world’s largest supplier of methanol, accounting for about 15 per cent of the 43 million tonnes distributed annually.

The company also plans to double its own production in the next few years, to about eight million tonnes annually. It can do this cheaply by ramping up production at its current facilities; it’s also set to open a new plant in Egypt, in which it has a 60-per-cent stake.

That said, the challenge for Methanex is growing competition in China, where plants are opening to meet the expected surge in methanol demand.

The concern is that too much production could reduce prices that are only just recovering from the global financial meltdown.

The price of methanol today is about $350 (U.S.) a tonne, compared with about $200 at this time last year. (Methanol prices surpassed $800 a tonne in the first quarter of 2008, largely as a result of unplanned supply shutdowns and the rising price of oil. Historically, methanol prices have gone up with oil prices.)

Still, Mr. Aitken is confident the industry’s long-term outlook “is very positive.”

“China is the story for this industry, as it is for other commodity industries,” said Mr. Aitken, who has worked at Methanex for 30 years, the past six as its president and CEO.

“Our role in China today is as one of the large importers into that market.”

The company’s hope for new methanol markets in China was renewed late last year after a national standard for blending methanol with gasoline was introduced as one way to reduce pollution.

The idea of blending methanol with fuel has been around since the 1970s in Europe and the United States, appearing around the time oil prices skyrocketed, but it lost momentum when oil prices fell.

China is the first country to make it a national priority. And while its new standards aren’t mandatory, analysts expect them to stick, given that methanol-fuel blends make driving cheaper and better for the environment than many of the alternatives. Methanol is also less politically charged than its fuel-additive rival, ethanol, made mostly from corn.

Methanex believes it has another advantage: Its methanol is made with natural gas, which is cleaner than coal-based methanol made in China. That also presents an economic gain for Methanex, given the flat price of natural gas and the rising price of crude oil.

“We take advantage of the arbitrage between natural gas values and crude oil values,” Mr. Aitken said.

The company also has natural gas contracts which are lower than the market price and rise on a sliding scale based on the price of methanol.

Cheap natural gas sources are behind the location of Methanex’s operations, including its first foray into the Middle East with its new Egyptian plant. And, with new sources of natural gas being discovered in shale rock formations in northern British Columbia, Methanex is expected to restart its plant in Medicine Hat, Alta., as early as next year.

Through joint-venture partnerships, Methanex has also started exploring for natural gas in Chile, after Argentina restricted crucial supplies to the country four years ago. That move had crippled capacity at Methanex’s Chilean operations.

The new Egyptian plant and improved natural gas supplies in Chile will help Methanex improve its production needs, analysts say.

“It’s not a sexy business, but at this point in the cycle, it’s a good one if you believe an economic recovery is under way,” said Steve Hansen, an analyst at Raymond James Ltd.

Methanol prices aren’t expected to be volatile for the next few quarters as a result of new plants coming into production, which will create a surge in supply.

“There will probably be some people holding their breath as we go through that,” said BMO Nesbitt Burns analyst Bert Powell. But he noted the industry may have already seen its lows after the recession.

“We believe recently weak methanol prices are stable at the current level and expect higher prices in 2011,” Mr. Powell said in a recent report.

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GLOBAL OPERATIONS

Chile: Plants can produce 3.8 million tonnes of methanol annually, supplying customers in North America, Latin America, Europe and Asia.

Trinidad: Plants can produce 2.1 million tonnes of methanol per year, supplying North America and Europe.

New Zealand: Flexible plants can produce between 530,000 and 1.8 million tonnes, supplying customers in Japan, South Korea and China.

Egypt: Methanex is building a 1.3-million-tonne methanol plant in Damietta, Egypt, to supply European markets.

Methanex also has storage facilities and a distribution network throughout Asia, North America, Latin America and Europe capable of storing 1.4 million tonnes of methanol.