China facing methanol dilemma as imports surge, storage tanks pivot to oil
The unprecedented demand for clean oil products storage spurred by global coronavirus lockdowns has diverted storage from methanol at a time when Middle East and Asian methanol producers are running at high rates, resulting in methanol arrivals moving close to exceeding available tank space for the world’s biggest methanol importer, China.
High operating rates at methanol plants across the Middle East, Europe and Asia continue to build on supply length from last year, which is being exacerbated in the first half of 2020 by even weaker demand due to the coronavirus pandemic, trade sources said.
Trade policy changes in 2019, including US sanctions on Iran and a 25% tariff on methanol exports from the US to China, have spurred new trade flows, resulting in China and Europe having to absorb much of the new supply emerging from Russia, the US, the Netherlands and Iran despite grappling with weak demand since 2018.
Unless demand picks up as COVID-19 lockdown measures ease, methanol imports will soon overflow tank space in east China, especially at Taicang, where storage capacity for methanol has been diverted to clean oil products, meaning Chinese methanol prices are likely to remain under pressure.
However, even though CFR China prices are currently at an 11-year low, the Chinese market is still seen as the best option for seaborne cargoes at present, simply because of its size and the ability of its end-users to take large parcels of 20,000-40,000 mt at one go.
This is despite tight tank availability and ample supply prompting traders without tank space to sell non-sanctioned cargoes at knock-off prices. Non-sanctioned Middle Eastern cargoes were sold recently at $165-$175/mt CFR China, compared with $250-$255/mt CFR China in January.
This pressured methanol prices to a record low $156/mt CFR China on May 26; well below the previous record low of $161.50/mt CFR China set on December 18, 2008, S&P Global Platts data showed.
Despite this, producers continue to send cargoes to China, and traders continue to receive them even though there is no space to store them, because the narrow margins in China still promise a greater return than any other market, trade sources said.
Oil traders globally rushed to lease vessels and oil terminals to store clean petroleum products when the May NYMEX crude futures contract settled at minus $37.63/b and ICE Brent fell 8.9% to $25.57/b on April 20 amid fears the escalating oil supply glut could overrun global storage capacity as soon as May.
This came after tank operators at Taicang had already re-allocated 80,000 cu m of methanol storage space to monoethylene glycol and gasoline cargoes in early April as they offered better returns, market sources said.
With storage options reduced, methanol inventory remains high in east China because cargoes there are typically used for position-taking in futures markets and only occasionally delivered, the sources said.
However, recent fee hikes by tank storage operators could spur traders holding on to stocks to sell off cargoes rather than bear higher storage costs, trade sources said.
Nantong Qianhong Petrochemical Port Reserve last week announced it will charge traders Yuan 1.50/mt a day if they do not clear their volumes within five days after squaring off hedges, then Yuan 3/mt a day from the sixth to the 10th day, before rising in stages to Yuan 15/mt a day – plus an additional Yuan 5/mt for transferring methanol in tanks to another party.
Zhangjiagang Changjiang International announced it will increase its storage fee to Yuan 2/mt a day from June 1.
The rise in crude oil prices and improved demand for oil products and methanol as lockdown restrictions ease should also help to move oil and petrochemical products out of tanks and ease tight storage supply, market sources said.
China’s factories ramped up operations in early spring as domestic coronavirus restrictions were eased, just as its export markets in Europe, Asia and the US were imposing lockdowns as the pandemic spread.
“It is as if the dam upstream has been released and the river has resumed its flow, but the mouth of the sea has not yet opened,” a trader said.
The countries downstream industries such as methylene diphenyl diisocyanate, formaldehyde, plywood and superplasticizer reported slow sales for April and May as export orders were canceled, and the rate of methanol discharged from tanks was slow as a result, trade sources said.
Despite this, China’s methanol imports surged 69.7% year on year to 1.07 million mt of methanol in April, and were up 26.6% from March, Chinese customs data showed.
Imports over January-April totaled 3.64 million mt, the data showed, keeping the country on track to surpass its annual import total of 10.89 million mt in 2019 and 7.43 million mt in 2018.
This is indicates that China will still retain its position as the world’s biggest methanol market, but rising imports can only mean further selling pressure for traders and producers.