Chemical Conversations: Hormuz Supply Shifts, 2026 Demand Decline & Asia and Atlantic Pricing

[MUSIC] Welcome to the Methanol Market, puts and takes podcasts, part of August Chemical Conversations Podcast series. I'm Cassidy Stagger, Senior Analyst, joined by Dave McCasco, Argus VP of Methanol and Derivatives. So a lot to discuss today, let's get started. Let's start with the memorandum of understanding that was signed between the US and Iran and mid-June's had to expire the 17th of this month, but it doesn't appear there's clear peaceful resolution at this point. So Dave, given the uncertainty, what can you say about the Methanol Market since our July podcasts, are you leaning pessimistic, optimistic, neutral over the next several months? Yes, probably from pessimistic in a lot of ways, but let's dive in, thanks for the tabling it up. And I do like how you frame the question with the word uncertainty. I sadly think the safest way to describe the current environment is indeed one of uncertainty. Iran, straight of her moves, how the global economy responds and continues to respond. And of course, the direction the Methanol sectors all is poised to take, I'll be the first one to say these are all guesses at this point in time. I think ongoing volatility is another nice way to describe the environment war in clearly the dynamics underpinning Methanol's direction seemingly changed daily, but if I pin down, here's the path the industry appears to be on at this time. And let me proceed in reference to supply, then demand, and close with discussing price direction. And it's probably convenient in that order because it's one of of easiest to hardest. Everyone knows Methanol supplies via the straight of four moves have been negatively impacted since the March timeframe. In to mid August, it's likely some four million plus tons of Methanol has not have not been produced and are not shipped since that March timeframe. This number is only going to increase as only four, maybe now five of 12 Iranian Methanol units are understood to currently be operating. Saudi, Bahrain, and Qatar Methanol units are all understood to be running at reduced rates. So further loss supply is unquestionably a given. Now there was a short surge of Methanol exiting the straight in first half July with that product now having reached various destinations and indeed providing temporary relief in prices that has carried us into the mid August timeframe. But as of this week, prices are again firming and firming rapidly. But staying with supply side issues, what concerns me now is the lack of Methanol shipping that should be occurring now in September and maybe even October that wouldn't be arriving then until September October or even November. But my concern is a little bit less in terms of today, tomorrow's supply, but much more about the lack of supply in the coming months and what that impact will result in. Now I think there's a huge difference in current shipping data comparing some of the published data to what I will call the fleet of transponders not turned on. And I think the latter, there's much more activity than people think they know about. So this is going to play havoc with people's views as ghost Methanol arrives at destinations, you know, again, over across the next several months. So there's nearer term, meaning the next couple of months, uncertainties regarding just how much Methanol is exiting is straight. But towards year end and Iran's winter, we can expect or I certainly expect the supply situation to worsen more. Based on history, fully expect Iran's winter will once again force the shutdown of essentially all Methanol production in the December, January, February timeframe as limited natural gas supplies are prioritized to domestic heating needs. This has been the scenario playing out for years and there's no reason to expect differently for this upcoming winter. In a worst case scenario, this means Iran Methanol production is reduced for several more months. And likely drops to zero, near zero for several more, and only then maybe returns to the supply side of the equation as spring approaches are arrives. We can all hope the current conflict is resolved before the spring of 2027, but I don't think today anybody would, it would not be a wise bet to go in either direction. I don't want to necessarily sound like the sky is falling, but there's nothing really good in this view until second quarter 2027 and beyond. And again, this assumes some kind of a peace settlement has indeed been reached. Middle East producers are at that point in time, spring of next year then, we would think Middle East Methanol producers are again running normally and the straight is free and clear to all shipping. Today, of course, these remain formidable obstacles. Thus, the industry is likely to be under supplied for maybe six more months. And this will, this is and will negatively impact derivative of demand and certainly put some kind of floor on Methanol prices around the world. Thanks. So you mentioned demand here at the end. I know global economics, GDP are looking somber kind of across the board. How do you see this impacting Methanol demand going into next year? The readers don't, the listeners don't know it, but I'm smiling because that's just such a great lead into the next topic being the demand side. And if I'm trying to be concise, let me first, let me first review where we've been, where we are with some numbers, 2025 Methanol demand was estimated at about 89 million tons, not including China's large captive CTO sector. So last December, when we were finalizing our preliminary 2026 views, I can say those words. We believe 2026 Methanol demand would be growing to almost 91 million tons at a two plus million ton increase over 2025. But still, that was a small jump compared to pre 2020 industry performance. Now, currently working on updates for our fall update, indeed, it looks like 2026 demand will actually fall by about 3 million tons are closer to an 86 million ton total. Again, this is down 3 million versus 200 to 2025. But down 5 million tons from our original 2026 demand estimates. So clearly, clearly there has been demand destruction, although today, that helps some, as much as a million tons of inventory drawdown in China's coastal inventories have off sell, have helped offset some of this loss supply. Still, there's almost no major region not having experienced some level of demand loss. China likely leads demand losses, not a surprise, they're over 50% of our industry from a demand perspective, and this obviously isn't a positive far our sector. With the large MTO sector now on pace, maybe to account for two, maybe three million tons have reduced Methanol consumption. Oliphant prices remain poor due to their own set of drivers, and the combination of high Methanol prices are the actual unavailability of Methanol feedstocks, have forced MTO operating rates to what we estimate 30, maybe 40% levels, which we probably really haven't seen that kind of poor performance since the 2012 timeframe when MTO was literally being born as a technology and as a Methanol derivative sector. MTO is and will be the sector seeing the largest drop, the numbers are clear. But as well, China, formaldehyde and acetic acid sectors are down as well. As are these same sectors in the rest of Asia markets, North America and Europe. The pain is being shared everywhere, but not equally. So again, when I'm thinking and seeing numbers of 5 million tons down from our estimates of about a year ago, 4 million of that is coming from China based on our best guesses and estimates at this time. So that's not surprising because Iran Methanol flows predominantly move to China. Iran Methanol flows are the largest impacted due to the Middle East conflict. They're not going to China, so per se China has to take the biggest hit. So the Methanol industry is clearly choosing or being forced to reduce derivative consumption, and this will continue until supplies are "back to normal." And as I said, this may be into the spring of 2027 at best. Further impacting the general demand side, I think there continues to be talks or fears about recession before years end or even in 2027. Should this materialize, I think it's safe to say, consumer spending is further negatively impacted, large sectors such as housing and automotive or further hurt, and Methanol demand will continue. to be negatively impacted. Any methanol demand upside hope far are thought wished far in 2027 could likely be squashed as well, which will be something we will follow in the coming months as we follow all these industry drivers. Awesome. I do have a question on formaldehyde and acetic acid. Those derivatives typically follow GDP growth. So even if it were one or two percent on the GDP for those sectors, do you think they will still track at that level but smaller or do you think we'll actually see them go negative growth if I can say negative growth but go negatively have a decline as opposed to generally usually increasing. You're absolutely right. They very much tend to follow tend as the key word there. I think GDP and consumer spending. But obviously in 2026, for example, if I pick on the acetic acid sector, there were a number of large outages unplanned turnarounds, extended turnarounds, extended down time in the US to pick on them where so acetic acid did, there will be less acetic acid produced in 26 than there was in 25 to the degree that rebounds then goes back to your point of GDP relations. And when we're looking and I think the last numbers I saw two two ish percent GDP for the US, but 0.3 or 0.4 for Europe. I mean those are those are just economically devastating at so many levels. And again, if I think about the US, if we have high, if it high interest rates continue, you know, getting into housing is just again one of those formidable obstacles, ginsers or whatever you people are are facing. Yeah, well, that's a good segue into our last topic, prices. Any good news or not so great news on the pricing front? Well, I guess I might my get responses. It's probably good news for sellers. It's definitely not going to be good news for buyers, but even sellers may not again yet again be happy with my thoughts. So perhaps the best news I can say is I think this is going to be the shortest discussion because of the three, this is the least quantifiable. And I think you only have to look at the volatility and our predictability of of methanol prices since the March timeframe to again validate. And I'm going to use that uncertainty word. It continues. So it's mid August. And for the most part, spot methanol prices have been slipping since June, June timeframe in most major markets. It's not to say there haven't been ups and downs along the way, but the trend has been weaker price levels. Now, just this week, this is fast changed as the temporary peace pack calling it that is gone with both sides claiming the upper hand and unwilling to budge or unwilling seemingly unwilling to negotiate. Still, while supply demand fundamentals have not changed overnight, sentiments clearly have. And for now, for now more in Asia and the US, where we've seen rising prices, but Europe will ultimately be forced to follow this trend. So our current base thinking incorporates the firmer pricing that we're seeing occur literally this week and extending that forward with no clear direction today on near-term supply demand, particularly disconnecting or better connecting. I think the safest to say the industry is needs to be poised for now a long run of what I'll just say is sideways, but still elevated prices through years end. The more uncertainty and direction continues, the likelihood posted price is moving down becomes very, very low. Moving up is more likely than moving down, but again, Iran and US word battles seemingly changed daily. I do want to go back to what I had referenced earlier that being the real exposure window from a supply perspective in the in the Q127 time frame. Again, believing Iran, Methanol supplies will be absent for an extended period. From whatever level, Methanol prices are, and again, I'm saying they'll remain at late August, September kind of levels. Asia prices will then likely move even higher, and this is again, will place pressure on Atlantic basin prices as well. And we have to assume they would directionally move up as well, maybe not step by step, but move directionally upwards. If the world finds peace and global commodity supplies are restored, it would seem logical that supplies of oil, gasoline, oliphans, other global commodities, including Methanol, these supplies return, and with this return, a downward price direction also returns through the back half of 2027. All right, that's helpful, I think, nonetheless, it's good to have a, you know, Methanol market fasten their seat belts, maybe for a little bit more turbulence, the next half of the year or a year potentially. All right, wrapping up day, where can we see you next month? Next month, Cassidy and I and a cast of methyl industry participants will be at Argus's, I guess, officially Methanol, but only a conference. Thank you for filling me in there and completing that since. And the date's Cassidy? Yes, kicking off from Monday, September 21st, and you'll see Dave on stage Tuesday the 22nd in the morning with your overarching Methanol market discussion, and then we'll have other speakers on derivatives and China, etc. And then yeah, we'll wrap up Wednesday by lunch, so, and that's in Houston, so hopefully we'll see some listeners there, and we can talk with some of our fellow Methanol folks in the market, and yeah, reach out if you want to meet with us or catch up, or pick Dave's brain even more, or disagree with what he said here, I'm sure he will be up for the discussion as always, so that's all for this episode of our Methanol Puts and Takes Podcast. This series is a presentation of Argus Media, a leader in market reporting and commodity pricing information. For more details on all things Methanol, visit ArgusMedia.com/Methanol. [BLANK_AUDIO]