Why Methanol May Be the Next Big Chemical Story

Paula is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Chemical producers don’t get much airtime on CNBC, and investors are generally less excited by aldehydes than they are about the latest smartphone app. But behind such off-putting, intimidating names as amorphous polyolefins and polyethylene terephthalate lie some extraordinary and extraordinarily profitable businesses.

Chemical companies have a long history of responding to industry demands with ever more innovative solutions, and of managing their resources responsibly to provide value to their shareholders. 

<table> <tbody> <tr> <td> </td> <td> <p><strong>3-year return</strong></p> </td> <td> <p><strong>10-year return</strong></p> </td> <td> <p><strong>Dividend Yield</strong></p> </td> </tr> <tr> <td> <p><strong>Eastman Chemical</strong> <span class="ticker" data-id="203388">(NYSE: <a href="http://caps.fool.com/Ticker/EMN.aspx">EMN</a>)</span></p> </td> <td> <p>148%</p> </td> <td> <p>357%</p> </td> <td> <p>1.62%</p> </td> </tr> <tr> <td> <p><strong>PPG Industries</strong> <span class="ticker" data-id="205065">(NYSE: <a href="http://caps.fool.com/Ticker/PPG.aspx">PPG</a>)</span></p> </td> <td> <p>122%</p> </td> <td> <p>185%</p> </td> <td> <p>1.69%</p> </td> </tr> <tr> <td> <p><strong>Celanese Corp.</strong> <span class="ticker" data-id="207021">(NYSE: <a href="http://caps.fool.com/Ticker/CE.aspx">CE</a>)</span></p> </td> <td> <p>65%</p> </td> <td> <p>209%</p> </td> <td> <p>0.61%</p> </td> </tr> <tr> <td> <p><strong>Dow Chemical</strong> <span class="ticker" data-id="203324">(NYSE: <a href="http://caps.fool.com/Ticker/DOW.aspx">DOW</a>)</span></p> </td> <td> <p>14%</p> </td> <td> <p>16%</p> </td> <td> <p>3.94%</p> </td> </tr> <tr> <td> <p><strong>Methanex</strong> <span class="ticker" data-id="207274">(NASDAQ: <a href="http://caps.fool.com/Ticker/MEOH.aspx">MEOH</a>)</span></p> </td> <td> <p>55%</p> </td> <td> <p>638%</p> </td> <td> <p>2.16%</p> </td> </tr> </tbody> </table>

Why Investors Have Methanol on Their Minds

Due to changes in the global supply/demand balance and the increasing popularity of this versatile chemical in Asia, industry insiders expect a positive pricing environment for methanol into 2015 and beyond.  Approximately two-thirds of the world’s methanol production is converted to formaldehyde used in building materials, such as plywood, foams and paints.  The remaining third of the supply has a role in home heating and cooking, as a fuel additive, and as a feedstock for plastic production. 

While the revival of the homebuilding sector across the US should drive demand for methanol over the remainder of the business cycle, the greatest pricing pressure should come from Chinese buyers hoping to cushion the blow of high crude oil costs and to feed the nation’s many newly constructed methanol-to-olefins (MTO) plants. 

Methanol Makes Sense as a Fuel Additive ... in China

China consumes 40% of the global methanol supply and is also the world’s the largest user of methanol as a fuel.  While the Chinese government approves its use as an additive to gasoline and even offers some tax incentives to motorists, methanol (unlike ethanol) is economical as an additive without government support or subsidies.  Private fuel stations sell methanol blends in eight Chinese provinces today, and several auto manufacturers now make Flexible Fuel Vehicles (FFVs) that run on fuel with a high methanol content.  Methanol as an additive is particularly appealing to bus and taxi drivers looking to save on their gasoline costs. 

According to the China Association of Alcohol and Ether Clean Fuels, 7 million tonnes of methanol were used in fuels in 2011 – a figure expected to double by 2015.  Methanol’s cost advantages over ethanol and its ability to reduce CO2 emissions have led to predictions that its use as a transportation fuel will grow to rival its role in the manufacture of building materials and various chemical commodities. 

In the US, however, methanol has largely been abandoned as a transportation fuel, either due to risks of groundwater contamination or the political momentum of the ethanol lobby (depending on whose blog you read).

China Is Finding Other Uses for Methanol

Simply put, methanol-to-olefins (MTO) is a process that converts methanol to the building blocks of plastics.  The commodity produced then becomes plastic for films and packaging.  From 2012 to 2015, 16 methanol-to-olefins and methanol-to-propylene (MTP) plants are scheduled to come on stream in China, requiring an estimated 8 million tonnes of methanol every year.  Considering a global market of only 50 million tonnes annually, these new projects should have a material impact on spot and contract prices for methanol.

Natural Gas Is a Feedstock for Methanol Production

Although methanol can be made from multiple feedstocks, producers clearly prefer natural gas to coal.  In fact, Chinese producers have found it so uneconomic to make methanol from the country’s plentiful coal reserves that China has become a net importer of methanol.  Historically, methanol prices have closely tracked crude oil because high gasoline prices tend to encourage more fuel blending.  Natural gas, on the other hand, appears to have permanently decoupled from oil, and natural gas is the principal feedstock for methanol production in North America.  This means that input costs for domestic methanol companies could remain stable and reasonable as long as gas can be sourced from shale.

Methanol Makes a Comeback in North America

As is typical in the chemical industry, much of the methanol manufactured worldwide is consumed by the industry itself.  Eastman Chemical, for example, produces methanol though its chemicals-from-coal plant in Tennessee to use in its own plastics products, such as packaging and toothbrush handles.  Many producers also contract to supply methanol to other chemical companies, including competitors who sometimes re-sell at higher prices.  In addition, rival companies often "swap and toll" or trade raw materials in informal transactions.  These factors, and the large number of private players in the space, make it difficult for investors to identify who will benefit most from higher methanol prices. 

However, projects slated to come on-stream in the next few years indicate that the methanol industry is experiencing a rebirth in North America.  Canada’s Methanex is taking advantage of low natural gas prices by moving a methanol facility from Chile to Louisiana, and Lyondellbasell (NYSE: LYB) plans to restart an idled Texas plant sometime in 2013.  Celanese, which uses methanol to create acetic acid (the company’s core product), also expects a new 1.3 million tonne plant to come online in 2015.  While the Celanese plant will provide feedstock for internal use, offtake agreements are in place with partners to purchase excess production, giving Celanese a chance to profit from improved methanol prices. 

A Go-To Name for Methanol  

Vancouver-based Methanex is the worlds’ largest supplier of methanol, with 15% of global market share.  Methanex supplies markets in Asia, North America, Europe and Latin America through an extensive network of shipping and storage facilities.  Although it competes directly with privately-held giants Methanol Holdings Trinidad and Southern Chemical Corporation, Methanex remains the only public pure-play on methanol.  Investors who have faith in the China growth story and the sustainability of current natural gas prices should consider this under-the-radar stock.

 


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