CHAPTER IX PRICE FORECASTS

Transcription

1 CHAPTER IX PRICE FORECASTS

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3 METHANOL PRICE FORECAST METHANOL PRICE HISTORY Methanol pricing has been highly variable and cyclical, as the chart showing historical methanol pricing demonstrates below. Dollars Per Ton Gulf War Historical Quarterly Methanol Prices, 1990 to Present Restructuring and MTBE "mania" Slowed US economic activity and oversupply Note: Pre '94 US Prices were the average of producer postings Mmtons of new capacity added (20% of world demand) Further Industry consolidation Asian Financial Crisis Sept 11 Attacks New World Scale Facility Capacity Eq. Guinea, Trinidad Plants Force Majeure; Global MeOH Price Spike Venezulean Srikes, NZ Gas Redetermination 2nd Gulf War, Energy Price Climb Begins Chile Outage Global Financial Crisis High US Natural Gas, Energy, Strong China Demand Growth, Crude Breaks $100/bbl Post Crisis Recovery China Gasoline, MTO Demand; Global "Hindered Capacity" Return of SEA Production Restricted SEA Production Crude Oil Prices Fall Contract-Net Transaction FOB USGC Contract-Market FOB W. Europe T2 Spot CFR Shanghai The reasons for volatility are severalfold, although generally methanol prices have been driven by supply and demand dislocations, as well as by cost to manufacture. Prices are bounded on the low side by the price that marginal suppliers (now firmly in China) have been willing to offer in times of market length, and on the high side by the amount that downstream consumers are willing to pay. Methanol supply increases during periods of profitability, typically at rates exceeding demand growth, which leads to a correction in pricing. Low pricing and margins dissuade supply and new projects, until demand forces bid up the price, restarting the cycle. After record contract prices were established globally in early 2008, a housing recession in the US, followed by the financial crisis and eventual collapse of global economies drove methanol prices down a record amount by the end of the year. Meanwhile, despite the continued outage of Chilean methanol capacity, new material from China, the Middle East, and Southeast Asia created oversupply. In early 2009, methanol prices remained depressed, although they recovered 393

4 meaningfully towards the end of the year due to the combination of demand from China (especially for DME and gasoline blending applications) as well as the end to free fall in developed markets, and, to a lesser extent, growth in other emerging economies, with values well above the $300 per metric ton level by year end. In 2010, methanol prices rebounded strongly after a midyear lull supported by strong demand for both traditional derivatives as well as alternative energy applications. China is in the center of this phenomenon, with a hefty increase in both imported amounts as well as domestic production of methanol. In 2011, prices moderated slightly in the early part of the year, due to market tepidity coupled with expectancy of increasing supply from a number of plants around the world (including China), stabilizing as the year progressed. Through 2012, prices remained firm but did not spike despite the impact of sanctions on Iran, the relatively poor operations at several deep sea export facilities globally, (including Iran, Malaysia, Egypt, Libya, Chile, and Brunei) and energy based demand from China which helped create tight markets later in the year. In 2013 to date, the bifurcation of pricing between West and East continued, with the heavy weight of lower spot pricing in Asia (in turn caused by resistance from marginal energy buyers as well as one-way flow of Iranian molecules to the region) countering the impact of attempted price increases in the West, which suffered from poor Trinidadian supply. By the end of 2013, as China s economic engine restarted, SEA producers were unable to operate facilities, and MTO demand beckoned, methanol prices in Asia shot upwards. In 2014, methanol prices tested affordability into MTO, and supply returned from Southeast Asia and Trinidad, sending prices down in the middle of the year. At the end of the year, prices again sank rapidly as crude oil prices plummeted globally, with methanol prices nearing marginal costs to manufacture in China. In the first portion of 2015, prices stabilized somewhat as crude prices stopped their slide, allowing a growing number of MTO consumers in China to step up their purchases, yet only to a level that ensured competitiveness with naphtha based olefins production. As 2015 closed, a further slide in crude, combined with Atlantic Basin oversupply exacerbated the earlier-year effect, sending methanol prices globally lower still. In the early portions of 2016, methanol prices globally have sunk close to cost floors, incducing futher reduction in Atlantic Basin contract pricing, before markets stabilized by 2Q Methanol Prices and Energy With increased used of methanol in energy applications, more focus has been placed on the influence that energy prices have over methanol valuations. A combination of high energy prices and supply restrictions (particularly the result of loss of production from Chile) provided a catapult for methanol pricing to spring from through the middle of 2008, with demand for methanol into energy applications suspending gravity even further (especially the growth in DME and gasoline blending in China). As implied by the chart on the next page, Methanol vs. No. 2 Fuel Oil, Naphtha, methanol prices are supported by refined crude oil product prices on an energy cost basis. Yet methanol prices on this basis remain much more volatile than refined 394

5 prices, flying up well in excess of refined product values whenever any significant amount of demand occurs from the large energy market occurs. This was certainly the case for portions of 2013, 2014, and 2015 in the US, when methanol prices on equal energy value basis, which had generally remained at or below the refined product pricing for several years, crested above refined product values as markets tightened in the West, as shown in the chart below. As 2016 approached, methanol prices on an energy equivalent basis were again moving towards refined product prices. 45 Methanol vs. No. 2 Fuel Oil, Naphtha $/MMBtu US$/MMBtu Jun-86 Jan-87 Aug-87 Mar-88 Oct-88 May-89 Dec-89 Jul-90 Feb-91 Sep-91 Apr-92 Nov-92 Jun-93 Jan-94 Aug-94 Mar-95 Oct-95 May-96 Dec-96 Jul-97 Feb-98 Sep-98 Apr-99 Nov-99 Jun-00 Jan-01 Aug-01 Mar-02 Oct-02 May-03 Dec-03 Jul-04 Feb-05 Sep-05 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 MeOH - USG Contract No. 2 Fuel Oil Naphtha C&F Japan Therefore, depending on timeframe, it can be partially misleading to say that methanol and energy prices are correlated. And, given the propensity for methanol prices to fly up well over the energy values for refined products, there are reasonable concerns that methanol is not ready for energy primetime (i.e. to succeed as fuel meoh Prices need to be more sustainably competitive with traditional energy, lower long term price expectations), especially in the US. Recently, particularly in China, the increasing gap between supply and demand has helped to buffer any potential volatility on the demand side of this equation, and has helped provide confidence in ample supply of methanol as a gasoline blend and DME raw material. However, the gap is effectively smaller due to operational issues around the world, and rapidly increasing methanol demand has begun to test methanol price ceilings as of this writing. The subsequent portions of this chapter will explain and present the MMSA view of future methanol prices. 395

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7 FORECAST METHODOLOGY Methanol is a globally traded commodity, and as such its value depends on a number of fundamental factors. However, these factors each change in importance over time. The following basic commodity drivers are considered in developing the forecast: 1) Economics of marginal producer to deliver to key markets. Over the course of the forecast period, the economics of Chinese producers using coal feedstock, as well as Persian Gulf producers using low priced natural gas feedstock, will have the most influence on methanol values globally. This is despite the increase in production in the United States expected in the forecast period, which is relatively small in comparison to China production forecasts. Forecasts of production economics values require that assumptions be made for the variables listed below. Feedstock (forecasts of natural gas prices in the Persian Gulf and coal prices in China are necessary) Variable costs (including catalysts) Direct fixed costs labor, maintenance, insurance, interest on working capital Inflation For Persian Gulf production, the following variables are also significant: Financing costs and returns Freight and handling charges 2) Market supply and demand dynamics The overall approach used, which delineates short-term and long-term price behavior is referred to as a cycle-trend forecast. For forecasting 5 years or less into the future, supply and demand dynamics (including expected additions and shut-ins to capacity; methanol facility operating rates) are taken into consideration. Beyond 5 years, a different approach is required because of the lack of clarity in forecasting new projects and rationalizations of capacity. The approach used for this analysis is to determine prices which allow for investment in methanol production capacity from regions that will supply the incremental methanol volumes to market. MMSA utilizes a cash flow model for a hypothetical coal based operation in China as a meter of the forecast s ability to meet reinvestment criteria. 397

8 3) Value in application ( Methanol Affordability ) Methanol prices can at times be influenced by the economics of derivatives (including MTBE and acetic acid). Notably, many applications for methanol use it in such small quantities that very large changes in methanol price have little impact on the final cost of the item using methanol. Thus, this factor is usually only dominant in influencing pricing in times when oversupply in the major consuming sectors (formaldehyde, acetic acid, and even DME) put a large burden on methanol suppliers attempts to increase pricing. In the longer term, methanol to olefins (MTO) consumers are seen as the substantial buyers of methanol, and the forecast ensures viability in this application as well. 4) External factors Trends within the industry at times will influence methanol prices. Examples include: Increasing scale of supply by major producers (and sporadic supply from marginal players, e.g. Iran, Southeast Asia) Increased contract versus spot purchasing using manufacturer-set prices. Fewer trade options versus other chemicals (the result of producer control of the supply chain all the way to the end user) yields limitations on the ability of smaller sources to significantly influence the market balance. At a minimum, all of these factors/drivers must be addressed in developing a coherent global price forecast for methanol. A flowchart depicting the MMSA methodology for price forecasting which incorporates the drivers presented above is shown on the next page. 398

9 METHODOLOGY FLOWCHART The flowchart below graphically displays the methodology and inputs that are used for MMSA s calculations of forecasted methanol prices. China Forecasted Methanol Price Delivered cost parity of imports into China Differential between spot and parity prices Cost of duty, throughput, and tax China methanol production cost from coal Cost of anthracite coal Variable production costs (electricity, utilities, catalyst) Fixed production costs (labor, maintenance) Energy Index Inflation Inflation Freight cost from PG to Rotterdam Rotterdam Forecasted Methanol Price PG netback margin to Rotterdam Average natural gas acquisition price Inflation PG netback margin to China PG methanol production cost from natural gas Variable production costs (electricity, utilities, catalyst) Inflation US Gulf Coast Forecasted Methanol Price PG netback margin to US Gulf Coast Fixed production costs (labor, maintenance) Inflation Freight cost from PG to US Gulf Coast 399

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11 ASSUMPTIONS (ENERGY, FEEDSTOCK, PRODUCTION COST, FREIGHT, INFLATION, CURRENCY) Energy The forecast was performed using methodology described above around assumptions of the future of energy, the relationship of crude oil and crude products to natural gas and coal prices, the corresponding impact of these factors on global economic development and, ultimately, methanol price drivers. Global energy markets recovered swiftly from their lows of 2009, only to fall again by the end of Nevertheless, these markets will eventually be stimulated by some of the factors driving price increases ahead of the 2014 crisis, including increased Asian energy demand, geopolitical instability, fears of peak oil, and natural disasters. In addition, it is clear that non-opec efforts to control supply of oil, especially in North America, has brought a correction to markets. Continued strong economic performance in China and other developing countries, combined with healthy United States and Europe economic condition, allowed crude oil prices to recover to the USD 60 per barrel range in early 2015, only to see a radical drop off midyear slowed Chinese economic growth roiled financial and commodity markets around the world, which in 2016 finds crude oil prices having reached the high USD 20 per bbl mark before a recovery to the mid US 40 per bbl range. Because market values of crude have rebounded well above the levels of marginal supply costs (these costs are estimated to range up to USD 75 per barrel for crude oil, depending on convention), there could be further suppression of marginal supply around the world, especially in North America. Longer term in the study period, it is assumed that peak oil considerations will not produce catastrophic consequences, but will help restore crude oil prices to levels that induce investment in alternative energy sources. The WTI crude price outlook used as a basis for the price forecast is shown in the price tables accompanying this report. A recent phenomenon has highlighted a widening discount of WTI crude, the U.S. benchmark, to North Sea Brent crude. Through early 2015, Brent crude values surged to a multiple-year high versus WTI due a combination of concerns that include potential disruption of supply from the Middle East due to geopolitical and social tension in that region. WTI values, meanwhile, have been under pressure due to relatively high inventories in Cushing, Oklahoma the US storage hub on the back of low gasoline demand, reduced crude runs, and ample supply from shale based hydrocarbon production. This difference has reset as energy prices corrected. Nevertheless, over the medium to longer term period, it is still believed that values of non-wti crudes can be expected to generally return to their historical differences with WTI, with minor adjustments owing to the increasing spread in value between lighter and heavier crude (this spread is increasing with the world desiring more of the light end of the crude barrel). 401

12 This case provides a most likely outcome in the opinion of MMSA. It assumes that, over the period in question, energy prices will return to levels which help generate investment in alternate energy supply to match growing demand. Prices for energy must rise to slowly and continually increase conservation and substitution of fossil fuel based energy sources accordingly. Over the forecast, fossil fuel energy will become costlier, with average energy prices above current levels (WTI average at constant 2015 USD 82.3 per bbl). This profile will allow growth in global economies to persist at the relatively healthy 3 to 4 percent yearly rates of the past decade, driving consistent growth in methanol and methanol derivative demand, and will also continue methanol demand growth as an alternative fuel. Coal values in China will adjust upwards relative to crude oil, on the assumption that they are currently undervalued on a cost per energy basis. High cost methanol capacity globally will require rationalization as investments in Middle East and Chinese methanol production continue throughout the forecast, at a pace supportive of methanol demand. Methanol prices, long term, will increase from current levels to levels that will enable reinvestment in efficient operations, either from the Middle East, or from integrated (coal or natural gas fed) large scale facilities. Feedstock Coal is the main feedstock for methanol production in China. Although the actual price paid by coal based methanol producers in China can vary substantially depending upon location, coal grade used, and quantity consumed, an average China premium mix coal price is assumed for this forecast. [Further discussion of the coal market in China is included in Chapter VI, Methanol Supply Feedstock Dynamics.] While China s economic growth has been a factor in driving the price of coal upwards in the past, it is assumed that forecasted coal prices will be primarily driven by the energy value of coal relative to international crude oil. Long term, the price of Chinese coal is seen growing at a slightly swifter pace than global crude oil for two main reasons: 1) cleaner technologies will increase the relative value of coal to crude as these will serve to increase efficiency and decrease deselection, and 2) consolidation of the coal industry into fewer and larger state-backed corporations leverage their supply positions against power producers (wherein the bulk of the contract negotiations for coal in China are settled) will limit supply, increasing value. Natural gas is the primary feedstock for methanol production in North America and the Middle East. Due to the abounding reserves in the Middle East, and the consistent use of long-term contracts there, it is assumed that natural gas prices will remain at low levels relative to international/us prices. It is further assumed that Middle East natural gas prices to methanol producers will remain largely uncoupled from international crude oil prices and will be set by the ruling entities in the Middle Eastern states. In the forecast, an average acquisition price of Middle East natural gas is calculated based on current average acquisition prices and this value is adjusted upward over time according to inflation. 402

13 Production Cost The production cost model developed for this forecast is based on the sum of three costs: feedstock acquisition, fixed costs (labor, maintenance, etc.), and non-feed variable costs (electricity, utilities, catalyst). Feedstock costs are calculated using the forecasted feedstock price and required amount of each feedstock to make methanol on a per ton basis. It is assumed that the fixed and variable costs only increase due to inflation over the forecast period and that no new disruptive advances in technology will develop in the methanol production process. Freight Freight costs from the Persian Gulf also display commodity behavior. For the forecast, values are assumed for the following costs based on current industry figures and calculations: ship speed, fuel cost, port charges, discharge rates, and time charter rates. For the forecast, the assumption is that these rates will be influenced by energy prices (affecting fuel costs) and inflation (affecting charter, port, and discharge rates). An index weighted by these two factors is used to calculate the forecasted freight costs. For the Arab Gulf to USGC and Arab Gulf to Rotterdam routes, a single 47,000 dwt shipment with two stops are assumed. For the Arab Gulf to Coastal China route, a 47,000 dwt shipment which makes three stops in Northeast Asia (Korea, Taiwan, and Shanghai large port) is assumed. Inflation It is assumed that the inflation rate throughout the forecast period will be 2.2%. This value is aligned with average values for recent annual US inflation. The conversion from current dollars to constant dollars in the forecast utilizes this index. Currency For the purposes of this forecast, it is assumed that the exchange rates between the Euro, US dollar, and Chinese yuan will remain near their current values throughout the forecasted period. 403

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15 PRICE FORECAST The chart below displays the forecasted methanol price in three major markets along with the delivered cost parity for imports into China. 500 Global Methanol Pricing Forecast 400 US Dollars per metric ton E 2017E 2018E 2019E 2020E 2021E Methanol China Spot, Avg. CFR China Main Ports USD/metric ton Methanol US Posted Contract Index, Avg Realized Price FOB USGC USD/metric ton Methanol West Europe Contract (T2), Avg Realized Price FOB Rotterdam USD/metric ton Please note: For the US and European contract prices shown, discounts are included. These discounts should be factored into any calculations of revenue. o US discounts for large commercial buyers are expected to increase on average to roughly 17 percent in 2016 o EU discounts for large commercial buyers are expected to increase on average to roughly 16.5 percent in 2016 Please note that this is a surprise free forecast thus war, terrorism, social unrest and other extreme events are not factored. The table on the next page tracks the annual historical and forecasted values of crude oil price, China coal price, Persian Gulf natural gas acquisition price, and methanol prices in the three considered regions in current and constant dollars. 405

16 Current Dollars Crude Oil, WTI Coal - Anthracite PG Natural Gas Methanol Methanol Methanol Spot, Avg. 1st Kcal/kg Avg. Acquisition US West Europe China Posted Transaction Posted Transaction Contract (T2) Spot, Avg. FOB US FOB QHD Port CFR MeOH Plant FOB USGC FOB Rotterdam CFR China Main Ports USD/ Barrel USD/metric ton USD/MMBtu USD/metric ton USD/metric ton USD/metric ton E E E E E E Constant 2015 Dollars Crude Oil, WTI Coal - Anthracite PG Natural Gas Methanol Methanol Methanol Spot, Avg. 1st Kcal/kg Avg. Acquisition US West Europe China Posted Transaction Posted Transaction Contract (T2) Spot, Avg. FOB US FOB QHD Port CFR MeOH Plant FOB USGC FOB Rotterdam CFR China Main Ports USD/ Barrel USD/metric ton USD/MMBtu USD/metric ton USD/metric ton USD/metric ton E E E E E E

17 ANALYSIS The global methanol forecast, in the short term, calls relatively flat and volatile prices. By 2020, the forecast predicts prices will have risen to between USD per metric ton, depending upon region and price basis (i.e. contract versus spot - please refer to tables for details by region). The main points to highlight from the forecast results are the following: The global methanol forecast, in the short term, calls for continued reduction in price levels globally through 2016, followed by a steady recovery to averages of the past 10 years by 2020, depending upon region and price basis (please refer to tables for details by region). The main points to highlight from the forecast results are the following: Short-Term Analysis In the next year, prices will continue to slump in all regions, with the US and Europe showing the largest annual drops, driven by the following factors: o Slowed capacity addition had in the past conspired with operational issues and restricted Iran supply to tighten the balance in the Atlantic basin. However, the weight of new Chinese and North American supply remains strong, with Chinese prices resisting the urge to increase due essentially to high bargaining power (improved with the inability of Iran to supply elsewhere). o Supporting prior forecasts, Chinese recalcitrance to higher figures will continue to limit the ability of Western methanol prices to increase. As new capacity starts began to appear in the US in 2015 and continue in early 2016, adding over 2.4 million metric tons of new production capacity by the end of that period, Atlantic Basin prices have and will fall relative to their historical premium versus Asian prices. o Demand from traditional as well as alternative energy (especially MTO) segments, particularly in China and other emerging countries, will cut into the gap between supply and demand, keeping margins in China positive and slightly increasing. o Production economics of marginal China methanol facilities (small, coalbased) remain important; the forecast requires that these facilities operate in the near term because they are currently the marginal supply source feeding the growing demand in China. These producers will require market pricing that enables their profitable operation. As such the floor price can be expected to remain relatively flat due to expectancy of relatively flat domestic coal pricing in the near term. o Margins to Middle East producers from Northeast Asia will continue to recover gradually and cascade to other global regions. 407

18 Long-Term Analysis By the end of the forecast, prices will slowly and steadily rise from current levels (especially in Europe and the US), and will remain above long term historical average levels, due mainly to the increased cost of the marginal production (coal based methanol in China), and anticipated high capital costs for new production. This price scenario will be predominantly shaped by the following factors: o Methanol values on an energy equivalent basis are expected to be competitive with refined products like gasoline and MTO, providing economic incentive for the development of these applications, despite the hurdles that remain. The recent trend of low crude oil pricing certainly is a challenge to this trend, however, methanol has remained affordable in both applications through the fall in crude. o Production economics of a Persian Gulf producer sending methanol via deep sea cargoes to the important markets in Asia will balance regional price levels. Note that a margin is maintained in the long term forecast for the Persian Gulf (PG) producers, since they will serve as the global source of swing supply. These margins fluctuate over time between regions, and eventually, given the ability of suppliers in the region to shift supply from lowest to highest margin regions, they come back to balance. Therefore, the forecast has PG margins equilibrating over time. The chart below displays this concept by tracking the forecast Persian Gulf netback margin for delivery to the three markets. 350 Margins for Middle East Producers 300 US Dollars per metric ton E 2017E 2018E 2019E 2020E 2021E ME Gulf Netback Margin (Net Transaction) USGC USD/metric ton ME Gulf Netback Margin (Net Transaction) Rotterdam USD/metric ton PG Netback Margin Northeast Asia USD/metric ton o Notably, the forecast does not call for a rapid flyup in pricing. Once again, cautious markets and pricing power in the largest methanol consuming uses 408

19 (especially DME in China) will increase effectiveness of the fightback methanol buyers put over the course of the period, unless unpredictable production upsets occur. Methanol Price Volatility Although the annual forecast may suggest smooth changes in methanol pricing, volatility does exist and is likely to continue. One lesson that history provides is that methanol prices can oscillate rapidly in a short period of time. There is a high probability that swings in methanol pricing will take markets well above and below the yearly averages shown in the forecast. This volatility must be factored into any discussion of methanol pricing. A review of historical pricing over different periods is a useful indicator for the potential magnitude and length of pricing swings in the forecast. MMSA characterized the volatility of methanol prices by calculating the rolling 1-year standard deviations of monthly historical China methanol prices as shown in the chart below. Until 2013, methanol prices had recovered from their most volatile period on record. Since 1998, the 1-year standard deviation has ranged widely, from USD 5 per metric ton to USD 126 per metric ton, and this variability increased through These standard deviation values show that not only are methanol prices volatile (standard deviation as high as 63% of methanol price), but the amount of variability over time is also volatile. Another way of describing this phenomenon is that very little certainty can be ascribed to how stable methanol prices will remain in a one-year period. Nevertheless, as demand for methanol continues to increase with the massive development of methanol capacity in the last few years, wild swings like 409

20 those observed in the last few years should minimize. However, longer term, the threat that production of methanol will be unable to keep pace with surging energy demand is real, and could return prices to their volatile state. Thus, a high risk is associated with predicting methanol prices. Any calculations of future investment returns for methanol projects must factor in this risk. 410

21 ACETIC ACID PRICE FORECAST ACETIC ACID PRICE HISTORY Like methanol and other petrochemical commodities, acetic acid has demonstrated significant price swings in Asian spot markets, from $285 per metric ton to highs over $780 per metric ton since In general, prices for acetic acid have moved with supply and demand fundamentals. Demand for terephthalic acid to make polyester, especially in Asian textile markets, had been a major factor driving tightness in the industry. In recent years, the global financial crisis exposed a market that was significantly overbuilt despite relatively strong demand growth. Since then, prices and margins have remained at low levels as the world tries to shake off the effects of too much capacity. Only operational issues have conspired to increase pricing. The chart below, which shows historic methanol pricing in the three major world regions, captures this volatility: Historical Asian Acetic Acid Prices, 1996 to Present Asian Financial Unplanned Shutdowns Asia, Europe UK Mothball Force Majeure US Outages in China and Europe USD per metric ton Polyester Industry Financial Sept 11 Restructuring Attacks High US Natural Gas, Energy Prices Methanol Price Rise China WTO Entry 2nd Gulf War, Energy Price Climb Begins Global Financial Crisis Weak Demand Asian Oversupply Crude Oil Prices Fall Spot CFR Northeast Asia 2009 was a year of volatility but mostly weak margins, thanks to major additions to global capacity and poor demand from almost all sectors of acetic acid demand. Prices are still reflective of costs to produce methanol in non-carbonylation facilities, with low margins, as continued oversupply in the construction, automotive, and textile markets limits pricing increases for acid derivatives, especially VAM and PTA. After 2010, acid pricing has been weak due to massive overcapacity, despite rebounding demand. The situation is more pronounced in China due to the large number of new, large facilities competing there. In 2011, the compeititve nature of 411

22 the Indian market saw virtually all non-carbonylation facilities shut down, with material imports (most of them originated from Singapore and Malaysia) becoming the preferred source, offering some relief, with prices increasing on spot outages, only to return to levels yielding very low, but somewhat improving margins through 2015 year to date, due to many supply options. 412

23 FORECAST METHODOLOGY & ASSUMPTIONS Acetic acid is a globally traded commodity, and as such its value depends on a number of fundamental factors. The following drivers, typical of basic commodities, have been used to develop this forecast: 1) Economics of the marginal producer to deliver to key markets Over the course of the forecast period, Southeast Asian methanol carbonylation producers supplying to China are deemed to have the most significance to the market. MMSA considered the following factors of a hypothetical SE Asian producer to develop values for the process economics: Feedstock (methanol and carbon monoxide) Variable costs (including catalysts) Direct fixed costs labor, maintenance, insurance, interest on working capital Freight to market 2) Market supply and demand dynamics The global and regional operating rates of acetic acid facilities, as described in Chapter IV, Regional Analysis, are considered, with operating rates assumed to have influence on the margins for producers (i.e. very low operating rates will yield low, or no margins for marginal producers). 3) Reinvestment economics The forecast is developed with the assumption that high margins generate investment in capacity, whereas low margins tend to discourage investment. In markets with growing demand, a minimum level for margins must be ensured to support needed reinvestment. Historic acetic acid margins are shown in the chart on the following page. 413

24 1,000 Historical Asia Acetic Acid Prices, Margins 800 USD/metric ton Nov 96 Mar 97 Jul 97 Nov 97 Mar 98 Jul 98 Nov 98 Mar 99 Jul 99 Nov 99 Mar 00 Jul 00 Nov 00 Mar 01 Jul 01 Nov 01 Mar 02 Jul 02 Nov 02 Mar 03 Jul 03 Nov 03 Mar 04 Jul 04 Nov 04 Mar 05 Jul 05 Nov 05 Mar 06 Jul 06 Nov 06 Mar 07 Jul 07 Nov 07 Mar 08 Jul 08 Nov 08 Mar 09 Jul 09 Nov 09 Mar 10 Jul 10 Nov 10 Mar 11 Jul 11 Nov 11 Mar 12 Jul 12 Nov 12 Mar 13 Jul 13 Nov 13 Mar 14 Jul 14 Nov 14 Mar 15 Jul 15 Nov 15 Mar 16 Acetic Acid, Spot CFR NEA Acetic Acid Cash Cost, Asia Cash Margin 4) External factors The following factors are also considered in determining appropriate margin levels for the forecast: Increasing scale of supply and percent market share of major producers. Improved trade options as more independent Chinese acetic acid manufacturers (using in house technology) have started up large scale operations, disrupting the control of the two major global acetic acid suppliers. The price forecast for acetic acid is described in more detail in the following section of this chapter. Please refer to the MMSA website for updates to acetic acid price forecasts. 414

25 PRICE FORECAST & ANALYSIS The chart below shows the historical and forecasted acetic acid prices (CFR Northeast Asia), acetic acid cash costs, and cash margins for the study period Northeast Asia Acetic Acid Prices, Margins Forecast USD/metric ton E 2017E 2018E 2019E 2020E 2021E 100 Acetic Acid, Spot CFR NEA Acetic Acid Cash Cost, Asia Cash Margin After a long period of overbuilding in Northeast Asia, in the mid 2000 s, acetic acid spot cash margins have skipped along the bottom, with some improvement in 2011 on the back of high demand from India followed by suffering through 2013 as new supply contined to overwhelm new demand. In 2014, thanks to slowed capacity additions as well as the drop in crude (which effectively lowered the cost of CO to carbonylation operations), margins recovered. However, with the onset of further correction in crude and poor demand growth in Asia, cash margind soon crashed back to near zero and sometimes negative levels (see weekly data, above). In the forecast, margins are expected to slowly return to reinvestment levels. The supply and demand balances suggest that demand growth for acetic acid continues to outpace supply growth. Continuing downstream demand combined with rationalization of non-carbonylation facilities will bring operating rates back up. However, this pace has been moderate and patience for producers will be necessary. Eventually, the acid market will regain tightness and the margins for acetic acid producers will accordingly reach healthier levels for carbonylation producers by the end of the study period. Note that the successful scale of of technology to consume acetic acid in the production of ethanol, once a great hope for the industry, remains elusive and increasingly non-competitive, and acetic acid prices will only increase on the strength of conventional demand, ultimately. 415

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