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.
|3-year return||10-year return||Dividend Yield|
|Eastman Chemical (NYSE:EMN)||148%||357%||1.62%|
|Celanese Corp (NYSE:CE).||65%||209%||0.61%|
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.