Middle East Conflict Continues to Disrupt Methanol Supply

With the Middle East conflict becoming increasingly prolonged, the supply-demand imbalance in the global methanol market remains difficult to resolve in the short term. Over the past decade, major macroeconomic and geopolitical events have occurred roughly every one to two years, indirectly affecting methanol supply-demand fundamentals and becoming important drivers of market price fluctuations.

The ongoing Middle East crisis has now lasted for around six months, with its impact on methanol trade becoming increasingly visible. Since the outbreak of the conflict, shipments from major Middle Eastern production regions to China have totaled approximately 1.6242 million tonnes, representing a year-on-year decline of 66.87%.

At the same time, China's coastal methanol inventories have fallen by more than 1 million tonnes from previous high levels. The combination of reduced imports, declining port inventories and persistent downstream demand has provided strong support for methanol prices. Current prices have climbed to levels second only to the major rally seen in 2021, when surging coal prices significantly increased methanol production costs.

Rising Coal Prices Add Further Cost Support

In addition to supply disruptions, the recent sharp increase in coal prices has become another important factor supporting methanol prices.

According to data from Longzhong Information, delivered coal prices in several major production areas of Inner Mongolia increased from approximately RMB 740/tonne to as high as RMB 950/tonne since late August. The significant rise in feedstock costs has substantially increased the production cost of coal-based methanol and contributed to the strong upward movement in methanol prices over the past month.

As methanol prices accelerated this week, however, downstream olefin production margins began to contract rapidly. The deterioration in downstream profitability has already generated some negative feedback, raising concerns about the sustainability of the current price rally.

Meanwhile, some methanol plants in major production regions may restart during the second half of September. If inland supply gradually recovers, the current price gap between inland and coastal markets could begin to narrow.

Inland-Coastal Price Spread May Face a Correction

The recent rally in inland methanol prices has been particularly aggressive, resulting in a relatively distorted regional price differential. If supply conditions improve in inland production areas later this month, inland prices may be the first to experience a correction.

Such a decline would not necessarily indicate a fundamental reversal of the overall methanol market. Instead, it could represent a normalization of the regional price spread after the recent rapid increase.

The key question is whether the correction in inland markets will be strong enough to encourage arbitrage flows toward coastal markets. If arbitrage becomes economically attractive, additional supply could gradually replenish port inventories and ease the tightness in coastal regions.

Coastal Supply-Demand Balance Remains Tight

The situation in the Jiangsu-Zhejiang region is somewhat different. The restart of an olefin unit, together with relatively stable essential demand from traditional downstream industries, continues to provide support for methanol consumption.

As a result, the coastal market is likely to remain relatively tight in the near term. If tradable port inventories continue to decline over the coming weeks, coastal supply shortages could become even more pronounced.

The market is therefore closely watching two potential sources of supply: the recovery of inland methanol inventories and the arrival of new production capacity. Their timing and scale will be critical in determining whether the current coastal tightness can be relieved.

At the same time, traditional downstream methanol-consuming industries will gradually enter their seasonal off-season in the fourth quarter. This could weaken demand growth and eventually create some pressure on absolute prices.

Methanol Futures Face a High-Basis Challenge

Another key issue is the approaching delivery month of the October methanol futures contract ("10" contract).

Currently, coastal spot prices are trading at a significant premium over futures prices, creating a relatively high basis. Under normal market conditions, the convergence mechanism between futures and spot markets should gradually narrow such a price gap as the delivery month approaches.

However, the current supply shortage in coastal areas makes this convergence process more complicated.

According to Longzhong's forecast, port inventories are highly likely to fall to historically low levels around the turn of the month. If physical supply remains tight, the high coastal spot premium may not be easily eliminated simply through a decline in demand or a pullback in futures prices.

In other words, the high basis itself may limit the downside potential of methanol futures. Meanwhile, a decline in inland prices would primarily reflect the normalization of regional price differentials rather than a fundamental deterioration across the entire market.

What to Watch Next

Looking ahead, the methanol market is likely to remain highly sensitive to changes in supply, coal costs, downstream margins and geopolitical developments.

The most important factors to monitor include:

• Changes in methanol shipments from the Middle East to China
• Further movements in coal prices and methanol production costs
• The recovery of inland methanol plant operating rates
• Methanol port inventories and tradable stock levels
• Olefin production margins and downstream operating rates
• The price spread between inland and coastal markets
• The development of new methanol production capacity
• Progress in talks involving Gulf countries and its potential impact on regional energy and chemical supply

Overall, coastal methanol markets remain caught in a supply-demand impasse, while the high basis provides support to futures prices. Inland prices may experience a correction as regional supply recovers, but such a correction could simply represent a return to more normal regional pricing relationships.

The key question for the market is whether inland supply recovery and arbitrage flows can arrive quickly enough to replenish coastal inventories. If port stocks continue to fall toward historical lows, coastal methanol prices may remain relatively firm despite weakening downstream profitability.

Market participants should therefore pay close attention to geopolitical developments and, in particular, the talks involving Gulf nations, as any change in the regional situation could have a significant impact on methanol supply expectations, energy costs and market sentiment.