Alembic Global Advisors

Chemical Industry Reports

US Chemicals – Methanol prices cracking fears overdone

10/27/14 -

US Chemicals – Methanol prices cracking fears overdone

  • Fears that Brent crude oil may pressure methanol prices overblown, in our view
  • Non-integrated MTO start-ups could boost global methanol demand by 15% in 2015
  • MEOH and OCIP shares rated Overweight (USD80 and USD30 per share target prices)

Summary

Recent declines in crude oil prices have pressured share prices for methanol exposed names over concerns that lower oil prices may directly lower methanol prices via a perception that oil and methanol prices are tightly correlated and indirectly via reduced methanol demand by dint of MTO facilities not coming on-line on the back of MTO economics losing their luster relative to naphtha based economics. Our analysis concludes both these fears are overblown.

In terms of the oil-methanol price correlation we contend it is not as tight as most perceive – an R-squared of 0.73 over 24 years of monthly history. While near-term oil prices have come down the long end of the Brent futures strip has come down by less than USD2 per bbl. The selloff in US commodity chemical share prices was indiscriminate on the back of lower oil prices with ethylene exposed names selling off to the same degree as methanol exposed names. We would remind investors that spot ethylene and methanol prices are at very different points with spot ethylene being near 52-week highs and methanol being near lows – limiting relative potential methanol pricing downside. We see MTO economics still very attractive relative to naphtha based economics and see minimal risk of project cancellations. Additionally we expect 3.2m tons of non-integrated MTO plants coming on-line over the next 5 quarters which could significantly boost global methanol demand (by over 8.0m tons). 

Finally our analysis suggests that at current valuations Methanex shares are discounting a USD20 per bbl drop in oil prices. We see limited downside valuation risk and significant upside potential.

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