How to ride the methanol wave in 2025 to massive profits and growth

What is Methanol and Why is it Important to the Natural Gas Industry?

Methanol is a derivative product that results from the natural gas conversion process. It's used extensively in natural gas sourcing and pipeline transmission. It's also used as an advanced biofuel to power transportation as an alternative to gasoline and diesel. At current natural gas spot prices, sourcing methanol is inexpensive. As of mid 2024, from a demand perspective, global spot prices for methanol are low as well. Methanol prices have been trapped in a stagnant range for the past 4 years.

Favorable Demand Outlook for Methanol

Demand for methanol, however, is poised to explode in 2025 - 2027, based on several factors, as well as developing political factors in the US, and emerging global economies. This creates a very favorable scenario for investors and those looking to benefit from demand growth on down the supply chain.

Two recent milestones illustrate this significant opportunity for methanol demand growth.

1. In 2023, Methanol overtook Liquified Natural Gas (LNG) as the #1 alternative fuel in the shipping industry, with 23% of new ships built adapted to methanol as a fuel stream.

   
   

2. In 2023, America became the world's #1 supplier of Liquified Natural Gas (LNG) exports.

Global factors support a bullish outlook for methanol as well. Since 2011, China has been buying methanol to help insulate the nation from geopolitical disturbance to the energy supply chain. This trend ramped up in 2022 as China promoted Methanol-powered cars. Methanol testing as substitute fuel for gasoline in the transportation sector has transitioned into scale outs of methanol-powered transportation fleets globally.

Supply Constraints

Domestic natural gas and deep-sea oil drilling, which utilize methanol extensively, have been subdued since 2020, as domestic energy production has stalled. The US deployed drilling rig count (number of rigs working in the field) in 1981 was 4,530. As of July 19, 2024, only 586 rigs are deployed. This severe supply shortage is likely to start to influence prices in the intermediate and long run, especially as global demand for Liquified Natural Gas imports has increased.

But as mentioned, this supply trend is poised to change rapidly in 2025 given current political trends in the US. Methanol production is expected to increase rapidly to meet accelerated global demand. So how should investors play the positive production/market price spread and increasing export activity expected in 2025?

How to play growth in the Methanol market

Ample low-cost supply should balance out demand increases in the short-term, keeping the spot price of methanol lower. This should support continued demand from China, and would likewise benefit methanol exporters in the US through 2025 into 2026. The US election will likely favor appointment of Doug Burnum as US Secretary of Energy. This will very strongly shift domestic US policy towards drilling and LNG export as paths to national security and prosperity.

Additionally, massive US LNG export capacity will come online between 2H2024 and 2028, pulling through LNG shipments to emerging economies, and potentially a conflict immersed European continent, with Russia as an aggressor. This backdrop means that more and more US natural gas will be pulled through channels that today, cannot meet growth in demand. In the near future, US LNG export capacity will help the US meet the base load energy needs of growing economies.

In addition, recent regulatory moves by the US towards Iran, which are rooted in US policy from 2012 suggest further global restrictions on Iranian imports.  Yemen's proxy involvement in attacking Red Sea shipping lanes is a counter-move to this policy, recently targeted by Israel's military intervention through airstrikes. Iran is a massive global exporter of methanol, so US and European methanol exporters, if action were taken, would have opportunity to fill the market void, and are likely to at least partially neutralize shipping constraints in the Red Sea.

Methanol Producers and Outlook

• Methanex (MEOH)

• Celanese (CE)

• Eastman Chemical (EMN)

• Dupont (DD)

• Methanol Holdings (Trinidad) - Proman

I don’t necessarily like directly investing in the production segment in the 1st half of 2025.  While global methanol demand is robust, and oil production activities remain high, spot prices are low, and supply is abundant at the current low natural gas prices.  Short-term, the supply/demand balance suggests low methanol prices over the next few months.  While there are potential factors that could increase fundamental levels of demand, such as extended use of pure methanol in the transportation sector, it’s my view that these are too early in the research and commercial development phase to change the current supply/demand balance.

My forecast is that net shipments and net exports of methanol will continue to increase over the 1st half of 2025, driven primarily by the Chinese market, but at constrained spot prices. Top-line revenue should increase accordingly for producers, at a steady, but not accelerated rate.  Producers who have vertically integrated operations, and exposure to the downstream transportation sector should benefit from increases in transportation shipping rates.

Exporters/Shippers and Outlook

Methanol shipping capacity is constrained.   There are only so many commercial tankers equipped to ship methanol.   Will more methanol coming online, an indirect investment may be the best way to ride the methanol wave.  Look for increased investment activities in methanol storage facilities, and methanol tanker construction to commence in early 2025.

Methanol Holdings Trinidad Limited – Owns a fleet of 10 methanol tankers, and 5 methanol production facilities, including the largest in the world (M5000) in the West Indies.

Iino Kaiun Kaisha Group – [stock quote] – Owns a fleet of tankers, including 20 chemical tankers, of which several are equipped to ship methanol

Mitsui O.S.K. Lines – [stock quote] –  Owns a substantial fleet of multi-purpose tankers, and the world’s largest fleet of dedicated methanol tankers.

Waterfront Shipping – This wholly-owned subsidiary of Methanex, based in Vancouver, owns 19 tankers equipped for long-haul Methanol transport.   Subsequent research will focus on this subsidiary’s contribution to Methanex’s overall earnings.

Conclusion

Oftentimes, investors hear terms like “robust demand increases” or “China driving demand” and immediately jump in (e.g. Rare Earths early 2010's).  In the case of methanol, even though demand will organically increase (perhaps somewhat aggressively) the supply dynamics do not lead me to believe that the demand increase will be a rapid catalyst for earnings for methanol producers.  Conglomerated chemical producers do produce methanol, however the contribution of that product to their overall revenue and earnings is infinitesimal. Producers with vertical integration and exposure to shipping (who can contract out excess shipping capacity outside of their core production) should benefit to a larger degree.  But I like the shippers here, as supply of shipping space is constrained, which should lead to increase in shipping spot rates over the short-term.

Sources:

• European Biofuels Technology Platform: “BioDME/Methanol”

• ICIS: Methanol Prices, Markets, Analysis and News

• Methanex Corportation: Technical Information & Safe Handling Guide for Methanol

• Atlantic Methanol Production Company – marketing materials

• Mitsui O.S.K.: http://www.mol.co.jp/pr-e/2008/e-pr-2741.html