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Methanol is an alternative liquid-fuel source. It is also used in the production of acetic acid, formaldehyde, plastic, adhesives, foams, plywood sub-floors, solvents, and windshield-washer fluid. In March 2013, IHS Chemical found that the demand for methanol was growing faster in China than any other part of the world -- the country increased consumption 23% from 2010 to 2012 and is expected to consume half the world's production of methanol this year, which is about 32 million tons. By contrast, the United States currently consumes about 6.5 million tons. IHS Chemical expects the demand for methanol in China alone to triple by 2022.
So, what's fueling China's interest in methanol?
On Dec. 14, China became the first nation in 37 years to land on the moon. As China's economy grows and becomes increasingly more industrialized, the demand for fuel is outpacing supply -- everyone wants a car, and you can't start a car without fuel. In addition to needing alternative sources of fuel, China is also transitioning away from burning coal and oil. Unfortunately, natural gas is more expensive and harder to find.
The process of turning natural gas into methanol
Methanol, also known as wood alcohol, can be made from a variety of fossil fuels, including natural gas, which is cleaner than coal or oil. Many central-heating systems in China are dependent on coal, which means northern China is experiencing the worst bouts of toxic air this time of year.
From a logistics perspective, natural gas has no special requirements for safe transport. It is biodegradable, non-carcinogenic, evaporates when exposed to air, and dissolves when mixed with water -- it doesn't impose the same environmental and health risks associated with petroleum. In the case of spills, it evaporates or biodegrades.
Natural gas is usually produced in liquid form where it can be sent to plants via a pipeline and shipped to China with the use of freighters in a process like the one outlined below by Northwest Innovation Works. When combined with steam and heat, natural gas can be synthesized into carbon monoxide, carbon dioxide, and hydrogen. A "catalyst" is then used to spark a chemical reaction and viola! Pure methanol is created.
Northwest Innovation Works is a socialist/capitalist collaboration between China's government and BP (NYSE: BP ) , formerly British Petroleum. The joint venture is looking into investing $3.6 billion in the building of two facilities in Washington state and Oregon. The facilities would produce 10,000 metric tons of methanol daily by burning 640 million cubic feet of natural gas.
Storage facilities to hold the methanol are already being built in Dalian, a city of 3 million people in northeast China. Northern Chinese cities are more familiar with air-quality issues, so the demand for natural gas and methanol is greater. The northeast Chinese city of Harbin had a severe event in October when air quality readings reached the maximum of 500 -- people couldn't see past traffic lights as schools were cancelled and traffic was paralyzed.
Investing in methanol
Most methanol plants based in the U.S. are in the Gulf Coast. Natural gas has traditionally been inexpensive in Texas and Louisiana. The Pacific Northwest is obviously a better geographic position to China than the Gulf Coast, but Northwest Innovations won't be able to add production to the market until 2018. Who will take advantage of the gap in demand until then?
Celanese (NYSE: CE ) is a specialty-materials company that processes methanol, carbon monoxide, and ethylene. It is the world's largest producer of acetyl products. The company has entered into a joint venture with Mitsui of Tokyo to produce methanol in Clear Lake, Texas, however production won't be ready until 2015, and annual returns on the stock are low.
LyondellBasell (NYSE: LYB ) , a company based in the Netherlands, produces methyl tertiary butyl ether (MTBE), which is a clean-burning gasoline component. The company recently announced plans to restart its methanol plant in Channelview, Texas. "The methanol plant restart is the first in a series of U.S. Gulf Coast projects by LyondellBasell to take advantage of the natural gas price advantage that we enjoy from shale gas," said the company.
With record fourth-quarter earnings, the leading producer of methanol in the world is Methanex (NASDAQ: MEOH ) -- what an exciting time for this company. Headquartered in Vancouver, Canada, the stock had a one-year return of 75% and has a market cap of $5.8 billion. Methanex sold more than it could produce last year, as prices for methanol went from $425 to $438 per tonne.
The Foolish bottom line: Get on the "Green Bridge"
In exchange for cleaner air in China, the United States gets 1,000 construction jobs and hundreds of permanent jobs. The company refers to the partnership as the "Double Green Bridge." If you want to get on that Green Bridge, the most efficient route is Methanex.
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