Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Methanex Corporation Q1, 2020 earnings call I would not only to turn the conference call over time, It's can Campbell. Please go ahead.
Good morning, everyone welcome to our first quarter 2020 results conference call, our 2021st quarter needs really management's discussion and analysis and financial statements can be accessed from the reports tab at the Investor Relations page on our website and methanex Dot com.
I would like to remind our listeners that our comments it answers to your questions today may contain forward looking information.
It's information by its nature subject to risks and uncertainties caused the student outcomes to differ materially from the actual out.
Certain material factors or assumptions were applied in drawing the conclusions or making a forecast or projection, which are included in the forward looking information.
Please refer to our first quarter 2020, and DNA answer why 2019th annual report for more information.
I would also like to cautionary listeners that any projections provided today regarding methanexs future financial performance, our effective as of today's date.
Our policy not to comment on or update this guidance between quarters.
For clarification any references to revenue EBITDA cash flow or income Needham today's remarks reflect our 63.1% economic interest in the Atlas facility and our 50% economic interest in the either.
In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark to Mark impact on share based compensation and the impact of certain items associated with specific I guess, if I did that.
We reported these non-GAAP measures in this way to make them a better measure of underlying operating performance and we encourage analysts covering the company to report their estimates in this manner.
I would now like to turn the call over to Methanexs, President and CEO Mr., John flooring is common and a question and answer here again. Thank you Ken Good morning, everybody I hope everyone is safe and staying healthy during this extraordinary time.
This morning, I'd like to start with a few comments about the current situation.
Oh, then comment briefly on our Q1 results provide an overview of what we're seeing and the methanol markets today and discuss how we're managing our business to navigate this challenging environment.
Our number one priority is the safety of our employees contractors like communities, where we work.
And I am thankful that our team is safe and healthy today, we're fortunate that our manufacturing operations had been allowed to operate in all of our regions.
Our operations and global supply chain are running effectively and have not been significantly impacted by cobot 19.
We are continuing to produce methanol with a limited number of team members on site.
Our managing the rest of our business to deliver secure and reliable supply to our customers mostly working remotely.
I wanted to acknowledge and thank our team members from all around the world, who have demonstrated tremendous dedication and agility over the past week says we faced multiple challenges from the covert 19 pandemic and low oil price environment.
Now turning to the first quarter results, we recorded a dozen adjusted EBITDA of $138 million and adjusted net income of $8 million or 10 cents per share in the first quarter of 2020.
These results are similar to our fourth quarter of 29 team results of adjusted EBITDA of $136 million, an adjusted net income up $10 million or 13 cents per share.
Our first quarter results reflect a higher average realized price, partially offset by lower sales volume of methanex produced methanol.
In addition, our fourth quarter 292019 results benefited from a 25 million dollar insurance recovery associated with the production outage.
Experience in Egypt in 2019.
We recorded $5 million of additional insurance proceeds in the first quarter of 2020.
In the first quarter, we saw global methanol demand declined by approximately seven per cent compared to the fourth quarter of 2019 due to the impacts from cobot 19 endemic combined with the sharply lower oil price environment.
Methanol demand into traditional chemical applications declined as manufacturing activity was severely curtailed starting in China in late January and later in other countries as a result of the cobot 19 pandemic.
[noise] methanol to olefin or MTO demand declined due to several planned and unplanned outages.
Demand into other energy related applications also declined due to government restrictions, which limited ground transportation and service industry operations.
Not that all industry supply declined in the first quarter due to various outages in North America, the middle East Southeast Asia, and particularly in China.
Our government restrictions related to the operations of moving up people substantially disrupted domestic methanol production.
Our overall production results in the first quarter were 117000 tons lower than the fourth quarter up 29 team.
Primarily due to the outages in New Zealand, Chile in Egypt, which were parks, partially offset by strong production in Geismar.
In addition, as we previously announced we idled or Titan plant in Trinidad in mid March which also reduced our first quarter production volumes that are too late for plant as of April 1st.
Both times for idled for indefinite period in anticipation of lower methanol demand.
In Q1, we continue to progress our Geismar one de Bottlenecking project. However, this incremental production from our guys were one facility will be delayed as we have moved to minimum staffing levels that are plant sites to ensure the safety of our team members.
Now turning to what we're seeing in the <unk> methanol market midway through the second quarter, we expect to see a decline in methanol demand in the second quarter of 2020 compared to the first quarter.
We're seeing a substantial reduction in manufacturing activity in North America, Europe, and Latin America combined with continued weakness in Asia Pacific outside of China, where we're starting to see a slow recovery with our customers.
This decline in manufacturing activity is impacting methanol demand into all traditional chemical applications with products going into automotive and construction markets being the most impacted.
We're also seeing government mandates restrict ground transportation curtail fuel demand, which reduces methanol demand into methanol <unk> <unk> military few butyl either MTV and biodiesel derivatives. We also expect demand into the MTO sector to decline in the second quarter as three facilities.
Undergoing maintenance activities.
In addition, a sharp Lee lower oil price environment indirectly affects methanol prices as oil prices impact the price of products that methanol goes into including MTB dimethyl ether biodiesel olefins and olefins derivatives.
We estimate that the industry cost curve, which continues to be set in China is approximately $220 per tonne, which is in decline as a result of a slight decline in coal prices.
Current methanol spot prices in China are below this range.
In previous methanol price cycles, when methanol prices fall below the marginal cost of production high cost production shuts down and supply and demand rebalance.
To date in addition to our own production cuts we have seen some other production rationalization globally.
We believe that more production cuts are required to balance the global methanol market.
We recently posted our May North America price, which decreased by 13% to $313 per done and our Asia Pacific price would decrease by 13% to $225 per ton.
Our European contract Buyouts is set quarterly and in our second quarter posted prices 260 euros per ton.
At this stage, we don't believe it is possible to accurately predict the full extended the duration of cobot 19, and the low oil price environment.
As a result, we're planning for a wide range of scenarios, including situations, where we see a deeper and more prolong reduction in methanol demand and low prices.
While positioning ourselves to deliver long term value for our shareholders as the global economy recovers.
We have taken several prudent steps to further strengthen our balance sheet and preserve liquidity through this uncertain economic environment.
First we have placed our geismar three project on temporary care and maintenance and deferred approximately $500 million in capital spending for up to 18 months.
This proactive step will enable us to further strengthen our balance sheet, while maintaining long term value and financial flexibility.
This actually will also allow us to complete this highly advantage project when market conditions improve.
Up to this point the projects have been significantly de risked and execution was safe on time and on budget.
We continue to explore partnership arrangements for the Geismar three project and we plan to continue those discussions.
However, in the current environment and with most companies focused on navigating the significant uncertainty in the global economy and with the project on temporary care and maintenance, we're not expecting these discussions through aggressive meaningfully until market conditions improve.
In addition to greater financial flexibility and preserve liquidity, we have reduced our 2020 maintenance capital spending by $30 million increased financial flexibility throughout the 436 million dollar draw on our credit facilities.
Reduced our quarterly dividend to 3.75 cents from 36 cents per share, which represents approximately a $100 million in annualized cash savings.
We're also working with our banking partners to obtain flexibility on certain financial covenants for an existing 300 million dollar committed revolving credit facility and an 800 million dollar non revolving construction facility.
We have agreed on key parameters with our lead bank and are working with other members of the bank syndicate to finalize these changes to the credit facilities, which is expected in the second half of me.
We have a flexible cost structure as the price for approximately 60% or natural gas supply, which is our most significant operating cost is linked to methanol pricing.
This means that our operating costs moved down as methanol prices reduced although there is a time lag of up to one quarter.
Also we expect to see lower logistics costs, primarily through lower fuel prices for our methanol shipping fleet in a low oil price environment.
We have a strong liquidity position and ended the quarter with over $800 million in cash on the balance sheet.
We expect the we only need to maintain a minimum cash balance of approximately $150 million to run the business.
We are focused on cash preservation in this challenging environment and continue to evaluate all capital and operating spending.
We do not expect to undertake share buybacks in this environment as any excess casualty used to further strength strengthen our balance sheet.
Before I comment on the second quarter outlook and pause for questions I'd like to highlight a couple of points regarding the resilience of our business.
First methanol is an essential ingredient is used in countless industrial and consumer products, including building materials foams resins plastics pains polyester and a variety of health and pharmaceutical products.
In addition, methanol demand is growth continuing to grow as a clean burning and alternative economic fuel. These are a central products and we expect the man will recover after the pandemic as and be the case with prior global economic turned out downturns second we have a low cost structure and our assets our position on the low to mid portion.
One of the industry cost curve, which allows us to be competitive across a wide range a wide range of prices and economics, it scenarios and serves us well in the current environment.
Third we benefit from our integrated global capabilities with a network of production sites around the world and global supply chain, which are a competitive advantage enable us to deliver secure and reliable methanol supply to our customers around the world.
Now turning to our outlook for the second quarter, we expect the coming months will be challenging and we expect that the headwinds we face from cobot 19 pandemic.
And sharply lower oil price environment will be significant in the second quarter.
With lower methanol prices and lower production levels as we've idled our Titan until the floor plans, we expect that adjusted EBITDA will be substantially lower in the second quarter.
Compared to the first quarter.
As a reminder, in a declining methanol price environment, our margins tend to be lower than in the stable price environment due the timing of methanol production and purchases versus the timing of sales.
We continue to monitor the impact of Cobot, 19, pandemic and low oil price environment and regularly review our plans across a variety of scenarios in order to respond quickly as conditions change.
We are focused today on keeping our teams safe running our plants safely and reliably delivering secure and reliable supply to our customers and protecting our balance sheet to navigate this unpredictable environment.
With our strong liquidity position and the resilience of our business model. We're confident that we were well prepared to whether this global pandemic and its impact on methanol demand I.
I would now be happy to answer any questions.
Thank you.
Once again, if you're using his speakerphone, please turn handsets and for making his selection. Please limit your inquiry to one question plus a follow up question.
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First question is from Ben Isaacson at Scotiabank. Please go ahead.
Thank you and good morning, good feedback on the call and glad to hear everyone's doing well.
John You said, but demand was down 7% in Q1, what's your early read on how April has played out.
Yeah, it's down more Ben I'm, it's very difficult, it's changing daily, but you know if we saw a 7% reduction in Q1, I think where you should expect a a much greater reduction in demand in Q2.
Certainly when we look at our own demand were down significantly a we don't know what our competitors are doing but when you're freeze the global economy, ER and all manufacture a lot of manufacturing ceases I think a demand from ethanol is going to follow right behind.
Thanks, and just a follow up I've noticed that the the discount there has been widening out over the last few quarters 16, 17, 18% how do you see that progressing.
The normal cycle.
Going forward is that going to kind of go back towards up 15%.
Our guidance is unchanged there I'm in a normal whatever you know if we see a stable environment, which we haven't seen much over the last few years I'm at 15% right guiding guide guidance, but as we go to rapidly down that tends to widen as we've seen in the last quarters, but you know I can point to 2018, when you know when prices went.
Not quite quickly that it shrunk so I'm still comfortable with 15, but is this environment you should be planning for higher than 15 as prices have come down in Q2 again from Q1.
Thank you.
Thank you.
The following question is from Steve Hansen of Raymond James. Please go ahead.
Yeah, Good morning, guys.
I see very quickly.
John you guys, if he can come pretty proactive.
Or.
For that.
Just want to get a sense or whether we should expect any additional action.
On the production front is there any other facilities that you would contemplate ticking down to help out until the market on your side or is that going to be left to others.
Well the reason we took tighten in Chile for down is because those were the only really two plants, where we had total flexibility where we didnt have take or pay gas all of our other sites, we have take or big gas. So we have some ability to reduce geismar.
By about 30%, where we're buying spot gas, but spot gas is under two bucks. So hopefully prices don't deteriorate to such a level that we would have to take that action, but anything's possible in this environment I.
I think we saw Matt we have some other opportunities as gas contracts expire here over the coming months, but we're not anticipating today to take any additional production out what we're looking to try and create as much flexibility in our supply chain as we can.
I will allow us to prepare for any any bench reality that we might see in the markets. A you know I think other others in the industry need to take some supply out as well.
There's a lot of material today that are well above a from a cost delivered cash cost perspective, where we're seeing pricing around the world. So I.
I don't think people like to lose cash or certainly we don't so hopefully we'll see some of the high cost producers that are still operating curtailed for where they're coming weeks and months.
That's helpful and just as a follow up to that is is it fair to say that your discussions at the end do you see in Trinidad or or currently at that upon.
No we're still discussing with the end do you see a you know all countries are really dealing with the cold hit 19, so whether it's our discussions on the gas contract or any other discussions with government are taking it back seat as they deal with a pandemic, but we're still negotiating we're negotiating in good faith, we'd like to secure a contract that makes.
As for US the government and the upstream and that's our intention. So we're going to continue to two two to work towards that.
Very helpful guys. Thanks.
Thank you.
The following question is CIC about.
Please go ahead.
Good morning.
You take a.
Wanted to a review the total capex spend expectations, we're calculating around 310 million in 2023 30 in 2021.
Right order of magnitude and what type of Wiggle room do you would you have there.
Yeah. So we've cut maintenance spending for this year by about $30 million, we've reduced the GE three project by about $500 million over the next 18 months. We said, we're going to spend up up to 200 million over that period for GE three were hoping or <unk>.
Turning in challenging the team to spend less and our maintenance capital is under review a edit <unk> all the time I mean, we will reduce maintenance capital, where where it makes sense, where we're not you know putting our plants and in a state where they're they're unsafe. So we're going to spend the money to keep.
Our plants safe and if there's opportunities to reduce maintenance capital. It doesn't impact safety then we'll look at it I'll remind you most of our maintenance capital is to deal with turnarounds you know statutory turnarounds turnarounds, we've delayed turnarounds because we couldn't execute them in this environment, because we couldn't get people to where they need to be so.
So we're going to learn a lot around how much maintenance capital. We can differ if we can't do it turned around and you know we can't run the planned safely then what was shut it down but right now we're we're comfortable that the turnarounds. We delayed we can run those plans safely and they're performing okay. So I don't want to give you a definitive numbers, but we're going to look at.
Each and every buckets or including operational expenses to see what we can differ or council. So we'll continue to do that as we go forward and see other markets turn up.
And then how much liquidity do you have available today and what type of Covenant relief you're looking for.
Yeah, So we have $800 million a cash on our balance sheet at the end of the Q Q1, I I've said, we need probably 150 million to run the company.
So that guidance is still there and maybe I'll ask our CFO in Cameron as comment about the covenants. The bank really so so take up there's probably three things were looking for in terms of flexibility.
One is we have to covenants interest coverage at EBITDA to interest tests, and we have a funded debt ratio, which is like a leverage test and today and where we're we're in compliance with those covenants, but if we saw sustained lower price environment those covenants could come under pressure.
We're trying to get some short term relief or around and flexibility around those two covenants. The other covenant that is around 23, we're just trying to create more flexibility in terms of completion timing of the completion of GDP. So that's that's a third area, where we're trying to obtain some more flexibility.
Okay. Thank you.
Thanks ticket.
Thank you. The following question is from Joel Jackson of BMO capital markets. Please go ahead.
Hi, good morning, John.
Hey, Joel John Locke ask your question about whether or not you continue with GE. Three you are well, let's pretend that you have to decide that you didn't make sense because of demand in China or the global demand and that's all this decade that didn't make sense to build G suite.
That's the question would be what penalties what minimum spend that you have to still go out the door in wind down got project. Thanks.
Yeah, it's too early to say give you a a number there Joel I mean, we're negotiating all the time with our.
Partners on the GE three project, it's our intention to completed at some time if it comes to a point, where it's just not needed or the world is still in a really serious a significant downturn. Then you know well, we'll do what we have to do a to mitigate the costs around cancelling that projects not our current view on on the project, but you know everything's on the.
Table I would say that you know weve been issued a number of horse matures and delays on on equipment et cetera, because of the covert 19, which gives us some additional flexibility as we negotiate with our partner. So we want to have win win situations here and you know we will continue to go.
A shade and try to find a a solution that makes sense for everybody, but I think a bit premature to be thinking about cancelling and I think it's when you make that decision where you are and what you've been negotiated which will drive how much additional capital you may have to spend but we're trying to minimize that as we go forward.
And my second question would be on cost curve from ethanol in China, you can have to where do you think it is what's driving margin cost today.
<unk> and setting Gothic, obviously seeing someone called prices get down to below one out there the bands the government OSAT and seeing if interventional coming onto a lot of stuff going on over there may be Taco, where you see the marginal cost.
Yes, 220 being set by coal producers, we've seen call slightly decrease its around.
Just over 500, 510, RMB, which is just at the lower end of the the band that the government had put in after the last oil collapse in 2016, something we're watching pretty closely and.
Certainly if it does go a lot lower that will impact the cost curve, but here. We are you know China has been dealing with call, but since the end of January so three months and the ban seems to be alive, but that doesn't mean, it's going to continue so something we'll watch pretty closely.
Thank you.
Thanks Joel.
Thank you.
The following question is from Mike.
From Barclays. Please go ahead.
Thanks, and good morning, John.
I really like no.
I wanted to return back to the conversation around your natural gas costs, and obviously the variable cost dynamic where you tie your cost to methanol prices has been helpful. Throughout the cycle, but can you just maybe give us a little more helpful. On how these contracts work now there were at the uniquely low part of the methanol price cycle is there any sort of variable.
Cost more whereas methanol goes further down that Doesnt <unk>, a quick to lower realized natural gas costs.
Yeah, they're all little difference. So we don't obviously talk about each and every contract the individual basis for commercial sensitivity reasons, what we have guided to in the guidance still is valid today is that above 180 methanol realized price.
We share about a third with the gas supplier on average through the contracts. So today you know we're over $200 a ton realized so even if we saw a further.
Reduction in realized methanol pricing before once we get to 180 auto realize basis, you should consider that on average the floor for the basket of gas contracts, although some would have a little higher floor and someone have a little lower but that's the guidance, we provided and that's still valid today.
Got it that's really helpful and I appreciate the outlook is very solid today, but just given what you've talked about it up the moves in price the timing lag of inventory and costs well through just presumed increased overhead absorption from the lower volumes would you still expect to be EBITDA positive in the second quarter.
Yeah.
I think it's too early to say that but if you asked me today, we will be but things are moving pretty quickly here. We're only in early may we've set may pricing you know I think unless you saw a complete collapse in June which I guess as possible.
We would be EBITDA positive in Q2.
Great. Thank you.
Thank you.
Following question is from Hassan Ahmed of Alembic Global Please go ahead.
I'm wondering John.
So that's on John question around you know it was very helpful. You know hearing your views on way you saw demand growth or demand declines rod to.
Sequentially in Q1, you know obviously seven to 10 declines in Q1, and then you guys. Obviously I do some of your facilities you know just wanted to get a sense or.
You know way you saw the industry sort of dine out in terms of supply or in Q1, I mean did you see an equivalent sort of global supply decline in in Q1 sort of matching the demand decline was at high and what that led to particularly keeping in mind.
You know de de shut down more China in particular was in Q1, and and where do you see that take a supply wise a as we sit here today.
Yeah, most of the shutdowns, we saw a from a supply side, we're in China, you're right to point that out.
Our actions were late in the quarter, so they really flow through into Q2.
We haven't seen too much we've seen some other shutdowns.
As I mentioned in my remarks, and other parts of the world, but we need to see.
Based on our current demand look a lot more shutdowns and there's a lot of a lot of.
Production today, which is above the the realized price that we're seeing a around around the world, especially in China. So we would anticipate as we've seen in previous downturns that supply supply will come off as the cash margins remain negative it takes a while sometimes it takes weeks and sometimes months it and I think it's more.
Predicated.
What their outlook is for you know the next one or two quarters than I think that's really hard to anticipate in this environment, but when you turn off the global manufacturing.
Complex a demand does get impacted and we've seen this move around the world. We sought and you know in China first in January than in Asia in in mid quarter first quarter and now in Europe, North America, South America, you know that the production or sorry. The manufacturing has been then turned off so.
So in order to balance things, we need to see other supply come off and or the other issue is storage. There's just not enough storage to Matt you know to manage all the methanol that's being produced today and they'll become a point, where there's just don't where to put it and that'll force.
People to turn off no matter what their cost position. This so it'll be interesting to see how it develops over the next quarter or too.
Understood understood helpful and as a follow up John.
I'll just be also to stress within within the oil and gas markets and the like you know question around.
Around your contracts I mean, if I remember correctly, you know back and 20, taking you announced like Dan contract out for gas supply or two guys. My with Chesapeake Energy you know this he died company you know reading the news recently seems to be.
You know in 50 sort of deep stress and enough sort of reports out there about bankruptcy filings and like I said, just one did a you know as best as you can you know Oh, you know what sort of moves are you considering what talk now that you do you have in case of a bankruptcy out there I mean is you know into.
It's all a secure it do you have got supply.
Pointing out the contract tend to like.
Yeah. So I think it's it's a short term and medium term term issue I mean, if we were to have the supplier of Geismar. One go bankrupt very positive for us because obviously the spot market today is much lower than what we're paying in geismar. So when we sign these contracts in North America for medicine.
Hot and Geismar. We you know we had the view that if markets got really tough and people went bankrupt we'd had natural hedge that meant the gas price was very low I'm not worried about the supply of gas in North America for the foreseeable future, but I think it you know the medium term is a bit different you know if you have a very low oil prices.
Permit and gas environment then.
You know you're going to see production budgets being slashed and exploration and development budgets being slash. So places like New Zealand till I, Trinidad you know I get more concerned around hot how do those but those assets become sustainable long term because you know in this business of oil and gas.
So if you're not investing you have the declines each and every year, which could lead to you know not enough gas to go around at some point in the future. So I worry more about that than short term bankruptcies or in North America.
Thank you so much of.
Thanks.
[noise] the follow on question from Nelson of RBC capital markets. Please go ahead.
Thanks, My first question.
As it relates to the bad debt covenants and flexibility.
I presume you guys true on your credit facilities, because there's a potential.
Some planned a few today may no longer be available I'm. Just wondering if you were to get relief on debt covenants, whether you would look too.
Use that cash to pay down the credit facilities. So you don't have to pay the oh are incorrect carrying cost of sitting on cash.
We don't know I mean, we're still in negotiations so everything's on the table. We're looking for relief on the covenants to give us more flexibility I mean, we didn't do anything on on those lines of credits or credit facility that we weren't allowed to do so Ah we thought it was prudent with all the uncertainty to get a bit more cash.
On the balance sheet, which is what we did.
But you know we're negotiating many many different things related to those a covenant relief and when we haven't deal will certainly let the market know what that deal looks like a including or paying down debt with cash. So it's too early to say anything about that but once we have a deal we'll we'll certainly but the market know what it.
Looks like.
Okay and then my next question relates to a methanol demand you mentioned that obviously the manufacturing sector is very weak, but you saw some signs of recovery in China.
Could you give a bit more color.
On what you're seeing in China, I'm, just thinking about whether there's a potential read through it.
Things to come up for the rest of the the world.
In terms of that the recovery profile.
In China.
Yes, it's slow I wouldn't say you know we are seeing recovery, but it's slow I'm looking to me like a U shaped recovery instead of a V shape, but that's early days.
I think we'll see how Europe comes out of the pandemic and certainly in United States in the middle of it right now. So there is starting to open up so we'll see how that that pans out for cases et cetera, but you know China is you know starting to on thaw and get back to more manufacturing activity, but it's still nowhere near what we saw.
In the fourth quarter of last year.
Obviously, China is a very has a lot of exports and they rely on the rest of the world's economy to be chugging along to have somewhere to to send their exports and obviously in the current environment Everything's basically stopped.
Great Thanks for that color.
Leave it there.
Thank you.
Thank you.
Selling question is from Jonas Oxgaard of Bernstein. Please go ahead.
Well thank you.
Touched back little bit I'm, not calling him in earlier on storage is basically so.
That's what physically happens when we run out of storage.
Chinese producer historically have been.
Quite bad turning off production, even a negative cash quickly.
And so if we're running into scenario wherever there's still producing methanol globally. There's no demand for it is that chance would run into the W. T. I have negative pricing paying someone to turning to be a knee or what.
How do you ever seen anything like it.
And I thought a bunch of question sort of tied into one but.
We see anything like it and what's your thinking of where we're heading next.
No. We obviously haven't seen anything like it I would disagree a little bit with what you said about production in China in previous downturns and own I'd in 16, we did see high cost production come off and we've seen that again. This time, so they don't like to lose cash and they're they're probably quicker to move than some of our competitors and other parts of the.
A world as far as turning off production and we've seen them do that quite substantially over the last couple of months, but if there's no you know when I talk about nowhere to put the part I'm talking about Chinese producers more I'm talking about imported product into other into different parts of the world. There's limited storage capacity. This was already an issue before covert.
Teen as as a demand has gone up significantly in China for things like MTO.
The amount of storage that was built was not anywhere close to what we saw the increase in demand. So it was already an issue of of supply chains and moving product in and out.
In a timely basis to meet demand with very little storage. So once tanks fill up I guess the next thing is similar to the oil companies as you can fill up ships and I think some of that is going on we've seen spot rates for ships go up quite significantly and we think that's because of storage and but once that's full then.
You have to turn off production or else Ah dump it somewhere else. So I think it it makes sense to turn off production rather than have we know where to put it but certainly we haven't seen that in the history of our market, but you know oil was not that never has been negative before for a long time, either so I think we're in and.
Unprecedented times and trying to predict anything in this environment is foolish.
Fair enough.
So if we have to actually do something else with it.
Is there a capacity to turn it into this idea me or I.
I mean.
This negative margin today to to make Danny for methanol.
But if you have to do something with it.
At fire to it.
Well I guess, you could set fire to it I didn't easiest thing to do it would be the blended gasoline, but I think that's the whole more complicated issue, but besides that I think you either set fire to it or or dump it but I think environmentally I'm not sure that makes a lot of sense either so to me the rational thing to do it.
The turned off production.
Fair enough. Thank you.
Thank you. The following question is from Eric Tree of Citi. Please go ahead.
Hi, John Good morning.
Good morning.
What does your exposure to MTO compared to the industry and how does methanol demand fair and the MTO given NASA base, that's weighing that economics have turned more advantage.
Those customers advancing or extending turnaround times.
Yes, so our MTR exposure is less than and many of our competitors. We have you know a couple of customers were selling MTO I'd say the MTO rates have held up quite nicely even in a very low environment for knobs, and very low environment for olefins I mean ethylene.
I think a historical low prices. So that's today that doesn't mean, it's going to be the case tomorrow, but we've seen MTO demand hold up quite nicely and you know again, we'll continue to monitor it but we've seen some planned turnarounds in these turnarounds were planned in Q4 before the whole Corbett 19.
Shock so.
Are they being extended because of economics, we don't have that kind of Intel.
But we're seeing the operating rates in the 70% today and in that market, which.
No it's quite healthy so well see how these these current turnarounds pan out and what the operating rates look like when they return, but again [laughter], making a forecast in this environment as foolish and we'll have to monitor things as they happened not try to predict or things that are unpredictable.
Helpful and as a follow up.
Hi, you noted that there were two projects that were expected the startup in 2020, obviously visibility into that slow but in past down cycles like in 2000 18009, typically how how long did you see project delays and I as a follow up you know what kind of methanol price do you need to see there.
We start construction <unk> three.
Yes. So there are two projects that are you know we thought would be completed in 2021 was the Trinidad project in another one in the United States.
We expect those to be delayed in the current environment. How the late it's I guess again I'm not going to guess today.
So we expect those to be completed at sometime over the coming you know few quarters or as far as a starting GE three I mean again, it's way too early we're in the midst here of a significant downturn from ethanol supply. We've we've negotiated a way to you know to restarted over the next 18 months.
If things improve and the you know obviously, what we'll need to see is a much better pricing outlook for methanol then we see today and a that seems to me a long way away from where we are today. So.
You know were we continue to see pricing you know go down in bottom out below $200 and you know we've always said, we think the long term price of methanol 350, bucks or a heck of a long way away from that price today and I have no idea how long is going to take for demand to <unk> to return and to.
Get back to any semblance of levels that we saw the fourth quarter of last year and I don't think anybody knows so we'll see as economies start to open up the impact on on further cases of call of it and how governments react. So it's kind of out of our hands is what I would say.
Thank you.
Thank you.
The following question is from Matthew Blair Tudor Pickering Holt. Please go ahead.
Hey, good morning, everyone glad to hear you are a safe and sound I wanted to clarify on the shipping costs for methanol.
Previously, there's some concern they would move higher.
Now have been moved lower due to cheaper fuel oil or would you say, there's still pretty elevated due to a storage demand and do you have any numbers on this that that'd be much appreciated.
Yeah, So we're using methanol and ultra low sulfur diesel in our ship. So you you know what's happened to those prices. So when we entered the quarter. We expected you know them to be trading at a price that was relative to the oil price at that time. So you can see that those prices up substantially lowered which has led to lower level.
Six cost for us, but rather than higher which is what we're predicting I wish they were higher because that means we'd have a higher oil and methanol price, but they are lower and that's what we're dealing with so I don't have the specific pricing in front of me Matthew we certainly can follow up offline and get to that data.
Great. Thanks, and then I'm I wanted to circle back to see previous comments to John you mentioned your hope that the higher costs methanol producers would cut back you also noted that the mess next husband take or pay contracts on gas supply are these take or pay contracts pretty standard a in the industry and something that could limit run cuts.
The plant shutdowns going forward.
Yeah, I hope is not a strategy. So I didn't think I use the word hopefully I didnt.
You know I thinks I'm a lot of companies do have somewhat a take or pay contracts, but I'll remind you a lot of these.
Methanol producers our competitors are state owned or companies that are in.
Geography is where they're kind of buying gas from state owned state owned company or national companies. So.
We're talking to our suppliers about our take or pay obligations and we have some flexibility and I I would say our competitors also have some flexibility. So I think in this kind of environment everything is up for for negotiation. If you can't sell it and you can't start then you can produce it so I'm not in prayer.
Maybe to our competitors conversations, but I I know, we're talking to our suppliers about some flexibility and that is unprecedented times.
Very helpful. Thanks.
Thank you.
The following question is from Laurence Alexander of Jefferies. Please go ahead.
Good morning on the storage question.
Look around them.
For two on what this means for inventory levels and the timing relative to normal.
This demand picks up how long it might work down that excess that might be sort of stored in scripts or in other areas.
And secondly could you give a quick update on some of the non traditional applications going to be I'm.
100 taxi trial.
I'm not sure boilers.
How demand levels are on that side.
Yeah, So again I can't predict the future.
Demand will be the driver to how quickly we work through the overhang and inventories.
We took were very quick proactive measures to take production out of our system to allow us maximum flexibility in our inventory and <unk> and I'm glad we did that although it was criticized at the time.
Because they give us a lot of flexibility we have a lot of flexibility in our current supply chain to weather <unk> significant demand downside and we're looking at creating more flexibility. So again, if you can tell me what your outlook for demand for methanol as I can tell you how long it will take to work through a excess inventory and I don't think either us knows that.
So all moved to your second question, which is around the.
Kilns boilers and am 100, well, obviously am 100 taxi trials continue, but if nobody is driving anywhere or going anywhere than fuel is not being consumed.
I know myself I don't think I filled up my car here in the last eight weeks. So if that's any indication of.
Fuel consumption around the World, then where we're going to continue to see things like MTV and.
Biodiesel and am 100, B b under pressure from a dance demand perspective, Fortunately kilns and bothers us different those are needed for threw up you know for heating and creating electricity in mainly heat sorry for blocks of buildings in China. So we continue to.
See nice gross there, but you know when you look at the demand destruction, we've seen elsewhere as it's just a drop in the bucket a compared to what we've seen a on the demand destruction side.
<unk>.
Just on the median notably on thinking about the inventory question is just is it is its significance as a build or is it wants to if we had any kind of recovery, but to say to demand levels that we saw a month ago would it just be sort of been a blip.
Yeah again, I don't know how much is out there being stored on ships its anecdotal but.
But we have seen the spot rates for ships chemical tankers go up quite significantly we have heard anecdotally that people are starting methanol on ships, we know that storage tanks and you know if the average storage was let's say 800000 tons on the coast in China, maybe it's a million plus today. So you know wouldn't take too.
Longtan to move through that in a in a better demand environment, but the big question I don't know is how much is being stored on ships.
Perfect. Thank you.
Thank you.
He thought one question is from Jason Croshaw Polaris Capital Management. Please go ahead.
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Hey, John just a couple of questions here.
Thank you.
ER tens of supply coming out of a mark to market I guess percentage basis supply needs to come out.
The market balanced last question yeah.
Depends on on where the demand ends up Jason so.
It's really early to tell is it going to be 20%, 30%, 40% I don't know.
And how long I think that's the other issues. So you know this market is all has always been balances to submit a at what price and you know at the current spot prices in China, There's probably 50 million tons underwater on a cash basis at about 80 million ton market. So you know <unk> a lot needs to come out if you have a.
Significant demand destruction, but I I can't predict what that and destruction could look like over the coming quarters.
Got it but it sounds like it's not.
Sounds like 2030.
Yes, it it's not 10, yeah, it's not 10, okay got it and.
And then I guess the other questions in terms of Ah.
In supply comes out.
Last week.
Yeah, what the plant.
Sorry.
Cost of their costs are you saw.
Yeah pretty flexible we've kept all our people you know people cost for US is a is not a very significant cost you know we only have 1500 people in the whole organization, they're very skilled and technical and we need them to restart. These plans when we take them down we take them down as such a way that we preserve them very well.
So if we made the call tomorrow that we're going to start. These plants up you are talking weeks not months. So work our plan is to keep our teams in place and too.
May be ready to restart when the conditions are right, but you know I can't see that happening or and if in the a immediate future. So we'll be ready.
And I I hope I'm wrong that things will improve a lot quicker than I'm, anticipating but I really don't know, but we will continue to keep those plants ready to restart and our people in place to be able to run those plants, if and when the time is right.
Got it sounds so it sounds like just like it.
For yourself for others and the industry I mean, it's not so onerous in terms of basically costs and sort of time duration.
People can't be flexible about bringing supply on the block and bring it back on.
The man hours.
Yeah, that's what I would suggest that's how it's happened in the past in Onein and 16, when we had similar conditions are those times, though it it only lasted a quarter or two and.
We didnt if those were one was an oil price shock, which took a lot of demand out permanently and the other one with the financial crisis, which froze liquidity for a quarter or two but this seems to be quite different to me. This is not one of those events. This is a once in 100 year event and we're learning as we go and Oh I refused to predict.
It's going to happen next week never mind next month, so we're going to manage the best we can and it really difficult environment.
Got it thanks guys.
Yes.
Oh.
Thank you.
Once again, please press star one at this time, if you have a question.
The last question is from Tom Roberts WPS. Please go ahead.
Thanks, glad you sound sound well and so are you have to deal with these challenges here.
John would you hazard, a guess at which end market might come back. The first used to do you think fuels applications because driving it looks like it's already starting to come back or something like formaldehyde and the construction market might come back is that usually stimulated during when interest rates drop into government start doing things.
Yeah again, you know predicting the future is really hard in this environment, John but I would you know I would expect a automobile driving to pick up pretty quickly I I'm not sure. If people are gonna be comfortable taking transit as an example, so are we going to see a whole bunch of new cars being being bought and driven it could be.
I think people have been at home now for quite some time in maybe construction activity will pick up as people renovate and you know I'm on the board of West Fraser, which is the largest lumber producer in North America, and we've seen a lot of activity in rentals for homes a market for for even in the current environment as people have stayed at home so I think that.
It's another industry that that could pick up pretty quickly but to me. It's all around economic activity in economic activity. That's created by people doing stuff by feeling free to move around and do do their normal day to day activities. You know before corporate 19, I personally think there's a lot of fear out there still.
And even if things do open up that there'll be a very slow.
Pace of getting back to whatever nor the new normal is so that's my personal opinion, but that's just a guess, but you know I think there's certain applications like you mentioned, which could could bounce back quicker than others.
And then in Trinidad I assume you'll have no problem getting gas when you restart, but I think Chile spend a little bit more competitive on gas if you're down for an extended period, you think longer turn that might hurt your diligent and negotiate gas there with the country.
No I I think I'm more concerned about further production exploration you know.
Most of the gas we get for the second plant all of the gas to get for the second thing comes from Argentina that gas. If we wanted to start up tomorrow is there, but you know what happens to Argentina, and it's it's situation in this environment and how does the E. N P companies in this out there you know continue to develop gas reserves. So those are unknown.
To me, but today, there's there's lots of gas in that cone, but five years, So no who knows I mean, it depends on L. all of this pans out and and where we go from here. So a bit of a guess John I again, I don't know what's going to happen next week never mind, a few years from now.
Okay. Thanks Stacy.
Thanks, John you too.
Okay, well. Thank you I wanted to reiterate that our top priority is keeping our team members safe and healthy we will continue to operate our plants safely and reliably deliver secure and reliable supply to our customers and protect our balance sheet. We have a strong financial position and we believe that we're well positioned to weather the methanol demand destruction and other chat.
Plunges, resulting from Cobot 19.
Thanks for joining us today stay safe and look forward to connecting with you in July. Thanks. Thank you for the interest in our company.
Thank you the conference has now ended.
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Uh huh.
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Okay.
Okay.
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[noise] <unk> 50, though.
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Yes.
Yeah.
She was pending.
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