Q2 2020 Methanex Corp Earnings Call
Oh participants please continue to stand by the conference will begin momentarily. Once again. Please continue to stand by me. Thank you for your patience.
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Oh, Pepsi Penske 10 by the conference if we did you begin.
Ladies and gentlemen, thank you for good bye.
Welcome to miscellaneous code, which in Q2 2020 earnings call.
Not to diminish over to meet Campbell. Please go ahead.
Thank you good morning, everyone welcome to our second quarter 2020 results conference call I, 2022nd quarter news really nationally.
No.
Actually the access from the reports tab of the Investor Relations.
And that's dot com.
I'd like to remind our listeners and our comments and answers to your question today may contain forward looking information.
Information by its nature subject to risks and uncertainties that make hottest stated outcomes to differ material and the actual outcomes.
Certain material factors, our assumptions were applied in drawing conclusions or making a forecast or projection, which are included in the forward looking information.
Please refer to our second quarter 2020, Mdna anti 2019th annual report for more information.
I would also like to caution listeners that any projections provided today regarding methanex future financial performance, our effective as of today.
It is our policy not to comment on our appetite added between quarters.
For clarification any references to revenue EBITDA cash flow or Inc. have made in today's remarks reflect our 63.1% economic interest in the.
And our 50% economic interest in Egypt.
In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark to market impact on share based compensation and the impact certain items, if you didnt.
That's right.
We report these non-GAAP measures in this way to make him a better measure underlying operating performance and be encouraged analysts covering the company to report their estimates and this is Matt I would now like to turn the call over to Methanexs, President and CEO Mr., John flooring for his comments and a question and answer Perry and good morning.
Everyone is continuing to stay safe and healthy.
We will start with a few comments about the current environment and then speak to our Q2 results.
Got an overview of the methanol market and discuss how we're managing our business in this challenging environment, while positioning ourselves to benefit from the recovery.
In the global economy.
Our number one priority remains the safety upper employees contractors and communities, where we work and we were thankful that our team is safe and healthy.
We continue to evaluate the risk at each of our locations to ensure the safety of our team members and we continue to take extensive health and safety measures across our operations and offices as we begin to return to our workplaces at most of our locations.
We have again, demonstrating the resilience of our business model as our operations and global supply chain continue to run effectively in a different very difficult environment and our ability to service customers has not been significantly.
Good and damage.
A big thank you to the entire team for a job well done.
Now turning to our second quarter results. This is a very challenging quarter for them ethanol industry and our company.
Due to the impact of Cobot 19, and low oil prices, we recorded adjusted EBITDA of $32 million, an adjusted net loss of $64 million or 84 cents for sure.
Our results were significantly lower compared to our first quarter due to a lower average realized price and lower sales volumes, which were partly offset by lower production and selling general and administration costs.
Also our margins tend to be lower in the declining price environment compared to a stable price environment.
Generally the office it applies with methanol prices are rising.
We estimate that inventory timing differences reduced adjusted EBITDA by approximately $25 million in the quarter.
We estimate global methanol demand declined by approximately 5% or 1 million times in the second quarter 2020.
Apparently the first quarter, reflecting significant declines in most parts of the world outside China.
[noise] the demand impact in China, resulting from manufacturing shutdowns due to call that 19 was felt the most in the first quarter.
If we compare the second quarter of 2022, the fourth quarter of 2019, we will see the full impact to covert 19, where we estimate that quarterly global methanol demand declined by approximately 12% or 2.5 million tons.
Prior to cope with 19 annual methanol demand was expected to increase by 3% to 4% or approximately 3 million tons in 2020 compared to 29 tea.
In China methanol demand increased by approximately 4% and the second quarter of 2020 versus the first quarter as economic activity began to recover from seasonally lower levels and cobot 19 impacts ground transportation and increased and fuel demand improved.
Nothing all demand improved across both traditional chemical applications, such as formaldehyde and energy related applications, such as MTB dnbi and other fuel applications.
And also olefin demand was particularly strong as several plants, we started to maintain high operating rates.
We planned and unplanned outages in the first quarter and supported by significant improvement in ethylene pricing and the second quarter.
Outside of China, methanol demand declined by approximately 19% quarter over quarter.
Traditional chemical demand decline due to significantly lower manufacturing activity, particularly in the automotive and construction markets, which are both major consumers of methanol.
Demand into energy related applications, including MTB declined due to reduced ground transportation fuel to mess.
Global methanol industry supply also declined in the second quarter of 2020 compared to the first quarter due to various outages and shutdowns around the world, but not quickly enough to offset the global decline in methanol demand, which led to prices falling below the cost curve in Q2.
As we previously announced we idled or tightened plant in Trinidad and mid March and our Chile for plan as of April one.
Seen other producers in Trinidad, Argentina, the Netherlands, Russia, and China reduce operating rates or shut down.
We estimate the global ethanol supply declined by approximately 9% when comparing the second quarter of 2022, the fourth quarter of 2019.
Overall production in the second quarter was 379000 tons lower than the first quarter of 2020, primarily due to the idling of our tight and Chile for facilities.
Early in the third quarter of 2020, improving methanol demand and methanol plant outages in southeast Asia, and the middle East impacted market conditions, and providing support for higher methanol prices.
We estimate that the industry cost curve, which continues to be set in China.
It was approximately 200 to $220 per ton.
Spot prices in China are marginally below the cost curve today.
We recently posted our August North American price, which remained at $276 per ton and our Asia Pacific price, which increased by 14% to $245 per ton.
Our European contract prices set quarterly and our third quarter posted prices 235 euros per ton.
We believe that the outlook over the coming months remains uncertain and it's difficult to predict the full impact of cobot 19, anaemic and the lower oil price environment on methanol demand.
As previously announced we have taken several steps to further strengthen our balance sheet and preserve liquidity, including deferring approximately $500 million in capital spending on the Geismar three project for up to 18 months.
Reducing our quarterly dividend to root zoltan, approximately $100 million, an annualized cash savings and reduced 2020 maintenance capital spending by $30 million.
As you are aware our cost structure moves with the price of methanol.
Price, we pay for approximately 60% of our natural gas, we consume which is our most significant operating costs is linked to methanol prices.
This means that our operating costs up moved down as methanol prices decline. Although there was this time lag of up to one quarter.
We expect that a lower oil price environment will offset our previously anticipated increase in shipping costs due to the new international Maritime organizations 2020 regulations.
We also continue to actively manage our operating cost across the organization organization during the current downturn due to call. It 90.
We have a strong liquidity position and ended the quarter with nearly $800 million in cash on the balance sheet.
We expect that we only need to maintain a minimum cash balance of approximately $150 million to run the business day to day.
We have no near term debt maturities.
We also recently announced that we amended our 300 million dollar committed revolving credit facility and 800 million dollar on revolving construction facility, which provides meaningful financial covenant relief.
As we previously announced we placed our job Geismar three project on temporary care and maintenance.
Prior to making this decision the project had been significantly de risked and our project execution was say on time and on budget.
We will consider a number of factors before deciding on whether to restart the projects, including the pace of the global economic recovery.
That all market conditions, our ability to effectively finance projects and the ability for suppliers to execute construction and to deliver material in equipment.
Given the uncertainty in the broader economic environment due to covert 19, we continue to plan for a wide range of scenarios, including ones, where we see a more prolonged period of lower methanol demand and continued bottom cycle pricing.
We are focused on cash preservation and continue to evaluate all options to ensure we maintain financial capacity and flexibility to navigate the current environment and emerged stronger over the cycle as conditions improve.
We will not undertake share buybacks in this environment as any excess cash will be used to further strengthen our balance sheet.
Now turning to our outlook for the third quarter.
We expect be outlook over the near term to be uncertain, we cannot predict the full impact of the cobot 19 pandemic lower oil price environment on the methanol market.
Well, we have seen higher methanol pricing in the recent weeks based on our posted methanol prices. So far this quarter, we expect average realized prices in the third quarter to be similar to the second quarter.
We expect our production levels in the third quarter to be lower than the second quarter.
However, as prices stabilize we expect the timing differences due to our fivefold first in first out inventory accounting will have less the impact on costs.
We expect adjusted EBITDA to be similar as the third quarter compared to the second quarter.
Before pausing for your questions, we'd like to highlight a couple of points regarding the resilience of our business.
Well the near term outlook is uncertain, we expect continued long term.
Men growth for methanol.
Methanol as a key ingredient that serves as a building block to produce a multiple multitude of everyday items used to construct and insulate our homes and automotive components to make cars lighter and then the technology teams that keeps us connected.
In many cases, there are limited if any cost effective substitutes room ethanol in many of these applications.
Methanol is also using an increasing number of energy related application and as a clean burning an economic alternative fuel.
Man from ethanol will eventually rebound as global economic activity recovers.
As the industry leader with a global production footprint integrated global supply chain and low cost structure, we have continued to deliver secure and reliable supply to our customers globally, which is our competitive advantage enabled us to be the supplier of choice to customers around the world.
Our production assets are well positioned on the industry cost curve to be competitive through the methanol price cycle, we have a strong cash flow potential was significant leverage to methanol price.
We estimate that every 10 dollar change in our average realized methanol price results in approximately 60 million dollar increase of adjusted EBITDA on an annual basis.
Finally, we haven't unique growth opportunities in Louisiana, allowing us to increase our production capacity at advantage capital costs when conditions improve to enhance our global leadership position and creates significant shareholder value and the stronger global economic environment.
We remain focused on operating our plant safely and reliably delivering secure and reliable supply to our customers and protecting our balance sheet.
We believe that are resilient business model and strong liquidity position will enable us to navigate this challenging environment.
He position ourselves to generate significant long term value as global market conditions recover.
We will now be happy to answer any questions.
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Perfect. Thank you.
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Well done.
Just a couple questions. Thank you for patients.
The first question is from Jayco about your line is open. Please go ahead.
Hi, good morning.
Good morning.
[laughter] once you're off on a g. three and maybe if you just talk.
But your ability to push that out further than.
The 18 months I live in 2021, and any financial penalties to to do so.
Yes, when we renegotiated our our recent.
Revolvers and including the construction facility, we did get some relief on the completion date for GE three.
So we have pushed that out a little farther.
Hi, how far out.
Another 12 months.
Okay.
And then can you just talk about the incremental costs, if any from from Cobots specific events in the quarter.
Oh, yes, very minor incremental costs relate to do with working remotely some technology, probably but very very insignificant.
And then just last question here on a global methanol demand. So you gave the numbers of ex China down 19%.
In second quarter I'd be interested in hearing on how things actually improved through the quarter.
And what July is looking like.
Yeah, I think it's difficult to predict demand in this environment Jacob So we'll continue to watch it but I'd say outside China, we're still seeing significant pressure on downstream and use products demand is slow to recover.
So we'll continue to watch it but I think is too early to predict a demand recovery.
We are things significantly worse in April than than June.
You know I don't want to go month by month, because you know better look at quarter by quarter, but I'd say you know demand is still.
Significantly down from where it was a Q4 2019.
Her to leave it there thank you John.
Thank you next question is from Ben Isaacson.
Please go ahead.
Good morning, Thank you.
Sean.
Read that.
Inventory levels that Chinese ports or reportedly high can you kind of put that into context as to how you see global inventory levels through the channel.
You know China levels continue to go up at sort of the demand is quite a bit higher.
Because of MTO operating in China, and we've said before that we haven't seen the.
Terminal capacity increase in China to the extent it needs to do to accommodate the new demand on the coast. So.
We would characterize inventory levels today, probably more normal that high I'd say they were certainly high as we entered the quarter with all the uncertainty.
India basically shutting down so most of the rating production ended up in China, which led to.
Higher inventory levels are globally, including our own are all levels, we wouldn't characterize as inventory levels as high but more I would say normal.
Suddenly stated yesterday that they see global acetic acid inventories is being low.
Do you think that's a meaningful tailwind to reduce methanol.
Yes.
Well acidic acid of the chemical them out I think is about 9%. So oh, we'll take any new demand, we can get versus where we'd been but you know I don't think it even if it goes up by double digit it's not going to have a significant impact on the overall methanol supply demand balance.
My last question as you realize that $8 million and savings in Q2 versus Q1.
How much of that do you think a sustainable on a run rate basis going forward.
Well I guess it depends on how cold it nine team continues to impact our ability to do things like travel and and you know our company set up.
As a collaborative type company will have a lot of global teams that meet on a regular basis and all of that and obviously has ended and obviously in this environment. When when were you looking at hiring and saying things like that were being very cautious so and I to me I think the big question is what is the longer term or medium term demand from ethanol.
We were setting up the company to being growing in line with the methanol market, which was 4% to 5% and obviously that's totally changed right. Now so we may need but fewer people are going forward. If we don't see a rebound and methanol demand and if we do then obviously, we'll adjust our cost structure.
Sure.
As a result, so I'd say, it's me the savings that we've got in.
Our maintain them, we can maintain them in the current environment.
Okay. Thank you very much.
Thank you next question is from Joel Jackson. Your line is open. Please go ahead.
Hi, good morning, John.
Morning comps Ive a few questions. So.
First one would be if I heard your your data points correctly prepped remarks, you talked about methanol market contracting about 12% between Q4 of 19 and the second quarter looks like your own sales volumes contracted between 16 and 19%.
Between Q2, and then Q4, so living you why you have Morse contraction in the industry.
Can you talk about that without a strategic choice to help balance supply demand.
You had some plants I close part of that as while meeting to talk about athletes.
Yeah, it's not a strategic choice to not sell product we saw the product we could certainly we took plants offline to get in front of what we saw declining demand environment, which should prove to be quite a good call in retrospect and the only plants, where we had total flexibility was.
Before and tight and thus far we chose.
Those plants.
If you look at the impact on US you know were underweight in China versus the rest of the World you know China recovered in Q2, all the rest of the world declined 19%.
Our larger exposure to Asia Pacific Europe, North America sauce decline more than Q2 than the market so that not unexpected based on our mix.
And MTO saw growth in Q2, and high operating rates and we have less supply into MTO and Q2 as a I think you know switched to buy more radian product that was being sold at a discount in China by up to $50 a ton during the quarter. So Oh, we would have not chosen to compete.
At some of those that MTO accounts that does price levels. So we chose not to sell but you know we sold everything that we could that made sense for us.
That's helpful personal turnaround you talked about having a some maintenance outages about few one in June two in the second quarter I believe the turnaround at GE. One last year, maybe GTV was do does this mean you don't need their turnaround at either GE wanted you to in the next couple of years, and then give any other turnarounds planned or any other plants. This year.
Yeah, well Gee, one you know usually we get four years between turnarounds and so we did do you want and so I don't expect to do it turned around G. One for three years as far as you do it hasn't had a turnaround yet since it started and you can do them out Joel.
Going up to four years, so I think that will be do at some point not not too distant future. The outages. We took in Q2 were really minor maintenance outages I mean pricing was low demand was poor. So we just took advantage of.
Those conditions to make some minor corrections to make those plants safer and more reliable.
Over the medium term.
We've always guided to two to three turnarounds per year, obviously in the cobot 19 environment, we had to delay.
Some of our planned turnarounds at some of our plants and assuming everything remains the way. It is today, which is a big assumption we plan to do those turnarounds in the second half of the year, but we're monitoring or the spread of call it and our ability to get these turnarounds done safely and effectively in the current environment.
That's helpful and just finally, so and talking with a set of conditions, you'll but looking at whether to restart GE. Three Unfortunately 15 month, let's just say that you come to conclusion, maybe around now that.
You're not going up for Suji three anymore.
I'm sure you've gone back to look at your options here. If you were stopped the project and penalties or how much payment you'd have to make or what you'd want to finish just to have ready for if you restart the party down the road.
Can you maybe just talk about as much as you can you know what flexibility what options you have how much you'd have to spend what the tallies might be if you stop Ci three you know now.
Yeah, I think it's early I, we've said that you know to stop it when we made the decision just a quarter ago or different or to put it on care and made us about the same and we havent changed our view on that as we've announced that we're obviously negotiating with all of our suppliers and different equipment different construction labor and engineering et cetera et cetera.
On on all these different components.
I'd also say we've had a number of equipment suppliers declared force majeure on us or interrupted because of covet 19. So.
There's hundreds and hundreds of these contracts that are being negotiated back and forth. So well if we make the decision to not go forward with GE three up you know sometime middle next year, we'll certainly highlight those costs that we would incur at that time.
Thank you.
Thank you.
The next question from Hudson.
Thanks, guys.
Good morning, John.
John if I heard you correctly.
You talked about relative to end of last year's supply being down roughly 9%. So my question to you is that you know with economics looking the way they all right now.
I mean could you venture a guess Oh, that's too you know what percentage of died 9% will maybe potentially be dominantly sort of are a great deal or do you think most of that supply is going to come on line and then Boston Boston with Duck.
How are you thinking about the base off net new capacity addition.
Yes. So we we've highlighted two plants that we expected to be completed sometime this year.
The Hong plant in the United States on me.
[laughter] met Mitsubishi plant in Trinidad I think they total about 2.8 million I think.
Both are probably under some challenges in the current environment based on our experience with labor availability in and how you.
I have to manage your workforce in this this type of environment.
So we think they'll start they will start at some point, possibly delayed but it's really hard for me to give you an exact on that Hassan.
As far as a you know methanol supply that's off line gone forever, no really hard hard to predict you know, what we're going through and in Trinidad and our competitor as five plants there and.
The gas dynamics are really difficult so they've shut down some capacity and.
Whether that comes back or not I think will be a factor of gas price and whether you know we and they can.
Negotiate a gas price that makes sense a through all points to the cycle of methanol. So I think we'll have to watch that and ER and see how that evolves, but it's really hard to predict where that's going to end up.
I think and in other parts of the world that pricing was to rebound to more normal.
And all cycle levels mid three hundreds we would expect that that supply to come back on.
Everything everything and as a follow up you know maybe early days, but a you know a notice sort of news releases coming out about a flooding at the Yangtze River. So what do you guys herring intends off a bit methanol output a as well as methanol trade.
That may or may not get impacted by you know this flooding go that's being reported in the breadth.
I don't have anything to add on to that assign sorry.
Okay fair enough. Thanks, so much.
Thank you. The next question from my Lifetime. Your line is open. Please go ahead.
Great. Thanks, Good morning, John.
Just.
To kind of higher level question today first I believe methanex owns its own vessel fleet that I think is worth call. It roughly 200 million on your balance sheet. Today curious what do you think about improving or financial flexibility in this environment, if you'd consider some sort of sale leaseback arrangement to help generate cash flow near term.
Or you would consider owning your own ships strategically important to where you are to the mathematics.
Yes, we might we don't own them all we have a a combination of long term time charters, which would be 15 years, some we own and partnership.
And some we have to see always contract of affreightment. So there's a mix there.
So whether we own them or not is not you know crucial to two two waterfront shipping. We know we started owning a few vessels just to understand more around the operations. Obviously, we want to promote methanol as an alternative fuels. So there was some strategic reasons.
It's an integral part of our overall supply chain, our competitive advantage as a secure reliable supply.
To our customers and waterfront shipping is a key component of that.
But you know I've said earlier all options for on the table, but what we want to preserve our balance sheet, you know enhanced liquidity, but not destroy the future of the company at the same time. So I think these things will be ordered.
And we'll we'll end the ability to execute has also.
In this environment or selling assets could be quite challenging in this environment. So there's a number of factors, but we'll consider everything to protect our balance sheet and to enhance liquidity going forward.
Great and then second question on the energy opportunity for methanol I think there's been a lot of talking investment in recent months around clean hydrogen and earlier. This month. There was a major hydrogen project announced the middle East where effectively theyre using ammonia as the transport medium to take hydrogen gas to the end market might might.
Understanding is someone could do something similar with methanol as the liquid hydrogen carrier for fuel cells. So I guess just between what's going on in clean hygiene or even just direct fuel blending can you just maybe update us and your thoughts on how you see methanol playing a part in this move towards clean fuel.
Yeah, well methanol has always been a great hydrogen carrier. That's that's not news, though we had a fuel cells project team going back to 20 years ago working with people like Ballard for example, and you know that continues to go forward not for automobiles in a in a big way, but for those smaller applications.
Generators, and et cetera, so still a very small part of overall demand but.
As a hydrogen carrier methanol the grain alternative I'd say that kinda application is really a medium to longer term to build out the infrastructure et cetera, So yeah, certainly possible, but as far as impacting demand in the next five years I would expect thought.
Perfect. Thank.
The next question from John Roberts.
Please go ahead.
Thank you.
I think it sounded like you were also curtailing New Zealand, a little bit I'm going forward in the back half the year could you give us an update there.
No we're not curtailing New Zealand that all I think I guided last year, we expected our production to be 1.8 million tons in New Zealand for the three plans based on gas availability in the country for 2020, we havent changed that guidance at this time.
Okay, and I think there's been a shortage of plywood in particle board is formaldehyde at least a bright spot in the methanol market.
Yeah I am.
I know, there's a shortage and from up not formaldehyde, but plywood and Particleboard and I think thats for a factor of makers of those products curtailed production in the second quarter as well and.
For reasons that we think a the renovation market is doing quite well as people are hunkered down or at home and trying to make their theres basis more palatable and they have to be there. All the time, that's created a short term a demand for those products, which is good for formaldehyde resins absolute.
But again the amount of formaldehyde rather than that goes into plywood in North America, well interesting, it's not going to move the needle from a demand point of view.
Thank you.
Just.
Thank you the next question from.
Your line is open. Please go ahead.
Yeah. Good morning, guys. Just a couple of quick operational ones, John If I may just the firstly on the maintenance schedule going forward I know you kicking that means capital.
For the year, just give us a sense for how much more flexibility there might be in that budgets and whether you have any major turnarounds planned through the balance.
The year I know you don't give specific timing on on those downtimes, but just trying to sense for whether we should expect anymore disruption.
And then to the follow up notes or question just on the CEO to levels that I think you noted in your feelings just I guess, that's what's happening there.
Yes so.
As far as turnarounds, we guided to two to three per year.
Obviously, we in the in the environment, we found ourselves in the first half of this year, we couldn't do any turnaround so assuming conditions remain similar to how they are today will proceed.
With our planned turnarounds for 2020.
And you know we're going to obviously practice all of these safety or things that we need to do today, and social distancing et cetera et cetera, as we do.
These turnarounds, it's a bit of Ah room, maybe to push some off a little bit if we need to because we can conclude them safely.
But theres limited ability to do so you know these are statutory turnarounds that we need to to change catalyst and do some maintenance work every three to four years. So we have limited ability to further postponed or these turnarounds and so that you should expect us to do to this.
Three a year in a normal environment and I didn't really understand the C. O. Two question related to Zealand or some of the high Seo to gas or Seo to admissions in the country.
The richest the very brief comments in the M&A about two levels being slightly down it wasn't too sure what that meant I think it referred to the fuel gas.
Oh that was medicine hat seat. So Oh, then takes yeah, we take Seo to across defense from a nitrogen plant.
And you know we have met min Max rates and not and we decided to go to to mid range. So I'm. The CEO too we were taking which impacted our production there little bit.
Understood and then just was hoping they may is on Trinidad where are we at with the broader Trinidad discussion and debate.
We all know the backdrop, there, but just trying to get a sense for how that.
You know broader discussion or negotiation is ongoing there in countries, where we can expect through.
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Yes.
We are not ready to resumed concentration if you've had some you can you repeat your question. Please go ahead. Please open.
Steve are you there.
Yeah, Hey, guys.
Hi, Thanks didn't need to break the call I apologize.
The question is really just somebody that <unk> and the background either.
[laughter] you can get if you if you didn't hear at running we're all familiar with the background I just wanted to get a sense for the status of negotiations with the government. There was like yeah. So so we're negotiating and as we said and you know we're looking.
To secure an arrangement that allows us to be you know somewhat profitable at all points to the cycle and certainly the NGC understands that.
And they're working hard to to.
Great that conditions allow us to sign a deal with them that makes sense for us makes sense for them and make sense for the upstream. So we have nothing to report today, but we will continue to negotiate were not alone I mean, there's others that on the island or in our business in methanol as well as in on you know fertilizer that are in the same Ah can.
Decisions that that we are so I think the government wants to have a solution to this issue and are working hard to.
To make to attempt to make things happen to allow in all the island to continue to be a significant producer methanol and ammonia and again well we'll report as we have something to report, but right now the plans is down.
And you know you shouldn't expect it to come up here in the in the near term.
Okay. Much appreciate it thanks guys.
Perfect. Thank you. The next question is from Matthew Blair. Your line is open. Please go ahead.
Yeah, Hey, good morning, John I was hoping you could provide just a general update on on what you're seeing with MTO just been some chatter recently that MTO really suffers in a low crude price environment. What kinda operates did you see an MTO both in Q2 as well as currently.
Yeah quite high I mean, there was one of the bright spots in the in the whole methanol demand environment. In Q2. So we saw increasing oh rates of production into you know as we had new finance year over year operating.
We did see low pricing for ethylene and propylene, which.
Should have impacted the demand, but we didn't see anybody turn off for economic reasons. So yes, I'd say MTO continues to operate in that 90% range. We understand recently that one or two plants are doing some maintenance one maybe plan one maybe unplanned and you know the enough number plants that are running I think a 90% operate.
Great is is pretty good and we would continue to expect you know in an 80% to 90% going forward and year over year that that gives us more demand because these plants word running all upto 2019.
Sounds good and then the discount rate on the methanol contracts was quite high in Q2, I think you referenced I'm just falling methanol prices as the driver there.
With methanol stabilizing do you do you see that Q3 discount rate getting closer to kind of like a long term normalized level around 15% or so.
Yeah, well, we've guided to when prices are increasing the just kind of go down a bit when prices are decrease decreasing rather rapidly like we saw in Q2, the discount will go up and Thats, our eyes discount since the financial crisis. Since the last time, we had pricing of this order of magnitude, yes, but our guidance is still applicable.
In a in a in a stable environment, where prices are flat, we should experience around 15%.
Discount and a Q3 might be a little higher than that it's early days, but you know that's still our guidance.
Thank you.
Thank you next question from Roger Spitz. Your line is open. Please go ahead.
Thanks, very much focused just on that and see how large chemical company on a teacher earnings call claimed and scaling and powerful below $50 a barrel.
Hi, Thanks, no doubt more complicated.
Hi that you said clearly be MTO guys were operating in 90% just a moment ago.
Do you have the.
You know what if I don't know how you feel that that's a dollar about what do you have a level, where you think it isn't unprofitable or a way to think whether it's when it does become unprofitable.
Yeah again, I've I've said this many times each side is a little different.
When you calculate profitability for MTO, you've got to look at all the derivatives are producing at any given site. It's not so much the oil price is more the ethylene and propylene prices and you know for oil and therefore NAFTA to substitute you'd have to have excess capacity of NAFTA in order to do that which is not there today. So.
We've said clearly that growth in a olefins is probably going to be in the form of ethane in NAFTA in today's environment and not so much MTO and that's what we're planning for but the existing capacity will continue to run a.
Provided that their cash positive on a site by site basis, and that's the case today and that's why we see them running at high rates.
Addiction on the future you'll have to tell me, what the ethylene and propylene and all the derivative prices will be and then we could calculate the affordability for each and every every site. So I think it's a pretty basic analysis to say $50 oil blow, they're all going to turn off and I think history would show that.
Not the case.
Alright, Thank you very much.
Thank you. Your next question from no no from India and Japan. Please go ahead.
Great. Thanks.
My first question this relates to the the working capital I know that in Q2, there's a big.
Positive working capital move I know 60 million of that was that due to.
The insurance proceeds from Egypt.
But can you give a bit more color as to.
Whether that will or whether a lot of that will reverse in the coming quarters or what that's some of that's permanent.
I hope it does.
I mean, as we got higher methanol prices, so I'm I'm cheering for the working capital drought every two to.
Reverse.
Some some most of that is just due to methanol driven by methanol prices.
Rather than inventories yep inventories gas do different things like that but yeah, we'd like to see a go back up yeah. Nelson, we're operating our place our company really tight right now we're really trying to manage our working capital really well. So that's going to keep a lid on that obviously inventories as John mentioned order, a little lower than they've been and so sellers.
And some really good work in terms of managing our working capital. So if you know for in this environment.
We're going to probably stay there.
It's John says if.
We got higher pricing then goes the other way, which is the good news story.
Okay got it and then just on your credit facilities I know you're sitting on a lot of cash, but I think during the quarter you repaid 100 million in your revolver, but you drew down 37 million.
On your construction facility.
Can you give a bit more color as to.
Your strategy with your cash balance and your decision to to draw things down so.
I'm just wondering why didn't you make repay.
All of your revolver.
Good.
Is it.
Is there some risks I won't be available in the future is that why it still drawing that I think about 200 million is drawn right now.
Yeah, no yeah. So in terms of let's start with construction loan on a 37 million dollar draw you know we're going to draw is as we spend money on geometry, we're entitled because it's a six term loan its.
Revolver non revolving facility. So we'll continue to do that and then in terms of in terms of cash and liquidity, we're going to have a balance in terms of how much cash we want in terms of having on the balance sheet versus the you know the negative carry and right now we as noted in the quarter we.
We've obtained a really you think good covenant relief that allows us to get through the next few 12 12 months.
You know with lots of flexibility. So you know we'll be evaluating over the next a little while in terms of how much cash while keeping our balance sheet versus returning and repaying. The the operating facility we have made decisions yet.
Okay, Thanks, and I'll leave it there.
Thank you. The next question from Thank you ladies open. Please go ahead.
Hey, good morning, Joe.
Good morning.
With lower methanol prices have you seen any increased demand for industrial boilers or is methanol still less competitive versus either coal or gas.
Yes, so the switched to industrial worst methanol is really driven by cleaning up the air rather than straight economics, most of the boilers in China today, our coal and they you know there quite polluting so, especially on the cost through the through the drive to clean clean up the air So three things you can do.
Use instead of color methanol natural gas.
In diesel fuel and.
Natural gas is not readily available throughout China, it's not like articulated system like we see or here in North America I think.
Natural gas is a good choice to go to from call on a lot of areas or you can get natural gas and I think that's for methanol plays its role. So I don't think weather methanol is at 200 or $300 a ton or 400 is going to make any impact on the switching rate of a whole time ethanol into boiler mark.
Good it's more of a.
Technology works and ethanol I can get it delivered.
So it's more of a supply chain issue than actual price. Some ethanol we continue to see conversions not only on boilers, but more recently on kilns as well. So on coal based kilns are starting to convert to those same three fuels and we see that as a trend that will continue, especially as China looks to clean up or is there.
Okay for my follow up question I wanted to ask kind of longer term dynamics, the marine fuel I think Lloyds recently approved and ammonia.
Fuel vessel, so how do you see methanol competing against.
Ammonia and you know meeting IMO.
2030 standard.
Yeah, well methanol is a great alternative fuel and will meet the IMO standards going going forward and Oh. The thing about it is easy to handle is readily available in all parts around the world It can be stored and regular.
Tanks that are on the ships, so from a storage and handling and availability its checks all those boxes, but I've always said, it's not going to be either or is going to be a number of solutions that people are going to promote including LNG and.
Ultralow sulfur diesel in the short term and methanol and ammonia has been used in diesel trucks in North America for quite some time so.
I think it'll it's not going to be a one size fits all solution and we're pretty pleased with the progress that we're making on methanol as a fuel onboard shifts to the nice thing I think that methanol hasn't advantages is it's a flexible. So you know you can have the same engine use a ultralow sulfur diesel or methanol so to me that.
Any time, you can provide flexibility on fuel of choice gives you a leg up on your competition. So we would continue to see methanol as a fuel on ships could growing a.
Again significantly probably mid next decade, because mid this decade because its a.
Mainly a new build story retrofitting, we don't think is going to happen people will just a probably use ultra low sulfur diesel, especially in the current environment.
Okay, how would you size the market opportunity in terms of tons.
Yes, that's about it if every ship was to convert them ethanol, which is not as but 500 million tons. So we don't need very much penetration to have a significant impact on the supply demand balance for methanol. So a ship like ours or one of our ships just to give you order magnitude there about 50000 deadweight tons a day around on methanol 100% of that.
I am it's about 10 to 12000 tons of methanol per year per ship.
Great. Thank you.
Thank you.
Thank you can ask question from should enter Bradburn, Glenn Japan. Please go ahead.
Thanks, very much good morning.
And in terms of the new methanol supply that's scheduled to come on line could you just get some color around what sort of logistical issues you think cobank 19 could have.
On in terms and the timing of those plants coming online.
Well, it's really around construction I mean, you know if you've ever been do us a large plant as being constructed people are working and pretty close quarters. So you have to put in quite a bit of safety procedures that you wouldn't normally put and without without a virus around social distancing masks.
Cleaning all the things that are being done everywhere that we see Ur cobot present in in a big Big way, so that adds time and probably as people and then you've got the commissioning process. Usually when you are commissioning of might you are bringing people in from all all different parts of the world that have expertise in particular.
Piece of equipment, or particular system or particular, a part of the plant and I think in Trinidad today, that's pretty difficult or in the United States, maybe a bit easier, but ER, maybe some people who want to travel they're going to do it remotely and that'll add complications. So I think not only will construction type.
The extended but commissioning could be a lot harder.
Then in a normal environment, but.
I'm always amazed what people are able to do a when they don't have a choice of being in person. So people find ways and but I think it'll be a bit more cost and probably a bit bit longer is what I would anticipate but those plants will will get commissioned at some point.
Here in the coming year or two.
Okay, and then last one for me and can you comment on what you're seeing as far as the impact of the sanctions on Iran and the flows of Iranian methanol.
Yeah really no impact on their ability to produce I think the impact to the sanctions is more getting spare parts and and developing the gas fields to allow them to deliver gas or on a reliable.
Level throughout the year so.
We're still continue to see methanol being shipped and really the only place. It can be sold is is China now India's back open. So there's some going to India and we've seen pricing rebounded in India. As a result, so I'd say, it's more not the ability to sell the methanol and it is at a discount to other material, but there's still.
Selling it is it's the production and the ability to run their plants reliably going forward.
Thanks to the time John.
Thank you.
Thank you see that they need to questions at this time, Okay Everything's Ok.
Thank you. So just a couple of clarifying points I think I mentioned in the extension on the GE. Three completion was 12 months, it's really nine months. So it's now in July 2023 apologize jolt for.
Being off by three months and we have a crack finance team here so during the call.
I didn't realize this but we havent cobot 19, a category for all expenses that are in addition to our normal operating costs related to covert 19, and so far today, it's $37000.
So just to answer that question, thanks to the finance team for providing that information.
I wanted to reiterate that our top priority is keeping our team members safe and healthy we will continue to operate our plan safely and reliably will reliably deliver secure and reliable supplier our customers and protect our balance sheet.
We believe we're well positioned to sustain our business in this uncertain environment and generate significant long term value as global market conditions recover.
Thank you. Thank you for joining us today stay safe and we look forward to connect you with you in October. Thank you for the interest in our company.
Thank you.
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