Q3 2021 Methanex Corp Earnings Call
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Please standby your conference will begin momentarily to ask a question. Please wait for the moderator to start the conference then press Star one system, Tony will be heard when you request has been accepted to cancel your question Press Star two.
You bet CMT goldfields come off her superb before zinc is still two years, so it will happen.
This conference is being recorded so it's going to be honest. It don't go as you see.
Ladies and gentlemen, thank you for standing by welcome to the Methanex Corporation Q3, 2021 earnings call I would now like to turn the conference call over to MS. Kim Campbell. Please go ahead Ms Campbell.
Thank you good morning, everyone welcome to our third quarter 2021 results conference call. Our 2021 in the third quarter news release management's discussion and analysis and financial statements can be accessed from the reports tab of the Investor Relations page on our website at Methanex Dot com.
I'd like to remind our listeners that our comments and answers to your questions. Today may contain forward looking information.
This information by its nature is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome.
Certain material factors or assumptions were applied in drawing a conclusion or making the forecasts or projections, which are included in the forward looking information.
Please refer to our third quarter 2021 N DNA into our 2020 annual report for more information.
I'd also like to caution our listeners that any projections provided today regarding methanex or future financial performance are effective as of today.
Our policy not to comment on our updated guidance between quarters.
For clarification any references to revenue EBITDA adjusted EBITDA cash flow or income made in today's remarks reflect our 63, 1% economic interest in the Atlas facility and our 50% economic interest in Egypt facility.
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 of certain items associated with specific identified a bet.
These items are non-GAAP measures that do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies.
We report 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 methanol President and CEO, Mr. John Lawrence for his comments and a question and answer period, Thanks, Kim and good morning, everyone.
This morning, a few members of our executive leadership team are joining me, including Ian Cameron, our SVP of finance and CFO.
So James who previously led our marketing and logistics organization and now leads our corporate development function, including the execution of our Geismar three project as.
As well as our sustainability function.
And rich Sumner, who was recently appointed to lead our market Junior and logistics organization. After working for many years with the company in various finance and marketing roles around the world.
My Curse, who led our corporate development function and our Geismar three project recently retired from the company after 26 years of exceptional and dedicated service.
Today, We will review our strong third quarter 2021 financial results discuss our latest views on the methanol market talk about our operational results and share a robust outlook as we enter the fourth quarter.
And we will open up the call for your questions.
Turning to our financial results, we recorded adjusted EBITDA results of $264 million in the third quarter and adjusted net income of $99 million or $1 29 per share.
Our adjusted EBITDA results reflect our continuing strong methanol price environment, partially offset by lower sales of methanex produced methanol.
In the third quarter, we increased our average realized price to $390 per ton.
$14 increased compared to the second quarter.
Our results illustrate the significant leverage that our earnings have to methanol prices.
In addition, amid a rise rapidly rising energy price environment, our results highlight our low cost structure and the value of our natural gas arrangements as approximately 65% of our near term North American feedstock requirements are matters through fixed price contracts.
Majority of our natural gas agreement across the rest of the world are linked to methanol prices.
Turning to the methanol market.
In the third quarter methanol market conditions remain tight with ongoing industry supply challenges.
Traditional methanol demand was flat as various factors, including supply chain disruptions and extreme weather events and global energy shortages impacted industrial production levels and constrained demand growth.
Demand for methanol to olefins or MTO producers was lower in the third quarter due to planned maintenance activities and China's government mandated industrial operating rate restrictions intended to limit energy consumption and energy intensity.
Demand from other energy related applications was steady.
That's what all industry supply continues to be impacted by various factors.
In North America, Hurricane Ida and technical issues affected methanol industry production and <unk>.
Europe sharply rising natural gas prices and planned and unplanned outages constrained methanol industry production.
In China limited coal supply and government mandated industrial operating rates restrictions as noted earlier to manage total energy consumption and energy intensity curtailed methanol production.
Over recent weeks global energy shortages, and increasing coal oil and natural gas prices are impacting methanol supply in methanol demand leading to a sharp increase in methanol prices and a significant steep steepening of the industry cost curve.
We estimate a sharp rise in the industry cost curve cost curve with an average range over the past several weeks of approximately 450 to $500 per ton.
We have seen significant volatility in coal markets and more recently, we've seen downward pressure at Nicole futures market as a result of announced government intervention in the coal market in China, giving historically high pricing levels.
We recently posted our November prices, which increased by $83 to $692 per Titan in North America, and increased by $90 to $600 per ton for Asia Pacific.
We set our European Court track price quarterly in our fourth quarter posted prices 490 euros or approximately $575 per ton.
Starting in January 2022, we are introducing a new posted price for the China market.
We will continue to oppose the Asia Pacific price for customers in the region, excluding China.
We're making this change to better reflect the different market fundamentals in China compared with other countries in the region.
Our outlook for the methanol industry is positive and we believe that new industry supply will be needed to meet growing methanol demand over the next five years.
Now turning to our operational results.
Our third quarter 2021 production of one 5 million times was slightly lower than the second quarter.
Our production in New Zealand was lower in the third quarter compared to the second quarter, primarily due to the short term commercial arrangement to make natural gas available sport of Titan New Zealand electricity market from early June until late August. Since then we have operated both Vermont annuity plants.
We estimate production in New Zealand for 'twenty, and 'twenty, one of 1.3 million tonnes.
Scream gas sector is completing several field development projects that could improve gas availability over the coming years.
In Geismar during the third quarter, we shut down our Geismar, one and two plants as a precautionary measure to ensure that the safety of our team members during hurricane Ike.
Fortunately the hurricane only caused very minor damage and we restarted production after approximately two weeks.
The production impact of this outage was approximately 100000 tonnes, which offset higher production, resulting from the completion of our Geismar two a debottlenecking project earlier this year.
In Chile, our production in the third quarter was similar to the second quarter, we typically experience lower gas deliveries in the southern hemisphere winter months impacting our second and third quarters.
We recently restarted production at our Chile, four plant, which was idle for the last 18 months and expect to operate both plants during the southern hemisphere summer months to the end of April 2022, we.
We estimate production for in Chile for 2021 of 800000 tons, our Atlas plant in Trinidad as well as our Egypt and medicine hat plants operated well during the quarter.
Now turning to our balance sheet, we ended the third quarter in a strong financial position with over $900 million in cash and $900 million of Undrawn backup liquidity.
We previously announced a strategic shipping partnership with Mitsui O S. K limited or M. O L. With the proceeds of $145 million. We recently finalized definitive agreements for this partnership and closing is expected in the coming months subject to regulatory approval and after all the customary conditions are met.
Turning to our capital allocation priorities, we generate meaningful cash flow across a wide range of methanol prices our capital allocation priorities remain the same we use the cash we generate to maintain our business pursue value accretive growth opportunities and continued our strong track record of returning excess cash to shareholders.
We recently restarted construction of our Geismar three project a unique project with significant capital and operating cost advantages that will strengthen our asset portfolio and substantially improve our future cash.
Generation capability.
Our capital cost estimate for the project is 1.25 to $1 $35 billion.
We have committed approximately $455 million to the project is at the end of Q3, 2021 and we expect approximately 800 to 900 million of remaining capital cost to be capitalized before capitalized interest or approximately $100 million per quarter from October 2021 onwards.
We are confident in our ability to complete this project on time and on budget and we have substantially reduced the project execution risk profile.
Our remaining budget includes allowances contingencies for both cost escalation and they're remaining risks of the project we were targeting commercial operations at the end of 2023 or early 'twenty 'twenty four.
With our strong liquidity position and cash flow generation, we are well positioned to fund the geismar three.
Project from cash and build on our long term track record of returning excess cash to shareholders.
We recently announced that we reset our quarterly dividend to <unk> 12.5.
<unk> per share and commenced a 5% share repurchase program.
At this time Geismar three is the only significant capital.
Growth capital in our plans over the next few years, we expect that to.
Q3 will substantially increase our cash generation capability and support a significant increase in our future shareholder distributions potential.
Now turning to our outlook for the fourth quarter.
Global entity short energy shortage shortages and escalating coal oil and natural gas prices are leading to a sharp increase in methanol prices, we expect realized methanol prices in the fourth quarter of 2021 will be significantly higher than the third quarter based on our current posted prices.
The forecast that our fourth quarter production will be higher than the third quarter as we restarted our Chile for a plant in early October.
We restarted our mountain Dewey plant in New Zealand in late August and we expect to run our geismar plants at full rates without an unplanned two week shut down due due to hurricane Ida as well as realizing the benefits of the completion of the Debottlenecking project.
As a result, we anticipate our adjusted EBITDA results in the fourth quarter to be considered but considerably higher than the third quarter.
We would now be happy to answer any questions.
Thank you.
Please press star one at this time you second question.
The first question is from Joel Jackson from BMO capital markets. Please go ahead.
Hi, Good morning, John I have a couple of questions I'll ask one by one if that's okay.
You know I I think we're in a very.
Complex part of the methanol cycle right now many of you would agree when you look at some of the academic or theoretical numbers out there like you would seem like maybe methanol is pushing up against its theoretical maximum price right. So it seems like the equivalent energy value.
Similar right now for methanol into gasoline in China, which I think some could argue is potentially the maxim unless oil and gasoline prices rise further.
I know, we don't predict the future, but you know all the things going on gas cool.
Cost cuts driving methanol going up gasoline prices catching up I mean, how.
How do you look at that right now in terms of the methanol pricing wherever you go from here.
Yeah, well, it's supply driven the current issues.
This rise as we've seen in <unk>.
Number of productions, though as I mentioned in my remarks would come off for around the world, which is leading to.
Less supply and more demand and you're right to point out when that happens prices will rise to the marginal.
Demand is impacted to get the world back in balance. So what is that price today is it's probably changing everyday based on all the factors you mentioned coal natural gas etcetera. So again, you know were a bit surprised how quickly prices have risen here in the second half, but nobody was planning on the.
Titan energy environment and high prices that we're seeing there. So again, you're right to say that the future is hard to predict but you know I think were enjoying the you know the benefits of a higher energy environment and some supply challenges that we don't expect to solve it themselves in the near term.
That's really helpful. And then I went out with a buyback you're able to comment on how much stock you're able to buy back so far in October based on September public data, let's see you are talking about 17 share. The day would you put your 5% buyback kind of done in about a year ago is that the idea to try to get that buyback evenly.
Maybe you can comment on that can be comment on how much you bought back in October so far.
I really can't comment on that at all but just in general what we've said is we want to have the cash on the balance sheet to compete complete in Q3, which we do now and another $2 million to $300 million and and then everything above that would be distributed to shareholders. So you know Q4 is looking really solid and we're going to generate you know quite a.
Net of cash and I think by the end of the quarter will reach those targets and you know we can then look to accelerate the buyback or or and other other options, but right now we have around 5% out there and we think another 3% to 4% possible and the 12 month calendar period. So that's our.
Primary focus now is to complete in Q3, and then return all excess cash above you know 1.1 0.2 to shareholders.
Thank you.
Thank you.
The next question is from Amit <unk> from Nelson <unk> from RBC capital markets. Please go ahead.
Great. Thanks, John I want to follow up.
On your comment regarding the supply Crunch and your view that it's not going to get resolved anytime soon like in China are you seeing any easing given I think they had some energy consumption restrictions in China, but how do you see.
Seen them easing and I guess, there's the recent.
Steps, they're taking to improve or increase our coal supply so.
Does that help.
The supply side at all from your perspective.
I guess it depends on your time frame now so right now we're still seeing the dual controls as they're called in China, which is impacting supply quite significantly and in demand we're coming into the winter months.
Natural gas still is a fairly large a raw material for production of methanol is in China, and we all know what the LNG prices have been like.
And yes. The government has stepped in and made some policy decisions around coal, but we have no idea how long it's going to take a further coal to rebalance in China, and we're coming into their winter, where they consume more coal so.
We don't expect it to be.
A light switch and things to return to the way they were before the crisis on coal and other energy, but Directionally, you know where they'll probably always gets back to balance at some point, but it's probably going to take some time in our estimation.
Okay. Thanks, and then my next question relates to logistics I know this is a different shipping.
Market, but obviously the container shipping side has seen a lot of issues and part of that is due to a tight labor.
Markets.
Have you seen any.
I guess delays from your from a logistics perspective on your end.
So this is one of our key competitive advantages that we all know we speak about quite frequently where you know we have our own chips that we you know.
Move around the world wherever we want.
Terminal relationships, we have our own terminals are so nothing's really changed in the last quarter I think I mentioned on the last call that we were seeing some slight delays because of the shortage of pilots in China.
That's adding like a week to two weeks so for discharge longer time, and you know it really doesn't impact our ability to service our customers. So Fortunately, we're not experiencing the same supply chain issues that most of our customers are in and even customers of our customers are.
Okay and then just one last question on G. Three I know you've flagged that you've factored in that number of contingencies.
But out of the remaining like eight or $900 million of Capex remaining do you have a rough breakdown in terms of the.
In terms of how it breaks down into like materials labor and equipment I'm just wondering.
How large the labor component is.
Yeah, I think I've guided to that.
Projects before and you know really there's three big components of.
The project Labor is the biggest one like I've said before most of the equipment is purchased we still have some.
Non strategic equipment to get on site, but its really labor. So the two big components are labor rates, which we've guided to are about the same as when we did <unk>.
Two and that's still the case today and then productivity.
And we'll know more about what we expect in productivity as we ramp up the site. So I think we have about five 600 workers on the site today and I think that's equal to be over 1000. So we have a large owners team much larger than we had for <unk>, two and really trying to manage the scheduling of the productivity issue.
Working with our you know our our KBR who's the engineering contractor on the job.
Okay. Thanks, that's good color I'll leave it there.
Thank you.
We ask that you please limit yourself to one question and one follow up.
The next question is from Jacob bout from CIBC. Please go ahead.
Good morning.
Good morning.
First question is on.
Methanol demand destruction and I know you said in the MD&A that there was a.
A 1% decline in global methanol demand.
The third quarter.
You know are you seeing signs of demand destruction now you know I know, there's some industry reports talk about MTO being at historic low rates and how are things shaping up in the fourth quarter versus required.
So we are seeing a demand impacted by the controls I've mentioned in China.
You know so we're there's.
Limits on on how in certain provinces, how industry can operate without it is impacting demand for methanol. We also knew there was quite a bit of planned maintenance in M. T O.
In the third quarter, which are which has happened.
Pricing is pretty volatile and in that sector. So.
You know when we were up at a 550 ish range, Joe that certainly would've been economically challenged for some of the MTO players not all and then the rest of the world like I've mentioned, we've seen these are high energy prices in Europe. For example, so some customers are cutting back production.
Because of the energy costs are so high and we had some disruption to the golf because of the hurricane. So I don't expect gas prices to ease in Europe and in the winter, but were not counting on another hurricane in the Gulf. So we should see demand improvement there.
We do worry about inflation as well you know you have a high inflationary environment, maybe consumer demand wanes.
Wayne is probably not this quarter, but that's another thing we're watching so.
We're not anticipating a demand drop in Q4, but we're watching it closely.
Okay and then Mike My second question is just on on gas costs and I know you touched a bit on this at the beginning of the call, but can you remind us.
How much of your gas free now is tied to spot versus like methanol pricing and how much of your gas is hedged.
And how in North America and.
In North America, we have 65% of our gas hedged or fixed price the.
The rest of the world is really linked to methanol.
So as methanol prices moved our gas costs move into about 35% of our gas.
In North America America is related to spot pricing.
And then how far forward you hedge to different different links we've layered in hedges are quite for quite some years.
You know so there's a number of different hedges and you know in medicine hat, where fixed price for another 10 years and so it's different lengths of time, depending on which hedge or which fixed price deal. It is.
I'll leave it there thank you Charles.
Yes.
Thank you. The next question is from ethylene Rodriguez from Jefferies. Please go ahead.
I think wondering guys.
John quick question, I mean, we've methanol prices significantly.
Are you seeing or do you believe you might see that the supply response could change in terms of you know.
Guys pulling forward the supply coming in.
Well, we would've expected anybody that could run in the last quarter Should've run hard and we you.
We certainly tend to see a lot of new.
Supplier idle supply come on we're not anticipating any other supply coming on in the quarter.
The cost curve as I mentioned is still in that 50 to 500 range today or the last weeks or so so you know.
There is still a really high cost curve, that's underpinning methanol pricing. So we don't expect additional supply to come on in the next few quarters.
Okay, and also related to methanol prices being absorbed so much like any concerns that the rate of adoption for new applications, you know and I can then don't see Ya.
That could be slowed down because of prices.
Getting up so high.
Well, you know where were when were looking at new adoption. There really the adoption is really being driven by environmental issues by clean burning fuels. So there we're competing with other potential clean burning fuels and those prices have also gone up quite substantially. So we we don't believe there'll be any impact on adopt.
Methanol as a clean burning fuel as a result of current prices.
Okay. Thank you guys.
Thank you.
Thank you. The next question is from Mike <unk> from Barclays. Please go ahead.
Great. Thanks, Good morning, guys and congrats on the quarter.
Thank you first question really related to demand I think excluding M. T. O you talked about energy related demand being flattish in the quarter I guess, given the material move higher we've seen them all carbon prices globally, you expect to see a pick up in some of these energy markets and acute tutors or is there just something about the relative.
If pricing of methanol, that's limiting some uptake right now.
No I think those applications are really mean being mainly for driving like biodiesel MTBE.
That's all in 100, and you know the world is not back to normal yet.
People aren't driving the way they used to so that has impacted some of the other energy demand as things normalize in the world goes and gets back to normal and if people get back to their normal driving habits, we would expect those applications to them.
Increase for demand.
Got it that makes sense and then secondly, just on the buyback I wanted to make sure I heard you right in your answer to an earlier question. It sounds like given where the cash flow generation. Currently sits you'll sort of get where you want to be by year end in terms of pre funding G. Three and then maybe you can get a bit.
More aggressive on the buyback it sounds like you'd like to hit that 5% authorization and then if I heard you correctly, maybe a few more percent within the next 12 months.
Youre thinking about it.
Yeah, so I'll be very clear so we want to have it around the cash on the balance sheet to complete G. III. So that's $8 million to $900 million left about 100 million a quarter, we want to have $2 million to $300 million cash on the balance sheet to run the company.
Everything above that or returned to shareholders in right now is through share buybacks, so that hasn't changed and so the more cash we generate.
We're gonna turned to shareholders and the quicker we can do it.
Makes sense. Thank you.
Thank you.
Thank you. The next question is from I sound habits from Alembic Global Advisors. Please go ahead.
Good morning, John.
A question on inventories.
You see it's been a very strange yeah, you know with winter storm jewelry, then obviously hurricane Ida.
I mean, historically you know in a rising pricing environment. You know typically you see restocking, but you know with all of these events that have transpired I would imagine you know inventories, which were lean only go out to dinner. So so you know what are you guys seeing in terms of global inventories.
How low are they and how long do you think.
Restocking exercise would take when would we get to normal inventory levels.
You know and and how would you see that factoring into demand growth as you look into 2022.
Yeah, I'll ask rich Sumner, our head of marketing to ticket crack at that and yeah, we definitely see low inventories across the supply chain.
And when we look to China. We also know that over time, China's a growth in market demand in China has booked constraints on storage capacity on especially on the coastal markets, So and we see low inventories in China coastal markets.
A lot of the supply demand balances that John talked about that we don't think it's going to be carried in the short term.
Can I ask you further strength to price any pricing and it will take some time before we can rebuild inventories in the industry. So so you know that that that factors definitely supporting our current pricing dynamics, Yeah, I mentioned earlier Hassan as well you know in Europe with high <unk>.
Prices you know some of our customers have curtailed.
Production as well and that'll have to be rebuilt it really comes back to demand.
So.
We believe there's pent up demand out there still and.
As we get back to normal.
Fly changeable at some point correct themselves in and people will be able to get what they want when they want it. So how long that takes a bit of a guess, but so we do believe there's pent up demand for sure.
Very helpful, John and as a follow up.
A question around sort of medium to long term supply growth.
It was very interesting last week on Celanese is earning schools.
As I'm sure you know said and he has had a pretty sizable position in China. So one of the risks that are at the C E O sort of flagged.
Was around their raw materials, and raw material sourcing and supply and particularly Lori the CEO mentioned methanol and how supply growth in methanol will not be as robust as it was you know in the next decade as it was in the previous decade, and you know rather interestingly she talked about how.
Commissioning is a major issue in China, I know historically, the capital cost advantage that they used to enjoy isn't really dead anymore, and and and a variety of other issues. So it's the point really being that she sounded quite negative I guess on supply growth prospect for methanol in.
In China, I mean, obviously you guys have announced D. Three you know the timing of which in light of these government seems quite interesting. So what are you guys seeing in terms of when it.
Global supply growth, but particularly with a focus on China.
Yeah, we've been saying the same things for some time I'm glad somebody's listening.
I think we've said in China that they're directionally, they're not gonna grow their methanol production and where they'll grow at as in inner Mongolia on the coasts, where a lot of consumption is so theyre going to need imports more imports.
Energy is an issue where you can see how quickly that's turned to an issue in China and directionally, they're going to use their energy for heating and electricity and they're moving up the value chain as well and all industries, not just didnt methanol cement steel et cetera, I mean, they're moving away from those industries in more up the value chain. So those trends have been going on for some time.
And then outside trying to work and you build the methanol plant today and you know and you have to have a price of $400 for 20 years in mind to get double digit return at $3 to $4 gas. So I think everybody's face the same issues and that looks hard to do today and then how do you get it financed and that kind of environment.
So I think that's hasnt changed and we had a period here recently of $2 50 pricing for some time and banks and lenders remember that so I think unless you have a strong balance sheet like we do in cash generation capability financing. This.
One three to $1 5 billion dollar projects are really difficult as far as us I mean, where Q3 is going to be perfect as far as timing as far as cost structure as far as emissions in C. O. Two emissions et cetera is going to be you know well the best in the world.
So we're quite happy about it but for other growth our focus is on getting our second plant in Trinidad restarted and our third plant in New Zealand restarted that's the cheapest way, we can grow our production and that's what we're going to focus on.
Very helpful. John Thank you so much.
Thank you. The next question is from Eric Petrie from Citi. Please go ahead.
Hi, good morning, John.
Yeah.
Do you expect methanol demand to return to more historical rates of 3% to 4% next year, excluding China dual control and hurricane weather events.
Yeah. It depends on your forecast for GDP, assuming you know MTO operates at around seven.
70% to 80% and we got you know, 3% GDP growth, yes, we would expect that kind of.
Growth in our high.
Inflationary markets that you know, it's hard to know if GDP will you'd probably be compressed so that to me. Those are the two things. We watch is G. D D M MTR rates.
Okay and then what are your production methanol produced tons grow in lockstep with that or do you think you'll do better with the.
<unk> G. One G. Two expansions are or how should we think about growth in production with your turnarounds next year versus this year.
Yes, so it depends on gas availability in Chile that'll.
That'll be what drives our production ramp right now we're running at high rates in Chile, and we'll see how it looks the their next winter our next summer, but assuming it's similar to this year.
You know I think we don't we don't Telegraph turnarounds, so I always say two to three per year and that's still the guidance.
But you know our Debottlenecking is done in Geismar and.
No hurricane events, we will do better there next year than this year and.
Hopefully in New Zealand, we won't have to sell on our gas CLEC electricity market.
Next year, but who knows.
You know, obviously, we don't want the country not to have heating and electricity. So assuming that doesn't happen, we'll be better and in New Zealand as well. So I anticipate I'd be very surprised if our production next year is not higher than this year.
Okay. Thank you.
Thank you. The next question is from Matthew Blair from Tudor Pickering Holt. Please go ahead.
Hey, good morning, John I didn't know where methanol prices are are there are there any prospects for a short term term opportunistic restart at Titan and Trinidad.
Yeah short term is not not possible. We don't have the people. If you recall, we have to spend some capital. So we don't have the opportunity to start it up in an opportunistic way and you know even if even if we did it probably doesn't make sense the amount of money you spend to start it up and not knowing how long high prices are going.
Alas, So we're still focused with the government on a five year contract that allows us to be profitable through the cycle and that's still where we're focused.
Got it and then I think I know your original modeling the pumps since you got all the incremental production from Q3 going to Asia is that still a good assumption and I was just that given the pace of demand recovery.
Because it seems like given the size of Q3, it might be lower on the cost curve than some of your north American peers. So just wanted to check on that.
We're still modeling it that way, but obviously, we're going to try to sell as many of those molecules closer to home.
Because the economics are better, but I think from a modeling perspective, when we're talking about returns et cetera. It was intellectually right thing to do to say the worst case scenario, we have to bring one 8 million tonnes to Asia, or China, and Asia, and so we're still modeling it that way but.
As things have all here you know if we can sell more in the Atlantic Basin, obviously, the economics improve.
Great. Thank you.
Thank you. The next question is from Adam Star go from Golf side asset management. Please go ahead.
You mentioned that you're going to have a separate price cheap for China at the beginning of the year.
Based on past history.
Well, the Chinese price compare with the rest of Asia Pacific and how does your volume breakdown between those markets.
Yeah, we're selling about a quarter into China, and about 20% into Asia Pacific.
In any given year you know in the recent history I would say China has been setting the cost curve.
So the pricing in China has been lower by the freight differentials to the other markets like Japan Korea Southeast Asia, It's about 20 to $25 today and I think on the last call I was grilled quite hard about the discount I don't know it hasnt come up today, but you know part of the challenge. There is we were trying to maximize our overall profit.
Ability by setting in Asia Pacific price that made sense for all the markets and with China being on average 20 to $25 lower it was impacting our discounts so having the two separate prices.
Hopefully it will.
Helped with that issue and.
That's why we decided to go that way.
But it's really not going to affect what you make it's just gonna be a little more transparent to us.
That's correct that's right.
Thank you very much also a higher gas prices, making the trinidadian more willing to.
Discuss.
A longer term contract.
Well the way the at least the offers that we got I mean, even at these prices, we'd be making very little EBITDA based on the price sharing mechanism that we saw so I don't know what our competitors are paying but that's what we were offered.
They're missing a pretty good bump right now but.
And in Chile, do you have is there still potential for higher gas supplies down. The road is there drilling going on in their new gas being developed.
There are new gas.
Gas on both sides of the border, Chile and Argentina.
And I think I've mentioned before we need to do some maintenance work on our Chile, one plant in the next few years as well to get to higher rates, but the gas availability is improving and in the southern basin.
Okay. Thank you very much and pre KP outlook.
Thank you.
Yeah.
Thank you. The next question is from Ben Isaacson from Scotiabank. Please go ahead.
Thank you very much and good morning to back to basics question for you John.
First one is on the cost curve.
You mentioned marginal cost is somewhere in the 450 500 range over the last few weeks prices have been higher than block, which suggests we're in a demand driven market right now where pricing is based off of the affordability and not on the cost curve. So my question is now that we're seeing pressure by the Chinese government to push coal prices.
Lower and at some point, we will see European gas prices coming off.
In the spring will that not push methanol prices lower or are we truly demand driven and affordability is trumping all else right now.
I I'd call. It supply kind of interruptions are driving there's not enough supply to meet demand and were probably saying the same thing there Ben.
In Europe.
I have to see gas prices fall quite substantially to even at today's prices allow restarts of.
The idle capacity there.
And then in China, you know, we'll see how the coal market that develops and Theres. Many things that go into what our methanol producers pay for coal in China. It's not just the index that you may read on Bloomberg or wherever wherever there's a lot of different factors. So yeah.
Youre right I'd say, we've been about above whatever the cost curve has been most of this year and until our supply catches up to demand, that's probably going to be the case.
Thank you for that my second question is the relationship between oil and methanol is quite complex, there's direct relationships, there's indirect relationships, there's perceived ones et cetera, and I'm I'm just.
To understand we're at $80 oil now.
A $10 change in the price of oil can you just remind us what does that mean for methanol and from methanex, whether you think about demand or pricing cost crickets affordability whatever it maybe.
Yeah, Theres, not really a length between oil and methanol Theres no real substitutable.
Products and the demand.
Were you know a higher oil price or a little lower oil price will lead to less demand for methanol, but generally I just mentioned a higher energy complex is good for for methanol pricing because of the cost curve moves up because of some supply has to come out and.
And demand for methanol into energy applications, which are really being driven by environmental issues with would continue to be to grow. So I think there's been really no link in our minds between the price of oil and the price of methanol on any given day.
Thank you.
Yeah.
Thank you Vicky.
The next question is from Matt Rowland Ross from Crown extra investments. Please go ahead.
Hey, John its all in how are you.
Good how are you rolling.
Yeah, Hey, yeah, sorry, I might be a third person, who you're going after that share buyback.
Chloe, but cannot just rely on a couple of probably comment I.
Understanding points so.
Number one the roughly 160 million caching.
I assume.
You still expect in Q4, so if I pro forma that you are looking at the $1 1 billion you mentioned before is that correct.
Yeah, plus we're going to get some hopefully the money from the M. O L sale is volatile.
Yeah.
Understood and then I know you guys did a great job and I guess it was to like 16, where you laid out.
Yeah, I think he was 865 actually I'm talking about <unk> Capex is any of that changed I think it was 100 in Q4, and then I think the large part form 10 and <unk>.
2022, and then about 350 in 'twenty, three and again I don't want to pinpoint you because I know that it is moving target, but is that roughly still.
You know what you guys expect as Capex lay out so cheaply.
So in our guidance hasn't changed on the Capex for <unk>, we have a large contingency as I've mentioned in in those budget numbers as well I mentioned in my opening remarks about $100 million a quarter is how you should model the spend on G. Three until completion.
Okay. So.
So basically again.
And I know you answered it in five different ways already but if that sale proceeds come in.
Are you there too you know redeploy any free cash flow and you.
You know back to two share buybacks or or is that is that too too aggressive to model.
Well, we are buying back shares every day today, so I'd like to see.
We get closer to our targets will can accelerate that buyback and think about it in a second one.
First you know kind of the next 12 months.
And in just one more on this I assume there are certain blackout periods on when you can buy back shares right.
No there are blackout periods, when we can change the rate of buybacks, but we can you know sort of certain months like.
Getting close to quarter end, well, we can't change the rate, but we can give a in order to buy X amount of dollars per day throughout a blackout period.
Okay, Alright, that's all I had thanks and pittsboro.
Best of luck for the next quarters Yeah.
Thank you.
Thank you. The next question is from John Roberts from UBS. Please go ahead.
Hi, good morning.
Good morning, John.
How far out do you think the first sequestration project is for world scale methanol plant would that be more than five years out do you think.
Our capital.
Capital, we're looking at it ourselves, especially in North America for Medicine hat and for Geismar and the capital cost is quite substantial so I think without some sort of government health subsidy or involvement it's probably longer than that is what I would say, John but governments are pretty.
You know bullish on on reducing carbon and this is one way to do it. So I know the Alberta government in Louisiana government or both.
Very interested in carbon capture and storage. So we have a team working on it and you.
You know if if and when you you know you get the S. I D. On it its probably couple of years to get to you know to build it into the plant so five years.
I would guess I I'd be hopeful that within five years, we'd have one in place.
Okay, and then there was some MTO in China that was being back integrated into coal has the coal situation in China set back those projects or are they still proceeding on plan do you think.
Two have been completed and they're they're running we haven't seen any impact and also how we manage that as we include those in our supply additions where some of the publications are.
Including the Miss demand losses.
It's a little bit of eggs apples to oranges sorry.
So those are those have happened and you know we are expecting another MTO plants consuming 1.8 million tons of methanol to come on in the next six months. So that'll have an impact on demand as well, but we haven't seen any change in the backward integration recently based on the coal prices.
Thank you.
Thanks, John.
Thank you you mentioned a reminder, you May press star one separate question.
Yeah.
The last question is from Joel Jackson from BMO capital markets. Please go ahead.
Hi, Thanks for squeezing one more for me.
If I remember how some of your as contracts work.
With your price with the methanol price sharing mechanisms.
I have to kind of the limit like Wayne.
Prices are very very low the bad part of the cycle, where methanol prices are very very highly I guess now planning cycle that some of those con some of the price sharing is different I may not be as linear can you just comment on that.
<unk>.
Methanol prices now versus say $100 lower to the contracts the price mechanism from I spoke a little bit differently.
Youre right Theyre, all a little different so the guidance. We gave is on average and you know in general I've used this for years.
Two $200 methanol were paying about two bucks for gas at 300 about three bucks and at 400 about four bucks. So that's.
That's the guidance, we give it's not exact obviously because each contract is different and as we renegotiate theyre all changing depending on the price markers etcetera, etcetera, but just in general.
The higher we go for methanol the more we're going to pay for gas.
Thanks.
Okay, well, thanks very much for all the questions.
We're very pleased to share our excellent financial results with you today, we generate meaningful cash flow across a wide range of methanol prices our capital allocation priorities remain the same we.
We use the cash we generate to maintain our business pursue value accretive growth opportunities and continue our strong track record of returning excess cash to shareholders. Thank you for joining us today and we'll speak with you again early in 2022 and thank you for the interest in our company.
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Thank you.
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