Q4 2021 Methanex Corp Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the Methanex Corporation Q4, 2021 earnings call I would now like to turn the conference call over to MS. Sarah here yet. Please go ahead Ms Harriet.
Good morning, everyone welcome to our fourth quarter 2021 results conference call.
2021 fourth 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.
Dot com.
I would like to remind our listeners that our comments and answers your question Nathan.
It 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.
The material factors or assumptions were applied in drawing a conclusion or making the forecast or projections, which are included in the forward looking information.
Please refer to our fourth quarter 2021, MD&A and to our 2020 annual report for more information.
I would also like to caution our listeners that any projections provided today regarding <unk>.
Financial performance are effective as of todays date. It is our policy not to comment on or update this 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.
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.
These items are non-GAAP measures do not have any standardized meaning prescribed by GAAP and 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 Matt <unk>, President and CEO , Mr. John <unk> for his comments and a question and answer period. Thanks, Sarah Good morning, and all the best in 2022.
Hope that everyone is continue to stay safe and healthy.
Today, We will review our outstanding fourth quarter and full year 2021 results provide an overview of the methanol markets discuss our operational results and share our near term outlook.
And then open the call up for questions.
Turning to our financial results in the fourth quarter of 2021, we reported our highest quarterly adjusted EBITDA in the company's history.
$840 million and a record adjusted net income of $185 million or $2 43 per share.
Our exceptional fourth quarter results are primarily due to higher realized prices and higher produce sales by highlighting.
We can leverage to methanol price.
For the full year of 2021.
Actual results were significantly stronger compared to 2020 due to higher realized methanol prices.
We reported our highest annual adjusted EBITDA of $1 1 billion.
Adjusted net income of four.
$460 million or $6.
<unk> per share.
We're extremely pleased with our record financial results. This past year following a very challenging 2020.
I'm proud of how our global team operated given the ongoing uncertainty of COVID-19 pandemic.
Our exceptional safety performance, coupled with high reliability and strong prices enabled us to deliver outstanding financial results for our shareholders.
Now turning to the methanol market.
We estimate the global methanol demand in 2021 increased by approximately 5% to 86 million tons compared to 2020.
This increase was driven by strong recovery in demand for traditional chemical applications from increased manufacturing activity.
Energy related demand also rebounded was slightly offset by lower demand from methanol to olefins or MTO production.
Yesterday, the global methanol demand decreased by approximately 2% in the fourth quarter compared to the third quarter traditional demand growth in the fourth quarter was offset by lower demand for MTO producers due to planned outages and the continued impact from China's government mandated in just industrial operating rate restrictions.
Okay.
The methanol industry ran at a lower operating rate in 2021 due to various planned and unplanned outage the run up in energy prices in 2021 impacted feedstock costs and availability, which made it difficult for production to increase back to pre COVID-19 levels in the fourth quarter. There were several plant outages.
<unk>, particularly in Iran. Due to natural gas natural gas restrictions and in China, where natural gas and coal were diverted to meet seasonal power demand.
Methanol prices fluctuated during the fourth quarter prices increased early in the quarter due to tight supply and rising energy prices before moderating later in the quarter.
Our average realized price increased $55 per ton in the fourth quarter to $445 per ton compared to the third quarter of 2021.
Entering the fourth quarter energy prices, particularly coal and natural gas prices increased significantly which moves the move the cost curve higher.
In December and into the first quarter of 2022, we have seen coal prices moderate to around 900 RMB per ton as a result of intervention in coal production in China by the Chinese government.
The result has been that the industry cost curve, which continues to be set in China decreased to approximately $350 per ton.
Coal price of 900 RMB per ton.
Although still robust our temporary posted prices were lower in Asia Pacific and flat in North America, and China at $480 $619 and $430 per ton respectively. Our.
Our European contract price is set quarterly and we increased our first quarter 2022 prices by 15 euros per tonne to 599 euros per tonne.
Our fourth quarter discount rate was higher compared to our guidance for 2021.
As a result of tight market conditions during the fourth quarter, we saw meaningful price premiums compared to China pricing in all markets for Asia Pacific where prices were 50 to $100 higher than China. We have traditionally used one posted price for the entire region, which includes China and this resulted in a significantly hard disk.
For the product we sold in China.
In 2022, we have introduced a separate posted pricing for China, where the C. D E and do not expect similar volatility in our future discount rate. A result of these large pricing differential between China and other Asia Pacific markets.
We mentioned on our Q3 quarterly call that we provide updated guidance on our discount rate posted methanol prices in 2022, we expect to see higher discount rates of approximately 20% on average compared to our prior 17% guidance as we are experiencing a more competitive environment.
We do not expect a higher discount to impact our overall realized price for methanol as we sell.
We saw it as we make our pricing decisions are made with a view on supply and demand fundamentals and the global cost curve at any given point in time.
Overall, the methanol markets remained strong we continue to see strong traditional derivative of demand and we expect higher operating rates on the MTO sector in Q1 today. The MTO industry is operating at approximately 8% rate we.
We continue to be optimistic about new methanol demand.
In 2021, a number of announced now since were made by containership operators for orders of dual fuel vessels. We estimate in the next three to four years there'll be over 35 dual fuel vessels on the water I'm, sorry, 55 dual fuel vessels on the water, including 19 of our own ships.
The annual demand from these dual fuel vessels will be approximately 1 million tons per year, assuming they run on methanol, 100% of the time.
Now turning to our operational results our production levels were significantly higher in the fourth quarter compared to the third quarter due to higher gas availability in Chile, and New Zealand and record production at our Geismar facilities.
In New Zealand, our production levels are higher in the fourth quarter. Following the completion of the short term commercial arrangement, we made to idle one plant and to make natural gas available to support the New Zealand electricity market.
Since then we've operated both mountain Dew, we plan, we estimate that our 2022 production in New Zealand to be approximately one 5 million tons of the two mountain dew any plants.
And guys. We're in both of our plants ran at full operating rates during the fourth quarter, resulting in record quarterly production for those plants with the completion of a second low cost Debottlenecking project at G to the Geismar facilities annual operating capacity has increased by 10% to $2 2 million tonnes.
In Trinidad our Atlas production in the fourth quarter continues to be strong with similar to the third quarter. We continue to have discussions around opportunities for longer term gas supply for our assets.
And Chilean production levels were higher in the fourth quarter as we restarted Chile four in October we expect to operate both plants during the southern hemisphere summer months to the end of April 2022, we estimate that the production in Chile for 2022 of approximately 1 million tons.
In Egypt production levels were slightly lower in the fourth quarter due to operating constraints and in medicine hat production for the fourth quarter was similar to the third quarter.
Our 2022 production is forecasted to be approximately 7 million equity tonnes. Although actual production may vary by quarter based on gas availability planned maintenance outages extended unplanned outages.
Anticipated events.
Now turning to our balance sheet.
We ended the fourth quarter in a strong financial position with $932 million of cash and $900 million of Undrawn backup liquidity, which meets our goal of having cash on hand, so the remaining G III capital cost spend.
We previously announced a strategic shift in partnership with Mitsui O S. K limited or M O L with proceeds of approximately $145 million.
We received all regulatory approvals for the transaction and expected to close during the first quarter of 2022.
Turning to our capital allocation priorities, our capital allocation priorities remain the same we will.
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.
Construction on our highly advantaged G. Three project is progressing to plan is well positioned to be completed on time and on budget by the end of 2023 are early 'twenty 'twenty four.
All major equipment items are now on site, which reduces the risk of supply chain issues or inflation.
Our capital cost estimate for the project is $1.25 billion to $135 billion spent approximately $508 million to the end of 2021.
We expect approximately $750 million to $850 million of remaining capital cost before capitalized interest.
We continue to anticipate to spend approximately $100 million per quarter understanding that the timing of expenditures may fluctuate period to period in the fourth quarter. We spent less in the $100 million due to the timing of expenditures expenditures related to the project.
With our strong liquidity position and cash flow generation, we are well positioned to fund the Geismar three project from cash on hand.
In addition to completing our G. III project, we plan to focus on increasing our production by securing additional economic natural gas for our existing assets.
As cash will continue to be returned to shareholders with a preference for using flexible share buybacks.
In the fourth quarter, we returned $68 million to shareholders through our share repurchase program and regular dividend.
Now turning to the outlook for the first quarter.
Based on our current posted prices for the first two months of the first quarter and notably higher forecasted sales of produced product versus the fourth quarter of 2021, we expect the first quarter 2022, EBITDA to be similar to the fourth quarter of 2021.
If it all market fundamentals remain strong and we are confident in our ability to generate meaningful cash flow at current methanol prices.
In 2022, we remain focused on managing safely through the global pandemic continue to progress our advantaged G. III projects safely and on budget operating our plants safely and reliably delivering secure and reliable supply to our customers and enhancing our strong financial position and financial flexibility.
We're well positioned to continue delivering significant value to shareholders over the medium to long term.
We would now be happy to answer any questions.
Thank you. Please press star one at this time, if you have a question. We ask that you. Please limit yourself to one question and one follow up question there will be a brief pause while the participants register for questions. Thank you for your patience.
Yeah.
The first question is from Jacob bout with CIBC. Please go ahead.
Good morning.
Good morning.
John I wanted to maybe just start off.
Just taking a bit more on what's going on in China. So what was the percentage.
Of sales that you shipped to China, and what's the mix higher in fourth course, specifically and how do you see this mix playing out for the next couple of years.
Yes, no big difference Jacob to previous quarters.
And what would that what would that numerically be.
So you might have to get to that number I don't have it right in front of me. So I don't want to quote you wrong number, but it's around 20% to 25% something like that but I'll get you the exact number.
Okay.
And then as far as your guidance for the discount rate I'm kind.
Kind of cut out there a bit so you're saying that the discount rate will be 20% higher or wont be 20% in 2022.
Yeah, we're forecasting our discount rate to be 20%.
In 2022, not 20% higher about 20%.
Colombia posted prices on average.
Okay.
All right I'll leave it there thank you Joel.
Thanks.
Thank you.
The next question is from Hassan Ahmed with Alembic Global Advisors. Please go ahead.
Good morning, John .
John a quick question around Europe , obviously, you know, we all know and are seeing whats happening with the natural gas pricing situation over there agreed just see a high level. Obviously tension continues between you know, Russia and Ukraine. So it seems that you know no relief is insight in terms of gas prices.
So you know what are you guys hearing in terms of.
Capacity over there.
Do you think that plays out you know at least as far as 2022 goes.
Yeah. So obviously, there's capacity offline in Europe , because of the high higher energy complex that they've been experiencing the tension between.
And Russia, certainly not helping the situation, there's lots of back and forth and what happens to the pipeline I really are not in a position to make a call on that hopefully things cool down and we don't have any outbreak of any hostilities, but we'll see.
As far as what we're seeing pricing I'm, sorry volumes coming from really the Atlantic basin, mainly.
North America to backfill the product that we're not seeing being produced in Europe , It's hard to know when the gas price will be in a place to allow you know methanol production to restart and I guess, it's a factor of methanol price as well, but I think our current view is earliest in the summer of this year.
Understood and a question now on supply demand fundamentals as they pertain to 2022.
I mean, obviously Q4 was a bit of a noisy quarter in terms of demand. You know you guys talked about sequentially demand being down 2%, but obviously there was supply chain constraint issues. You know obviously the European issue that we were talking about good yet, but now as you look at 2022 you know.
Higher crude oil prices, but with a bias to the upside I would imagine inventory levels relatively low supply chain constraints slowly sort of.
Getting sorted out so in comes off 2022 demand growth should we expect demand growth to be well above normal levels and how would that compare to what you're seeing in terms of supply growth for 2022.
Yes.
Not any supply growth her son in 'twenty in the year I mean, there may be some additional product coming out of Iran. Depending on how the how they operate how much gas they get.
The technical issues that they've been dealing with sanctions or lot of grey area. There. So we're not expecting any significantly increased supply.
During the year now having said that we just talked about Europe that could come back on but so when we're looking to have pretty well what we saw in the fourth quarter continue into the first quarter, where we're seeing all of them going on to planned outages again with some of the larger plan instead of a recently come up so I think supply is going to continue to be a challenge.
In 2022, especially in a high energy environment.
Like I mentioned MTO rebounded.
In the quarter, we expect traditional demand to continue to grow at GDP rates, so whatever numbers you're using there.
And then depending on the pandemic and you know it looks like early signs that things are getting somewhat back to normal in some parts of the world. We expect the fuels demand bounce back and that's still the laggards that fuels demand as you know is still whether it be MTBE or biodiesel or others has been a bit of a laggard drink because people just.
There aren't driving as much because of some of the shutdowns of the pandemic restrictions. So overall we.
We see you know without a.
Severe demand shock event that we're not anticipating a pretty robust supply demand imbalance, which leads should lead to a pretty decent pricing for methanol during 2022.
Extremely helpful. John Thank you so much thank you.
Sure.
Thank you. The next question is from Ben Isaacson with Scotiabank. Please go ahead.
Thank you and good morning, John .
Can you just touch on the dual control energy policy in China am I understand that as it relates to methanol plants, we have seen operating rates going lower I wasn't clear if that was for the Olympics or for the lunar new year do you see that continuing.
Throughout 2022 and could that lead to capacity shutdowns.
While we've seen this ongoing with not only with methanol, but with other industrial production, mainly in the eastern part of China, shutting down because of pollution, because we're using the energy for other applications hitting them.
The city and more production coming in inner Mongolia that trend has been going on we expect that to continue.
When coal prices got to 2000 RMB.
The fourth quarter, obviously, it just didn't make economic sense to make methanol even at $450 pricing is always saw production shut down at that time and as you know traditionally the winter natural gas is used more for eating.
Then for making chemicals like methanol, so I'd say right now production.
Rates in China are higher than we saw in the fourth quarter. When we saw severe pressure because of high coal prices and high natural gas prices and we would expect them to be somewhat higher in the summer months as gas is as available for making methanol from natural gas and not used as much for heating.
So we would expect our methanol production in China to be a little higher in the summer months than what we saw in Q4.
Thank you that's great and then just for my follow up.
Last quarter on the call you said that you were looking to accelerate the buyback and you mentioned you have 5% out there now and you're talking another three or 4% with possible Ah in 2022 do you still hold that view.
Home prices have moderated or has your view shifted.
Yeah, it's moderated from an extremely high level. So if we could take these with current methanol prices for the next 20 years, we'd all be very happy, but you know.
I think we can move significantly down in pricing from where we are and still complete the buyback.
No by the end of April is our current view. So we did accelerate it if you look at the filings you know around the third week of December we increase.
No quite substantially the amount, we're buying and that's because of the strongest fourth quarter we had.
Our anticipated strong first quarter. So we have enough cash on the balance sheet now to complete these really will get the M. O L. Proceeds so to me in excess cash that you're generating a ton of now we will go back to shareholders through regular dividend and our preference is share buybacks and we can as we look to complete that.
Current bid probably by around the AGM time end of April we have the ability to put a second here.
So 10% of the public float and so that would be our plan with everything that we know what I'm, saying.
Thanks, so much.
Yeah.
Thank you. The next question is from Nelson <unk> with RBC capital markets. Please go ahead Chris.
Great. Thanks, Good morning, John just for acute high for Q4 can you just talk a bit about the the.
The inventory build it was the production increase so large that you weren't able to sell everything or was it shipping constraints timing.
And should we presume that the inventory there'd be a inventory reversal in Q1.
Yeah, I think my my remarks kind of hinted at that.
We have if you look at five or four of the last five quarters.
What we call it produced inventory build there.
The amount of produced inventory in our inventories of about one point to 1.3 million times has increased for the last five quarters and that's not abnormal you can go back over the last five to 10 years at a quarter to quarter. It doesn't actually ever match the amount of inventory that we produce is sold because of the way our FIFO layers work in there.
Accounting rules.
So yes, you would.
Expect a reversal at some point.
More produced inventory being sold and what we produce so in Q1, we're anticipating to have another really strong quarter.
Production and we expect to sell more produced molecules that we did in in Q4, which is leading to a similar EBIT dock at a lower price deck. So that that's how we are forecasting it may not work out exactly like that.
Generally that's what we're expecting in Q1.
Okay. That's good color and then just a follow up on Europe , so like in in terms of the.
I guess whats happening in Ukraine like what are your.
What are your methanol customers doing are in Europe are they stockpiling are they.
Like are they essentially paying higher prices to stockpile.
To kind of mitigate the risk of any.
Any issues in terms of our supply.
No actually we're seeing pretty low inventory levels in Europe , if you've watched the spot markets in the last week, they've kind of spiked here and why is that a.
We understand one of our competitors have a delay in one of their ships coming to a rotterdam. So they're all buying in the spot and there's still blending happening in Africa now so there isn't a company that they're buying spot methanol molecules and then either blending it with other gas components are blending it in Africa, we're not exactly sure, but they're buying methanol blending.
In Africa, because of the high energy complex those two events of a bright.
Bright spot prices have increased quite significantly in the last week in Europe , which tells me our inventories are pretty low and as I've always said the liquidity in both the North American and European markets is very low and when you get a spike in demand like we've seen in the last week to 10 days the price reacts quite quickly so I don't think any.
Our customers have been stockpiling methanol.
At these prices.
Okay. Thanks, I'll get back in the queue.
Thank you. The next question is from Laurence Alexander with Jefferies. Please go ahead.
Good morning.
Can you.
If we roll them up the.
Our fuel blending demand in Africa, and China, the industrial boiler trends in China.
The marine our demand and then also any kind of ripple effects, you're seeing from <unk>.
Decarbonization initiatives are rippling through to methanol demand.
If you look at the next three five years.
Do you see the growth algorithm from ethanol being noticeably different.
The historical.
Either faster or slower and can you just talk a little bit about how you see that.
You know what the trend growth for methanol is going to be depending on whatever the GDP levels are.
Yeah, I've got a couple of variables a couple of factors. Obviously for you know GDP you mentioned that'll drive the traditional chemical a higher energy complex traditionally has been more about more demand from ethanol, whether its clean burning fuels or other fuels like we're seeing in Africa.
Depending on your outlook for oil and other energy parts of the energy complex or higher complex that we're seeing today will drive additional demand and what we've traditionally seen for the last two years at a lower oil environment.
Obviously, the shifts are brand, new you know where we.
We're running our ships on methanol.
And a lot of people are now ordering ships I mentioned up to 55 ships. If they all ran on methanol, 100% of the time they'd be a million tons. Just there in the next three to four years, where continued continuing to see adoption in China or methanol to replace coal in boilers in kilns methanol as a cooking.
Gili continues to have these two large trials with 25000 taxis.
100 engines and our you know.
The more that the world looks to Decarbonize, our methanol is as part of that solution, whether it'd be from natural gas I'll remind you. Our G. III facility will be 50% less C O two emitting than a traditional.
Methanol plant and we all know we can produce green dots and all we've done it in Iceland, we've done it using renewable natural gas at our Geismar facility and we can do more of that so.
I think there is a future for methanol as part of the solution to go to a lower carbon economy globally.
But right now the economics are such that it's hard to get any traction from the consumer side, but I think that will change overtime.
And yeah, So I think in a higher energy environment, and a little north of the world moving to low carbon the demand for those applications will only continue to increase I think the wildcard is always going to be at least the mediate drug the M. T O.
And the MTO operating rates you know its 15 million tons of demand today and a large demand you know one of these plants could use 1.8 million tonnes. So.
A couple of them decided to shut down for whatever reason it does have a immediate impact on the supply demand balance. So are our view still is they'll run they're running at 80% today. They ran through the pandemic, except for the fourth quarter when methanol prices got really high in China, and the 85% to 90% and beyond the.
The Ohio plant, that's coming up in the middle part of this year. Another 1.8 million tons of demand. We don't expect any more MTO. Today, you know if you have a view of a higher oil price and higher naphtha prices in the future that could change, but that's certainly not in our planning alerts.
And then are you seeing the decarbonization push starting to have an impact on approvals of methanol projects are there either designs are there regions that will be out of favor. If decarbonization pushes you know it becomes a more serious and widespread policy.
Yes, not today, but I think theres two developments there that could impact that obviously, an increased carbon tax environment, Canada has talked about going to 150 to $180 a ton well that obviously would impact potential.
Potential investments for carbon based.
Emitting plants like methanol from natural gas.
Mind, you coal based methanol producers five to seven times the amount of carbon as a natural gas based based plant and you know I think the other thing that's being talked about or you know do duties at borders for imported products that are being produced from <unk>.
Emitting.
Carbon production. So I think those talks are early days I don't expect something to be developed.
In the next little while but you know I think it's going to make it harder for companies maybe to build plants that emit carbon or C O two.
The central taxes, as well as you know access to capital.
Number of firms that have said, they're not going to lend money or do do business with high end high emitters of C. O. Two so I think we're early days here, but certainly the trends are there and I think it's not easier to build the methanol plant from natural gas or coal today than it was three or four years ago and it was.
As an easy three or four years ago.
Okay. Thank you.
Thank you. The next question is from Matthew Blair with Tudor Pickering Holt. Please go ahead.
Hey, good morning, John .
That expansion at Geismar.
Could you talk about where your marketing these volumes or are they staying in the domestic market or are they export it to Asia and and how does the incremental margin on this 10% compare to the legacy Geismar production.
Yeah, you should stay at about the same I mean, depending on the price of gas. That's what we saw spot prices of cats Spike up here and now down. So you know, we're taking three to $4 gas will be the range and in that area for the midterm. So if that's true and about the same cost structure for the additional debottlenecking.
As we have for our existing and again, we optimize all the time, where we go with with our methanol, but any any increments.
We're sending looking to target Asia, but in this environment, where we've seen our competitors have production issues, we've seen the European situation with production shut down because of the high cost feedstock and product being diverted from North America. So there's more opportunity for us to keep it closer to home. So that's the only good for us.
Sounds good and then insight to what's going on in Iran, and North mill pick market, even even for you, but there's been a lot of reports on a natural gas shortages, causing methanol plants to run at either 50% utilization or even even fully shut down. So are you do you have any.
Insights you can provide there and is that something that's affecting global methanol supply demand.
Yeah. So we've seen this before again this is not new and it's only getting exasperated as the sanctions continue to go on longer and longer so whether.
Whether it would be equipment or availability of technical expertise or catalyst or gas or it's not.
In our view under under a severe sanctions environment that were that around is facing going to get any better.
And until the sanctions are resolved and they can get free access to.
Capital to build out their gas infrastructure and get catalysts in people and equipment et cetera. So we don't expect it to improve until we see a change on the sanctions and I have no specific information on what what's going to happen there either.
So we continue to see around exporting some products.
And in the past in the wintertime, we have seen the phenomenon, where our plants have not operated as strongly because of gas diversion than it appears that some of what's going on again this year.
Great. Thank you.
Thank you. The next question is from Joel Jackson with BMO capital markets. Please go ahead.
Hi, good morning, John .
They put the discount rate if you go back over many many years you know the discount rate goes up and down but typically nothing active realizing you know our realized price.
That's a very narrow and consistent premium over spot.
Spot prices and they can change a bit but it's pretty consistent.
So I think is that what we should think about that it's going to be exactly like that and maybe as your contracts change. You know you have higher discount rates may be in some of them by you know how you have posted prices might also change you may end up grossing up posted prices with with deeper discounts does that makes sense, what I'm, saying.
Yeah, absolutely I mean, the the realized price is what really counts that's what drives our earnings so our realized prices of methanol and how much we produce those are the two major things that drive our earnings that we had an outstanding quarter in the fourth quarter, we're going to have another one in Q1 so.
There's a lot of noise around discounts and hopefully the the guidance I provided today.
It will allow analysts to you know use the number that hopefully we don't see the big mess like we saw in Q4, it's a bit frustrating to have a record quarter end.
Solid EBITDA and I haven't missed like that so.
I think when we set prices.
We don't look at the desk, while we look at the discount as far as opposed to price, but what the it's the net price that we think about in that price depending on whether it's a balanced market or a tight market you said that price to have the marginal cost producer run to keep the world balanced and that obviously changes regularly.
Depending on feedstock price and freight so that's how we set prices, we talked to our customers, what they're seeing and the inventory levels come into it and you know lots.
Lots of things and factors, so it's not really the discount.
It should be the attention it should be how much are we realizing.
Each and every quarter for our methanol and at $440, a ton or $420 a ton, which is kind of where we are today, we generate a ton of cash and we will send that cash back to shareholders through share buybacks and that and complete G. Three so those are the things we're focused on and hopefully this discount issue.
We'll go away.
So we have to think about revising it up or down in the future, but if you think of our guidance on this is it doesn't change on it you know more than every number of years. So I think we're comfortable where we are today and we.
We do have a change I think with the change to the Chinese posted price will also take some of the noise out I mean, it's a good news story when the rest of Asia trades up to $100 higher than China. You know traditionally it's been 20 to 30, so for US. It's a good news story, so I think.
And making another posted price just for China, where I think spot prices have the biggest influence of any region in the world because it's a fairly large spot market.
I'll take some of the noise out of our discount as well.
Okay. Thank you for that and if I think about production for 2022. So are you expect a two party here are you expecting a normal number of turnarounds in 'twenty. Two maybe you can compare it to what happened in 'twenty. One and then are you expecting every production facility to have higher production in 'twenty two than 'twenty one.
Yeah, So I've given a guidance of 7 million tons of equity tonnes approximately.
I've guided to two to three turnarounds per year.
Obviously based on my guidance for Q1 production you shouldn't expect that turnaround in Q1, which is fantastic because we forget just generating a very high realized price for methanol. So all the produce product will be sold out.
We're very good pricing.
And we tend to time, our turnarounds with you know whether it weather in certain places or gas availability, so no change to that guidance Joel and.
We're going to have another strong year for production based on our current forecast.
Yeah.
Thank you.
Thank you once again, please press star one on your devices keypad. If you have a question. The next question is from Steve Hansen with Raymond James. Please go ahead.
Yeah, Hey, guys.
The discount rate issue, you've built into it some degree here, but I'm just going to try and be a little bit more pointed on the north American market, specifically, because I think I understand how the new China contract will help.
Just trying to understand you know what the pricing decisions a little bit more you know if I'm looking at your latest posting here with the flat roll you still appear to be posting at a very large premium versus the spot market somewhere in the range of 35% to 40% above the spot.
So should we view that as a strength of the company and your ability to try and extract better.
Economics out of the current tightness in the market to me it strikes me as a bit of an advantage you have but I'm just trying to understand how and why that posting would be at such lofty levels relative to even the 20% discount.
Discount rate and that you referred to I know, they're not directly related but they they'd be certainly have a correlation.
Well I think that's a good point, Steve like the discount rates are not equal throughout the world right. So there's competitive factors we've seen a lot of production come on in the Atlantic Basin in the last years, and obviously people want to keep their molecules as close to home as possible. So to think that it's 20% all over the world would be the wrong assumption.
It's higher in the Atlantic Basin and in Asia as an example, but when we look at individual region pricing decisions the supply demand balance the tightness of the market input from customers about what they're seeing what their demand is going to be like they all come into play and you know I'd say again just to emphasize.
Spot markets in Europe , and North America are extremely thin like they almost trade very very few molecules you know maybe a thousand 3000 tonnes a week.
And Europe's recently as I mentioned because of those factors in North America is very thinly traded so it really doesn't have much at the spot price in those regions don't have much of an influence on our pricing decisions, where it has an influence in China, China is still a very large spot spot market and.
The spot market there does have an influence on what we decide to propose for China. So.
Nothing much has changed it's just that the regional differentials used to be based on trade from China and for reasons of tight supply and just.
<unk> placements on the supply side from countries that have sanctions are now or are not producing methanol. That's that's widened out which is really good for our business, but bad.
Bad for our discount and so we've tried to clarify that today and hopefully as we you know.
Our Q1 results.
You'll see that through our results.
Okay very helpful.
One follow up I know you've already been pretty clear on your capital allocation.
Policies here going forward and preference towards the buyback I'm, just wondering that on the margin whether or not you feel theres going to be a need.
It's this year or sometime down in the future to start thinking about investing in some of the lower carbon.
Speaker 1: or sometime down in the future to start thinking about investing in some of the lower carbon
Alternatives I suppose in methanol I don't like the word blue and green necessarily but but you know that theres been a number of projects announced on sort of the green methanol front in recent years, there's obviously a broader push towards a lower carbon molecules, you've got a small investment in Iceland.
Speaker 1: I suppose in methanol. I don't like the words blue and green necessarily, but there's been a number of projects announced on sort of the green methanol front in recent years. There's obviously a broader push towards lower carbon molecules. You've got a small investment in Iceland that we all know about. I'm just thinking about over the next five years, do you feel like there will be a need for Methanex to start going down that road and investing in some of the transitions or I'll just maybe call it lower carbon ammonia or lower carbon methanol over time.
Don't know about I'm, just thinking about you know over the next five years do you feel like there will be a need for methanex to start going down that road and investing in some of the transition.
Our oldest maybe call it lower carbon pneumonia or lower carbon ethanol overtime.
Speaker 2: Yeah, there have been lots of announcements by a lot of people, but no money being spent and no expertise. An idea is an idea and you can announce whatever you want.
I know, there's been lots of announcements by a lot of people, but no money being spent and no expertise in and ideas and idea and you can announce whatever you want but.
Speaker 2: not a lot of things happening. As far as what we have, I think what we have in Geyser is really a good first step. We can make renewable methanol using renewable natural gas.
Not a lot of things happening as far as what we are I mean, I think what we havent guys are is really a good first step I mean, we can make renewable sorry renewable methanol using renewable natural gas you know obviously, we paid 40 Bucks a M. B two for that gas so the price he needs over a thousand bucks methanol, but we can increase that you know.
Speaker 2: $40 MMBQ for that gas, so the price you need is over $1,000 methanol, but we can increase that quite easily. We also have a team that's looking at all of these different green technologies and when you cut through the noise, they're all basically the same, taking some resource of hydrogen, some concentrated CO2 and making methanol, which is exactly what we've done in Iceland.
Quite quite easily. So we're also have a team that's looking at all of these different green technologies and when you cut through the noise or all basically the same taking some resource of hydrogen some concentrated C O two and I'm, making methanol, which is exactly what we've done in Iceland and that's a small plans as you know 4000 times, we cant even sell that at premium.
Speaker 2: And that's a small plant, as you know, 4,000 tons. We can't even sell that at premium prices. So I think it will develop. I don't know how fast. I think we're ready to invest if it makes sense. But the order of magnitude of these investments versus a Geismar is much smaller. You're talking 25,000 ton plant, 50,000 ton plant.
So I think it will develop I don't know how fast I think we're ready to invest if it makes sense.
The order of magnitude of these investments versus the Geismar is a much smaller you're talking 25000 ton plant 50000 ton plant.
Speaker 2: You know, and so you're talking, you know, a fraction of what we're spending in Geismar. So if it makes sense, there's a market, we can sign up customers that are willing to pay a price that allows us to get our normal return of 13%, you should expect us to invest.
You know, it's so you're you're talking you know a fraction of what we're spending in geismar. So if it makes sense theres a market. We can sign up customers that are willing to pay a price that we're allowed to allows us to get our normal return of 13% you should expect us to invest somewhat in the technology, but in the short term and in Geismar.
Speaker 2: somewhat in the technology bit in the short term. I think Geismar making from renewable natural gas makes the most sense. And, you know, companies like Mayors have been very public in saying that they want to run their ships using so-called green methanol. I mentioned the price of that green methanol is around $1,000 a ton, so we're prepared to supply. We'll see if we can get something commercial that makes sense for both parties, but we certainly don't have anything like that today. Okay.
Making for mineral renewable natural gas makes the most sense and you know.
Companies like mirrors had been very public in saying that they want to run their ships using so called green methanol.
Mentioned the prices like Green methanol is around a thousand dollars a tonne. So we're prepared to supply.
We'll see if we can get something commercial that makes sense for both parties, but we certainly don't have anything like that today.
Okay, great. That's good rational answer like it thanks.
Speaker 2: But just to answer your question on capital allocation, nothing's changed. We don't anticipate spending any significant capital over the medium term beyond our completion of our Geismar 3 project and that we're going to, you know...
But just to answer your question on capital allocation Nothing's changed we don't anticipate spending any significant capital over the medium term beyond our completion of our Geismar three project.
And that we're going to you know.
Speaker 2: focus on getting more gas for our adult facilities in Trinidad and New Zealand and get Chile back to full rates. That will be our major focus and we can get a lot more production in those areas with a fraction of the capital of a new build.
Focus on getting more gas for our idle facilities in Trinidad in New Zealand, Chile back to full rates that'll be our major focus and we can get a lot more production in those areas with a fraction of the capital of a newbuild and we're going to return all excess cash to shareholders through our preference as a M C.
Speaker 2: And we're going to return all excess cash to shareholders through our preference as a NCIB share buyback.
Diabetes share buyback.
Speaker 2: But the regular dividend is something we'll continue to look at. We've looked at it historically, and in the future we'll look at it around our AGM time, which is the end of April , and I'm not signaling that we're going to get it back to where it was pre-pandemic, but I think there's room to look at it as well as we come close to the AGM this year.
But the regular dividend is something we will continue to look at.
We've looked at it historically and in the future we'll look at it around our AGM time, which is the end of the April then I think there we.
Shouldn't be signaled I'm not signaling that we're going to get it back to where it was pre pandemic, but I think theres room to look at it as well.
As we come close to the AGM this year.
Thank you.
Speaker 3: Thank you. The next question is from Sherilyn Radborn with Citi Securities. Please go ahead.
The next question is from Cherilyn Radbourne with TD Securities. Please go ahead.
Yeah.
Thanks, very much and good morning.
Speaker 4: very much and good morning. With respect to Geismar 3, I appreciate that all the major equipment is on site, which gives the company good protection from supply chain issues or inflation, but I'm curious how you would say that those issues are impacting the replacement cost of capacity, which I believe used to be in the range of $1,100 a ton plus for projects on the Gulf.
I'm wondering with respect with respect to Geismar three I appreciate that all of the major equipment is on site, which gives the company good protection from supply chain issues that inflation, but I'm curious how you would say that those issues are impacting the replacement cost of capacity, which I believe used to be in the range of 1100.
Dollars, a ton plus or projects in the Gulf.
Speaker 2: Yes, so the last two projects that have been completed, which is the Coke Methanol plant and the Nat Gasoline plant, were around $2 billion plus for 1.7 million tonnes, so in order with what the price that you've said.
Yeah. So the last two projects to be completed which is a coke methanol plant in the Nat gasoline plant worth around 2 billion plus for $1 7 million tons sold in order with what the price that you've said.
The three big components of building a plant.
Speaker 2: our equipment which is made up of steel and metals etc.
You know equipment, which is made up of steel and metals et cetera.
Engineering, and and then labor so the equipment side of it is probably 20% to 25%. So whatever inflation you want to use for that portion of the overall capital costs. That's what it will increase by and certainly work today, you're not seeing a lot of activity in the endo.
Speaker 2: engineering and then labor. So the equipment side of it is probably 20 to 25 percent.
Speaker 2: So whatever inflation you want to use for that portion of the overall capital cost, that's what it'll increase by. And, you know, certainly we're today not seeing a lot of activity in the Gulf Coast for new projects, and I think that's helpful when we're building G3 because labor availability is quite good and productivity is quite good. We've got 800 to 900 people on site and moving, you know, forward quite nicely.
Alf coast for new projects and I think that's helpful. When we're building G. III because we've labor availability is quite good and productivity is quite good we've got eight to 900 people on site and moving forward quite nicely.
Speaker 2: But if there is a ramp-up in activity, I think, you know...
If there is a ramp up.
And activity I think you know.
Speaker 2: fab shops and people making equipment would increase their prices. And if they're experiencing higher raw material costs that we've all seen, then it's going to be passed on to the people that are, you know, buying the equipment. So...
Fab shops, and people, making equipment, but would increase their prices and if there are.
Experiencing higher raw material costs that we've all seen them, they're getting it's gonna be passed on.
To the people that are buying equipment. So it's about 20% to 25% of our Newbuild is based on.
Speaker 2: It's about 20 to 25% of a new build is based on equipment. Now, engineering, really haven't seen a lot of inflation in engineering, but that doesn't mean we won't in the future.
Equipment, No engineering really haven't seen a lot of inflation in engineering, but that doesn't mean, we won't in the future.
Okay. That's helpful and then.
Speaker 4: Okay, that's helpful. And then, how, if at all, has supply chain congestion at ports impacted Methanex's or the industry's ability to supply customers on time, and has a shortage of shipping capacity been helpful to Methanex in attracting backhaul traffic to help to offset the higher cost of bunker fuel?
How if at all has supply chain congestion at the port impacted mathematics is or the industry's ability to supply customers on time and has a shortage of shipping capacity been helpful to methanex and attracting backhaul traffic to help to offset the higher cost of bunker fuel.
Yeah. So this is a key competitive advantage to secure reliable supply to customers. That's why we have to deal with the very best customers in the world I mean, the investments we've made in our own shipping and terminals over the last 25 years paid dividends during the pandemic environment, we experienced zero shipping issues all of our customers got.
Speaker 2: Yeah, so this is our key competitive advantage, secure, reliable supply to customers. That's why we get to deal with the very best customers in the world.
Speaker 2: I mean, the investments we've made in our own shipping and terminals over the last 25 years paid dividends during the pandemic.
Speaker 2: environment, we experienced zero shipping issues. All of our customers got their product when they wanted it and the quantities they wanted it and the quality they wanted it. The only area that we could even think of was in the, you know, the Shanghai area. Because of the pandemic, the amount of pilots that were available was less than historical, which maybe led to a weak delay on some of our vessels. But, you know, in the order of magnitude, we experienced delays like on a regular basis in different parts of the world.
Their product when they wanted it and the quantities they wanted it and the quality. They wanted to the only area that we could even think of was in the Shanghai area because of the pandemic. The amount of pilots that were available was less than our historical which maybe led to a week delay on some of our vessels, but you know on the order of magnitude weeks.
<unk> delays like that on a regular basis in different parts of the world. So.
Speaker 2: The investments we made were, you know, certainly made for reasons of secure, reliable supply and in the environment we experienced, you know, really paid off in spades.
The investments we made were certainly made for reasons of secure reliable supply and in the environment, we experienced really paid off in spades as.
Speaker 2: As well, our backhaul continues to be a good part of what we do and helps with our overall freight costs. And we're making new arrangements all the time with different parties, and about a third of what we carry today on our ships is not methanol. So I think that there's room to grow that in the right environment, but I think that's an outstanding achievement by our waterfront shipping team to grow it and to keep our costs much better than our competitors.
Well, our backhaul continues to be a good part of what we do and helps with our overall freight cost.
We're making new arrangements all the time with different parties and about a third of what we carry today on our ships is not methanol. So I think that there's room to grow that are in the right environment, but I think that's an outstanding achievement by our waterfront shipping team to grow it and to keep our costs.
Better than our competitors we don't.
Speaker 5: you know, understand any of our competitors that are doing that kind of backhaul or any on a regular basis. So it gives us another key competitive advantage.
I understand any of our competitors that are doing that kind of backhaul or if any on a regular basis. So it just it gives us another key competitive advantage.
Yeah.
Thank you for the time.
Thanks.
Yeah.
Speaker 3: Thank you. The next question is from John Roberts with UBS. Please go ahead.
Thank you. The next question is from John Roberts with UBS. Please go ahead.
Speaker 5: Good, thank you. Sounds like you have a line of sight to the first million tons of demand from the marine market. Is it linear after that because it's limited by rate of ships being replaced and number of ports that have methanol storage and so forth? Or do you think it accelerates after that first million? And do you think ammonia at some point becomes competitive here and maybe impacts the growth rate of methanol for marine?
It sounds like you have a line of sight to the first million tons of demand from the marine market is it linear after that because it's limited by rate of ships being replaced a number of ports that have methanol storage and so forth where do you think it accelerates after that first million and do you think ammonia at some point.
Becomes competitive here and maybe impacts the growth rate of methanol for marine.
Speaker 2: Yeah, so it has accelerated. I mean, we've had our own ships and now there's orders for 55, so that's accelerated significantly during 2021. And we would expect as people look at the relative advantages of different fuels to replace.
Yeah. So it has accelerated I mean, where we've had our own ships and now like there's orders for 55. So that's accelerating significantly during 2021, and we would expect as people look at the relative advantages of different fuels to replace.
Speaker 2: I mean, the big advantage of methanol is it's a dual fuel capability with the same engine.
Existing she also I mean, the big advantage of methanol as its dual fuel capability with the same engine.
Speaker 2: There are other things that are being looked at, including LNG and ammonia, but...
There are other things that are being looked at including LNG and ammonia, but everything I read everything that our experts have red methanol has a clear advantage over some of the other fuels doesn't mean, those other fuels won't get adopted as well.
Speaker 2: Everything I've read, everything that our experts have read, ethanol has a clear advantage over some of the other fuels. Doesn't mean those other fuels won't get adopted as well.
Speaker 2: because I don't think it's just going to be one product that dominates, but based on the choices that large companies that know a lot about shipping, like Mayorsk, are making, they view methanol as a preferable fuel.
I don't think it's just going to be one product that dominates but based on the choices that large companies.
I know a lot about shipping like many are scar, making are they they view of methanol as.
A preferable fuel.
Speaker 2: everything else being equal. So I don't know, John , how the adoption is going to go, but I think we've seen it accelerate in 21 and we expect it to continue to accelerate as companies order new ships.
Everything else being equal so I don't know John how the adoption is going to go but I think as we've seen it accelerate in 'twenty, one and we expect it to continue to accelerate as companies order new ships.
Thank you.
Yeah.
Thank you. The last question is from Chris Shaw with my next Crespi Hardt. Please go ahead.
Speaker 6: Thank you. The last question is from Chris Shaw with Moness Crespi Art. Please go ahead. Yeah. Good morning, John . How are you doing? Hey, Chris. Good. I think you alluded to the answers of my questions in Steve's portion, but just so I'm understanding the... Yeah. Yeah.
Good morning, John how are you doing.
That's good I think you alluded to when he answers all my questions. Then these portion, but just so I'm understanding the.
Speaker 6: the discount, so if everything was sort of equal, nothing had changed, and you had introduced the Chinese contract price, we would have expected the, I guess, guidance on the discount rate to decrease, right? Is that the right way to think of it?
The the discount.
If everything was sort of equal nothing had changed that you introduced the Chinese contract price, we would've expected the I guess guidance on the discount rate to decrease right.
The right way to think of it.
No what I said I think if you listen to my remarks, we saw significant increased competitive activity.
Speaker 2: No, what I said, I think if you listen to my remarks, you know, we saw it.
Speaker 6: significant increased competitive activity in the Atlantic Basin, which led to a widening of discounts. So when we put all the pieces together, based on our forecast, we expect back in 2022 to have about a 20 percent discount. Right. But just mechanically, introducing a Chinese contract price should have...
The Atlantic Basin, which led to a widening of discounts. So when we put all the pieces together based on our forecast we accept backed in 2022 to have about a 20% discount.
Right, but just mechanically introducing a Chinese contract price should have.
Speaker 6: cut the discount if nothing else changed. Is that right?
But the discount if nothing else changed that right yes.
Speaker 6: Assuming nothing else changed, but we negotiate our contracts at the end of the year and now we have all of our contracts negotiated in place and we total up all the numbers by very smart people. It looks like it's going to be about a 20% discount, and that's the guidance you should follow. All right. That's what I was trying to figure out. And then, to your point just before about the increased...
Yeah, assuming nothing else changed but we negotiate our contracts at the end of the year and now we have our all of our contracts are negotiated and in place and we total up all the numbers are by very smart people. It looks like it's going to be about a 20% discount and that got the guidance. You should you should follow right. That's what I'm trying to figure out and then tiered.
Point, just before about the increased competition.
Speaker 6: Explain that. It seems a little discordant with the idea that it's a tight supply and demand market, pricing is really strong, but you're seeing this really strong competitive market. What's the disconnect there?
Explain that like you know it seems a little discordant with the idea that you know.
Tight supply and demand market.
Pricing is really strong, but you've seen us really strong competitive.
Market, what what am I, what's what's the disconnect there.
Speaker 2: Well, it's regional, right, Chris? So you've had a lot of new production come up in the Atlantic Basin, mainly in the United States.
Well its regional right, Chris So you've got a lot of new production come off in the Atlantic Basin, mainly in the United States.
Speaker 2: And those suppliers want to sell as much as they can in the United States and closer markets. And obviously the incumbents like us are not going to just walk away from markets we've had for a long time. So you get a little bit of rivalry and that's settled out now. And the competitors know where they're selling their product in the United States and elsewhere and that's what's going on.
And those suppliers want to sell as much as they can and in the United States and closer markets and obviously the incumbents like us are not going to just walk away from markets. We've had for a long time, so you get a little bit of rivalry and that's settled out now.
And we know all the competitors nowhere, they're selling their product are in the United States and elsewhere and that's what's going on so.
Speaker 6: We've seen this before when new plants start up, but the discount is again not the focus. The focus should be on the realized price of methanol. This quarter and last quarter, these are outstanding realized prices. Anywhere close to over $400 a ton, we're really happy. Great. Thanks so much and congrats on the quarter.
We've seen this before when new new plant startup, but the discount is not again not the focus the focus should be on the realized price.
Of methanol in this quarter and last quarter.
These are outstanding realized prices anywhere close over $400 a ton we're really happy.
Yeah, great. Thanks, so much and congrats on the quarter.
Thanks, Chris.
Okay.
Speaker 2: Okay. Well, we're pleased to share our record financial results with you today. We have continued to demonstrate the strength of our business models through the ongoing pandemic and our competitive advantage of delivering secure and reliable supply to our customers. We believe that the long-term outlet for methanol is excellent. Methanol is a key chemical building block that is used to produce a variety of everyday consumer and industrial items. It is also used in a growing number of clean burning and economic alternative energy applications.
We're pleased to share our record financial results with you today, we have continued to demonstrate the strength of our business models with the ongoing pandemic and our competitive advantage in delivering secure and reliable supply to our customers.
We believe that the long term outlook for methanol is excellent methanol as a key chemical building blocks and is used to produce a variety of everyday consumer and industrial items. It is also used in a growing number of clean burning an economic alternative energy applications.
Speaker 2: We generate meaningful cash flow across a wide range of methanol prices.
We generate meaningful cash flow across a wide range of methanol prices are.
Speaker 2: Our capital allocation priorities remain the same. 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.
Our capital allocate occasion priorities remain the same we use the cash we generate to maintain our business pursue value accretive growth opportunities continued to continue our strong track record of returning excess cash to shareholders.
Speaker 2: We will continue to execute on our strategy to deliver significant value to our shareholders over the medium to long term. Thank you for joining us today, and we'll speak with you in April . And thank you for the interest in our company.
We will continue to execute on our strategy to deliver significant value to our shareholders over the medium to long term. Thank you for joining us today and we'll speak with you in April and thank you for the interest in our company.
Speaker 3: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
Thank you.
France has now ended please disconnect your lines at this time and we thank you for your participation.
Speaker 3: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
Speaker 7: This conference is no longer being recorded. Cette conférence n'est plus enregistrée.
This conference is no longer being recorded Seth Kofi Huston at Bluestone Hershey's Te.