Q4 2021 Methanex Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and 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.
Yeah.
Good morning, everyone welcome to our fourth quarter 2021 results conference call, our 2020 , one fourth quarter news release management's discussion and analysis and.
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 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 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>.
Your 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 each 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 events.
These items are non-GAAP measures that 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 for it for his comments and a question and answer period.
And all the best in 2022.
We 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.
We then open the call up for buses.
Turning to our financial results.
Fourth quarter of 2021, we reported our highest quarterly adjusted EBITDA in the company's history.
$340 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 our produced sales volume highlighting.
We're getting leverage to methanol prices.
For the full year of 2021.
Financial results were significantly stronger compared to 2020 due to higher realized methanol prices.
Reported our highest annual adjusted EBITDA of $1 1 billion.
Adjusted net income.
$160 million or $6.
<unk> per share.
We're extremely pleased with our record financial results. This past year following a very challenging 2020.
Got it.
Our global team operated given the ongoing uncertainty of COVID-19 pandemic.
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 that 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, but was slightly offset by lower demand from methanol to olefins or MTO production.
We estimate that the global ethanol 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 Chinese government mandated and just industrial operating 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 level.
Fourth quarter, there were several planned outages, 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.
Rising energy prices before moderating later in the quarter, our average realized price increased $55 per ton in the fourth quarter to 404.
$45 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 it moves 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.
At a coal price of 900 RMB per ton.
Although still robust starts February posted prices were lower in Asia Pacific and flat in North America, and China at $480 $619.
$430 per ton respectively.
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 2020 one as a result of the 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.
Traditionally used one posted price for the entire region, which includes China and this resulted in a significantly higher discount for the product we sold in China.
In 2022, we have introduced a separate posted pricing for China over the C E D.
We 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 said as we saw 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 remains strong we continue to see strong traditional derivative demand and we expect higher operating rates from the MTO sector in Q1 today. The MTO industry is operating at approximately 80% rate we can.
<unk> to be optimistic about new methanol to that.
2021, a number of announced notices were made by containership operators for orders of dual fuel vessels.
Estimate in the next three to four years there'll be over 35 dual fuel vessels on the water.
Sorry, 55 dual fuel vessels on the water, including 19 of our own ships.
Annual demand for 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.
New Zealand, our production levels were higher in the fourth quarter. Following the completion of the short term commercial arrangements, 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 Martin Louie plans, we estimate that our 2020 two production in New Zealand to be approximately $1 5 million tonnes from the two montney 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.
With the completion of the 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 for an October we'd 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 and unanticipated 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 for 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 is expected to close during the first quarter of 2022.
Turning to our capital allocation priorities, our capital allocation priorities remain the same we will 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 suite project is progressing to plan is well positioned to be completed on time and on budget by the end of 2023 are early 2024.
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 $125 billion to $135 billion spent.
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 a 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.
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 .
Methanol 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.
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 were 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.
I 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 I'm.
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.
Yeah, No big difference said Jacob to previous quarters.
And what would that what would that numerically be how much are you selling you might have to get to that number I don't have it right in front of me. So I don't want it caught you a wrong number but it's around.
But I'll get you the exact number.
Okay.
And then as far as your guidance for the discount rate kinda.
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 but 20%.
Colombia posted prices on average okay.
Yeah.
All right I'll leave it there thank you Charles.
Thanks.
Thank you.
The next question is from Hassan Ahmed with Alembic Global Advisors. Please go ahead.
Morning, John .
Has on Java quick question around Europe .
See you know, we all know and I've seen what's happening with the natural gas pricing situation over there agreed just the high levels, obviously that can continue as between Russia and Ukraine. So it seems that you know no relief of insight in terms of gas prices.
But you know what are you guys hearing in terms of.
Lastly over there how 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.
They've been experiencing the tension between NATO and Russia are certainly not helping the situation there's lots of.
Back and forth, but what happens to the pipeline I really are not in a position to make a call on that and hopefully things cool down and we don't have any outbreak of any possibilities, but we'll see.
As far as what we're seeing pricing I'm, sorry volumes is 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 earlier, but now as you look at 'twenty 'twenty. Two you know 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 you know getting sorted out so.
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.
Yeah, there was 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 they are how they operate how much gas. They get you know the technical issues that they've been dealing with sanctions. So a lot of gray area. There. So we're not expecting any.
The 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 ongoing unplanned 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.
And then depending on the pandemic as 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 auditors has been a bit of a laggard dream because people just.
Aren't driving as much because of the some of the shutdowns of the.
Debit restrictions so overall we.
We see you know without a.
Severe demand shock event that we're not anticipating a pretty robust supply demand balance, 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.
Next question is from Ben Isaacson with Scotiabank. Please go ahead.
Thank you and good morning, John .
Yeah.
Could you just touch on the dual control energy policy in China am I understand that as it relates to methanol plants, we had seen operating rates going lower I wasn't clear if that was for the Olympics, where 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 is shutting down because of pollution, because we're using the energy for other applications heating and electricity 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 in the in the fourth quarter, obviously, it just didn't make economic sense to make methanol even at $450 pricing. So we 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 with 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 use 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.
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.
In 2022 do you still hold that view now that methanol prices have moderated or has your view shifted.
Yeah, it's moderated somewhat extremely high levels. So if we could take these the current methanol prices for the next 20 years, we'd all be very happy but.
I think we can move significantly down in pricing from where we are is still complete the buybacks.
You know 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 stronger fourth quarter, we had and.
Our anticipated strong first quarter. So we have enough cash on the balance sheet now to complete G. III you will get the M. O L proceeds so to me in excess cash which are 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.
To complete the current bid probably by around the AGM time end of April you have the ability to put a second.
So 10% of the public float and so that would be our plan with everything we know today.
Thanks, so much.
Yeah.
Thank you. The next question is from Nelson <unk> with RBC capital markets. Please go ahead.
Great. Thanks, Good morning, John just for acute high at for Q4 can you just talk a bit about the the.
The inventory build it was a 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.
Yes, I think my my remarks kind of hinted at that we have if you look at the five Florida. The last five quarters, we have had.
What we call 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.
<unk> rules.
So yes, you would expect the 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 of 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 but 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, what's happening in Ukraine like what are your.
What are your methanol customers doing in Europe are they stockpiling or they are like are they essentially paying higher prices to stockpile. It.
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 watch the spot markets in the last week, they've kind of spiked here and why is that are we.
We understand one of our competitors had a delay in one of their ships coming to Rotterdam, So they're all buying in the spot.
And there's still blending happening in Africa now so there isn't a company you're out there buying spot methanol molecules and then either blending it with other gas components or ore 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.
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 react quite quickly so I don't think.
Any of our customers have been stockpiling methanol.
You know at these prices.
Okay. Thanks, I'll get back in the queue.
Yes.
Thank you and the next question is from Laurence Alexander with Jefferies. Please go ahead.
Good morning.
Can you.
If we roll them up the.
Fuel blending demand in Africa, and China, the industrial boiler trends in China.
The marine.
Demand and then also any kind of ripple effects, we're seeing from.
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.
From the historical.
Either faster or slower and can you just talk a little bit about how you see that.
What's the trend growth for methanol is going to be depending on whatever the GDP levels are.
Yeah, a couple of variables a couple of factors, obviously 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.
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 few years at a lower oil environment. Obviously, the shifts are brand new.
You know, where we're running our ships on methanol.
A lot of people are now ordering shifts I mentioned up to 55 ships that 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 fuel geely continues to have these two large trials with 25000 taxis.
100 engines and you know.
The more that the world looks to Decarbonize 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 a meeting that a traditional methanol plant and we all know we can produce green methanol we've done it in ice.
We've done it using renewable natural gas and our Geismar facility and we can do more of that so I.
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 over time.
And yeah, So I think in a higher energy environment and the low normal world moving to low carbon demand for those applications will only continue to increase I think the wildcard is always going to be at least the immediate drove the MTO.
And the MTO operating rates you know its 15 million tons of demand today and a large demand you know one of these brands 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 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 in the 85% to 90% and beyond the <unk>.
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 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 de carbonization pushes 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 <unk>.
<unk> investments are for carbon based are emitting.
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 space 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 high 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 I think it's going to make it harder for companies, maybe the build plants that emit carbon or C O two.
The central taxes, as well as you know access to capital.
Number of firms that are.
They're not going to lend money or do do business with high end high and there is a 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 a methanol plant from natural gas or coal today than it was three or four years ago and it was.
And 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.
Good morning, John on the terms what kind of.
Expansion.
It's Marc.
Could you talk about where you are marketing these volumes or are they staying in the domestic market.
Although exports to Asia, and and how did the incremental.
Margin on this 10% compare to the legacy Geismar production.
Yeah, you should stay at about the same.
Depending on the price of gas. That's you know what we saw spot prices the cats spike up here.
And now down so you know, we're taking a three to $4 gas will be the range in that area for the mid term. So if that's true and about the same cost structure for the additional debottlenecking is as we have for our existing and again, we optimize all the time.
Or do we go with with our methanol, but any any increments, we're sending looking to target Asia, but it is 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.
Yeah.
Sounds good and then.
So what's going on in Iran, and North mill.
Market, even even for you, but there's been a lot of reports on natural gas for just called them ethanol plants to run at 50% utilization or even even fully shut down. So are you do you have any extra 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 it be equipment or they'll ability of technical expertise or a catalyst or gas or.
Not in our view under under a severe sanctions environment that were that around is facing going to get any better.
Uh huh.
And until the sanctions are resolved them they can get free access to.
Capital to build out their gas infrastructure and get catalyst 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 winter time, when you have seen the phenomenon, where our plants have not operated as strongly because of gas diversion than appears that's what's going on again this year.
Okay, great. Thank you.
Thank you.
Next question is from Joel Jackson with BMO capital markets. Please go ahead.
Hi, good morning, John .
I think what the discount rate if you go back over many many years.
Discount rate goes up and down but typically nothing that could realizing you know our realized price.
A very narrow and consistent premium over spot.
What prices 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 right.
How you said posted prices might also change you may end up grossing up posted prices with with deeper discount what makes sense, what I'm, saying.
Yeah, absolutely I mean, 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 to the guidance I provided today.
It will allow analysts to you use the number that hopefully we don't see the big Miss like we saw in Q4, it's a bit frustrating to have a record quarter and a solid.
Solid EBITDA and I have a miss 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.
The marginal cost producer bond 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 of things and factors, so it's not really the discount.
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. III. So those are the things we're focused on and hopefully this discount issue.
We'll go away until we have to think about revising it up or down in the future, but if you think of our guidance on this it doesn't change on them 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. 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.
I think as 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.
We thank you for that and if I think about production for 2022. So you expect a two party here are you expecting a normal number of turnarounds in 'twenty. Two maybe you can compare it to happen in 'twenty. One and then are you expecting every production facility to have higher production in 'twenty to 'twenty one.
Yes, so I've given the 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 Shouldnt expect that turnaround in Q1, which is fantastic because we're generating a very high realized price for methanol. So all the produce product will be sold at very good pricing.
And we tend to time, our turnarounds with you know whether its 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.
Yes.
Thank you.
Thank you once again, please press star one on your devices keep that if you have a question. The next question is from Steve Hansen with Raymond James. Please go ahead.
Yeah, Hey, guys.
Telling them the discount rate if you you've delved 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.
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 understand how and why that posting would be at such lofty levels relative to even the 20%.
Discount rate and that you referred to I know theyre not directly related but they certainly have a correlation.
So 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 in Asia as an example.
But when we look at individual regions 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 the spot markets in Europe , and North America are extremely thin like they almost true.
Very very few molecules you know, maybe 1000 3000 tonnes a week or.
More you know in Europe 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 freight from China and for reasons of tight supply and <unk>.
Displacements on the supply side from countries that have sanctions are now are not producing methanol.
Why now which is really good for our business but.
For our discount so we've tried to clarify that today and hopefully as we.
Report, our Q1 results, you'll see that through our results.
Okay very helpful and just one follow up I know you've already been pretty clear on your capital allocation.
Policies here going forward and preference for the buyback.
Just wondering on the margin whether or not you feel theres going to be a need.
It's this year or some time 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 because 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 a lower carbon molecules, you've got a small investment in Iceland.
We all 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.
I'll, just maybe call it lower carbon pneumonia or lower carbon ethanol overtime.
There's been lots of announcements by a lot of people, but no money being spent and no expertise and ideas and idea and you can announce whatever you want but.
Not a lot of things happening as far as what we are I mean.
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 btu for that gas so the price he needs over a thousand bucks methanol, but we can increase that.
Quite quite easily. So we're also have a team that's looking at all of these different in 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 making methanol, which is exactly what we've done in Iceland and that's a small plans as you know 4000 times, we can't even spell that at premium.
Prices. So I think it will develop I don't know how fast and I think we're ready to invest if it makes sense, but.
The order of magnitude of these investments versus the Geismar is a much smaller you're talking 25000 ton plant 50000 ton plant.
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 I think geismar.
Making for Monroe 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 I agree methanol at 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.
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 good at.
Focus on getting more gas for our idle facilities in Trinidad in New Zealand and gets Chile back to full rates that would 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.
<unk> share buyback, but the regular dividend is something we will continue to look at what 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 think there we.
Shouldn't be segment 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 closer to the AGM this year.
Thank you.
The next question is from Cherilyn Radbourne with TD Securities. Please go ahead.
Yeah.
Thanks, very much and good morning.
I'm wondering with respect.
Respect to Geismar three I appreciate that all major equipment is on site, which gives the company great 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.
To be in the range of $1100, a ton plus or projects on the golf.
Yeah. So the last two projects to be completed which is a coke methanol plant in the Nat gasoline plant.
Round 2 billion plus for $1 7 million tonnes. So in order with what the price that you've said.
The three big components of building a plant.
Our equipment, which is made up of steel and metals et cetera.
Engineering, 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 and Doug.
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.
But if there is a ramp up.
And activity I think you know.
Fab shops, and people, making equipment, but would increase their prices and if there.
Experiencing higher raw material costs that we've all seen them, they're getting it's gonna be passed on.
So the people that are buying the equipment. So it's about 20% to 25% of our Newbuild is based on.
Equipment 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.
How if at all has supply chain congestion at the port impacted mathematic 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 our key competitive advantage to secure reliable supply to customers. That's why we got 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.
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 Shanghai area because of the pandemic. The amount of pilots that were available was less than.
Historical which maybe led to a week delay on some of our vessels, but you know on the order of magnitude we experienced delays like that on a regular basis in different parts of the world. So 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 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.
And 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 we don't.
You know 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.
Thank you for the time.
Thanks.
Thank you. The next question is from John Roberts with UBS. Please go ahead.
Thank you.
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 in number of ports that have methanol stories and so forth, but do you think it accelerates after that first million and do you think ammonia at some point it becomes competitive.
Here and maybe impacts the growth rate of methanol for marine.
Yeah. So it has accelerated.
We've had our own ships and now like 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.
Existing she also had made the big advantage of methanol as it is a dual fuel capability with the same engine.
There are other things that are being looked at including LNG and ammonia, but everything I read everything that our experts of red.
<unk> has a clear advantage over some of the other fuels doesn't mean, those other fuels won't get adopted as well.
Because I don't think it's just going to be one product that dominates but based on the choices that large companies.
But no a lot about shipping like they are making.
Methanol is a preferable fuel.
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 'twenty, one and we expect it to continue to accelerate as companies order new ships.
Okay. Thank you.
Yeah.
Thank you Bill.
Last question is from Chris Shaw with my Name's Crespi Hardt. Please go ahead.
Yeah. Good morning, John how are you doing.
Hey, Chris good.
I think you alluded somebody answers all my questions.
A portion of.
So understanding the.
The the discount.
So if everything was sort of equal nothing had changed that you introduced the Chinese.
Contract price, we would've expected the I guess guidance not 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 in the Atlantic basin, which led to a widening of discounts.
So when we put all the pieces together based on our forecast.
Back in 2022 to have about a 20% discount.
Right, but just mechanically introducing a Chinese contract price should have.
Cut the discount if nothing else changed that right.
Assuming nothing else changed but we negotiate our contracts at the end of the year and now we have our all of our contracts negotiated 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 I thought the guidance you should you should fall alright, that's what I'm trying to figure out and then to.
To your point just before about the increased competition.
It seems a little discordant with the idea that it's a tight supply and demand market.
<unk> is really strong, but you're seeing is really strong competitive market.
Okay, but what about what's what's the disconnect there.
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.
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 we know all the competitors nowhere, they're selling their product.
The United States and elsewhere, and that's what's going on so.
We've seen this before.
When new new plant startup, but the discount it's not again not the focus the focus should be on the realized price.
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 the rats in the quarter.
Thanks, Chris.
Okay.
I'm 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 that are 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.
We generate meaningful cash flow across a wide range of methanol prices are.
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.
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.
Thank you.
The conference has now ended please disconnect your lines at this time and we thank you for your participation.