Q2 2022 Methanex Corp Earnings Call
Please standby your conference will begin momentarily to ask a question. Please wait for the moderator to start the conference then press Star one system, Tony will be heard when you request has been accepted to cancel your question Press Star two.
Specialty coffee holes come off hot soup, the well bores in guest still at two years. So it's while I take it on my desk I thought did you state a coffeehouse and done that you did you see Stan Goff Yamaha because I told them one day day, except D. Pardon you lead with like is still at two years. So it was due.
Oh.
Okay.
This conference is being recorded.
Gold sales at all or as you see.
Ladies and gentlemen, thank you for standing by.
Welcome to the Methanex Corporation Q2, 2022 earnings call.
I would now like to turn the conference call over to MS. Sarah Harris. Please go ahead.
Good morning, everyone welcome to our second quarter 2022 results conference call. Our 2022 second quarter news release management's discussion and analysis and financial statements can be accessed from the reports tab of the Investor Relations page on our website at Methanex Dot com.
I'd like to remind our listeners that our comments and answers today to your questions 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 the conclusions or making the forecast or projections, which are included in the forward looking information.
Please refer to our second quarter 2022, MD&A and to our 2021 annual report for more information.
I would also like to caution our listeners that any projections provided today regarding <unk> future 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 average realized price EBITDA adjusted EBITDA cash.
Hello, adjusted income adjusted earnings per share made in today's remarks reflect our 63, 1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility and our 60 per cent interested waterfront shipping. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark to market impact.
<unk> on share based compensation and the impact of certain items associated with specific identified events.
These items are non-GAAP measures and ratios that do not have any standardized meaning prescribed by GAAP and therefore are unlikely to be comparable to similar measures presented by other companies.
We report these non-GAAP measures in this way because we believe they are a better measure of underlying operating performance and we encourage analysts covering the company to report their estimate estimates in this manner.
I would now like to turn the call over to Beth <unk>, President and CEO , Mr. John floor for his comments and a question and answer period. Good morning. So I hope that everyone is continuing to stay safe and healthy.
Today, We will review our second quarter 2022 financial results provide an overview of the metro markets discuss our operational results and share our near term outlook.
Well also make a few remarks on the capital cost and schedule review of our Geismar three project and the recent announcement to increase the quarterly dividend. We will then open up the call for questions.
Our average realized price of $422 per ton generated adjusted EBITDA of $243 million and adjusted net income of $84 million or $1 16 per share.
Adjusted EBITDA was lower in the second quarter compared to the first because of lower sales of methanex produced product, coupled with higher natural gas and higher logistics costs due to higher bunker fuel prices.
Yeah.
I wanted to remind everyone that we have our gas hedging program in place for our North American assets, where we our target target hedging 65% of our gas needs to allow us to run our plants at minimal rates if spot natural gas in the United States becomes economical.
Next year, we are very well positioned with 85% of our gas hedged at <unk>.
<unk> lower prices compared to the current spot prices after 2023, our hedge position reverts closer to our target of 65%.
Global methanol demand in the second quarter was 3% higher compared to the first quarter of 2022.
Methanol to olefins or MTO operating rates.
Hi through the quarter and demand from traditional chemical applications rebounded following the seasonal slowdown in manufacturing activity during the lunar new year in China.
Industry operating rates improved in the second quarter with increased production from Iraq, Iran seasonal gas supply constraints ease with partial offsets with planned turnarounds in Europe and southeast Asia.
As a result, we saw an increase in availability up methanol and coastal China.
This combined with a weaker sentiment from global economic headwinds and the Covid Lockdown risks in China as a resulted in lower methanol market pricing in China and other major markets globally.
We estimate the industry cost curve based on the marginal coal producer cost in China to be above $350 per tonne and expect that a significant amount of production in China is under economic pressure at today's spot pricing levels.
We've seen a reduction in Chinese plant operating rates over the last few weeks and affirming spot pricing in China.
Our August posted prices remained robust, but were slightly lower in all regions North American prices decreased by $10 per ton to $595 per ton.
Pacific and Chinese prices decreased by 30, and $35 per ton to 420 and $375 per ton respectively.
Our European contract price is set quarterly and we decreased our third quarter 2022 price by $15 Eurostar per ton to 555 euros per tonne.
D decreasing spot prices in the second quarter, primarily in China led to a higher discount rate up 23% as we adjusted our discounts in this pricing environment.
Entering the third quarter, our demand outlook remains stable and despite despite global economic uncertainty.
We see demand growth outpacing supply growth in the medium term and a favorable market outlook, even if GDP growth rates are lower than expected.
Hi, global energy prices, and hence methanol is cost competitive.
Against alternative fuels, and we continue to see growing demand in energy applications.
Methanol has emerged as a top alternative marine fuel for the shipping industry as they focus on de carbonization and the transition to the low carbon economy.
Demand for dual fuel vessels that can run on methanol continues to accelerate.
We estimate there will be over 80 methanol dual fuel vessels on the water in the next few years with represents potential methanol demand of approximately $131 7 million tonnes per year.
We're currently in discussions with over a dozen shipping companies as they couldn't expect the number of new methanol vessel orders to continue to grow.
Our production levels were lower in the second quarter compared to the first quarter due to lower production in New Zealand and Chile.
In Chile as expected.
Our production in the second quarter was lower than the first quarter, we typically.
Experienced lower gas deliveries in the southern hemisphere winter months impacting our second and third quarters, we expect to receive higher gas deliveries in the fourth quarter.
New Zealand New Zealand, the Maui gas field had planned maintenance in may which extended into June due to weather events and emergent work during the maintenance, which restricted gas availability to the plants and resulted in lower production in the second quarter.
Based on our revised outlook for natural gas in New Zealand, we are lowering our guidance for the year to $1 3 million metric tons.
We ended the second quarter in strong financial position with approximately $900 million in cash and $600 million of.
Drawn backup liquidity.
Our cash balance was impacted this quarter by the timing of interest and tax payments.
Our disciplined approach to capital allocation has not changed we continue to focus on maintaining our business pursuing economic value added growth opportunities that exceed our cost of capital by three percentage points and that can be executed without undue risk, while returning excess cash to shareholders.
Construction of our advantaged <unk> project with programs progressing safely. The team completed a cost has got a review in July and we've updated our guidance for the project to begin operations and produce first methanol in the fourth quarter of 2023 and have lowered the upper band of the copper capital cost range by $50 million to 101.
$3 billion.
The team has done an excellent job of Derisking, the project and minimizing the impact of inflationary pressures.
Now that we were able to narrow our capital cost estimates downward in this inflationary environment.
We have spent approximately $725 million at the end of the second quarter on G. III, we expect approximately $525 million to $575 million of remaining capital cost before capitalized interest, which is now fully funded with cash on hand.
For those of you that were not able to visit the site at our Investor Day in June I would encourage you to view the project update video on our Investor Relations page to see the latest drone footage of the site.
I'm excited to have <unk> online by the fourth quarter of next year.
Will significantly enhance our cash flow generation capability and reduce our overall portfolio greenhouse gas emissions intensity.
Earlier in July the board approved a 20% dividend increase our third dividend increase in the past 12 months. This increase reinforces our commitment to return cash to shareholders and highlights the strong cash flow generation capability of our assets.
Our next reviews of our dividend are planned around our annual general meeting in April 2023, and after the completion of the Geismar three project in the fourth quarter of 2023.
We completed our Upsized share buyback program in July and a new buyback program will be evaluated in September with.
With our strong cash flow generation capability, we will continue returning excess cash to shareholders through a sustainable growing dividend and share buybacks.
Based on our lower posted prices for July and August we expect lower adjusted EBITDA and earnings in the third quarter in the medium term the methanol market outlook is positive and we have growing cash flow generation with G. III coming online at the end of next year, and we will continue to deliver on our capital allocation.
Commitments of returning excess cash to shareholders.
We'd now be happy to answer any questions.
Thank you.
You May press Star one at this time, if you have a question.
First question is from Ben Isaacson from Scotiabank. Please go ahead.
You very much good morning, John .
I think you said.
Q2 demand was up 3% quarter over quarter, but was that right.
That's correct.
Can you just go into a little bit more color maybe in terms of the main buckets of methanol demand and how are those playing out to get to about 3% and kind of where do you see those buckets going for the balance of the year.
Predicting the future has never been my strike. So we have not seen any impact in our forecast from our customers and you know for the for the third quarter and we have those forecasts in place.
But we're all aware of the economic headwinds that are certainly present out there. So I think we're at a climb we're predicting the future demand is really really tricky harder than most times.
The main reason for the increase in demand in Q1 Q2 over Q1, we continue to see very strong MTO operating rates and we had a bounce back in the traditional chemical derivatives as China came out of its lunar holiday usually in the first quarter, we see less demand for traditional Ken.
Nickel applications in China.
And then just a follow up question, if I may I understand in Trinidad that there's a.
A bid round due in January for upstream development with awards likely in April is it fair to say that.
Probably won't hear anything from you on heartless and or tightened for for about a year because you need to see how those bid round.
Or is that separate.
I think that bid round from what we understand is for deep water and that's probably longer term gas than what you know what you should expect in the next 12 months.
What has to happen in Trinidad we're aware that the upstream contracts are coming due over the next 12 months they have to be renegotiated.
As well as most of the downstream contracts are coming due in the same period the.
The government has been very clear they want to have everybody survive on the island and defined.
And economic situations allows the upstream too just to do well the government to do well in the downstream to do well so.
Things really changed I think it's going to take some more time for this to play itself out in Trinidad, but you know the government has been very clear they want everybody to continue to operate so we're still optimistic that we'll get something for tightened that allows us to stay cash positive through the cycle, but certainly it won't be at the same economics.
Previous deal with Titan.
Thanks, so much Jim.
Thanks Ben.
Thank you. The next question is from Joel Jackson from BMO capital markets. Please go ahead.
Morning, John .
John how do you see production a triple production are playing out in Q3 versus Q2 and in terms of a $200000 reduction expectations for volume out of New Zealand.
A year it looks like 100000 that came in Q2, if that's right and then it's 100000 left to go we've got to be more in Q3 and Q4.
Yes. It is.
Adjusted our guidance down about 200000 tonnes and that's.
Based on what we've seen in Q2 with the Maui outage being extended because of weather and some additional repair work.
So we expect to continue into Q3. So that's why we have adjusted our guidance down to one 3 million tons.
The industry operate as I mentioned better in Q2 than Q1, and that's mainly as a result of Iran coming out of their winter season, and having more gas availability for methanol and other petrochemicals.
Alright for yourselves Methanex. So would you see would you see your own production being lower in Q3 than Q2, and then it sounds like Youre in New Zealand and pack, you're not expecting anything in Q4.
We don't guide on our production Joel.
You know, we typically guide that we have two to three turnarounds per year.
We didn't have any in the first half so.
But we don't give specific guidance on our production numbers.
This is my last question would be the world around US is changing I mean gas differentials have gone crazy as you know right I mean, the fact, Henry hobby is $79 in a given day is crazy. The fact that your P. T. T. F is 40, 50 60 $70, it's crazy around a given days.
Does this change your world like short term thinking on anything how you view, what you should be doing on gas contracts and hedging how you should look at.
Treating a patient with type I would turn out of government tightened as it looked at where you want to put your next capital your next dollars.
How the methanol market made may develop depending on gas prices like what does it mean for your kind of short term and long term thinking.
I think we're in really good shape I mean, we hedged our 65, 65% of our needs in North America, whether that's a fixed price or pure hedges.
We're out of the money for six years.
Getting criticism, we should have bought spot gas and a couple of quarters of whats happened in those those hedges are now in the money by quite a lot. So nothing has really changed in our gas supply as our biggest input cost 50% of our cost structure with gas and we want to have gas firmed, either fixed or hedged away or the sharing mechanism.
That we have everywhere outside North America for these very reasons that you just pointed out because the future is hard to predict.
When gas was at $2 50 in the United States, and Canada, and nobody thought it would be at $8 and here. We are so I think we're really well positioned next year with 85% of our.
Gas hedged in in North America, and you know when I look at our average cost of gas in North America. In Q2. It was very similar to the gas price we're paying in other parts of the world where the sharing mechanism. So I think we've done a really good job at insulating us from this current energy prices that we're seeing.
Okay. Thanks, John .
Thank you. The next question is from Steven Hansen from Raymond James. Please go ahead.
Yeah, Good morning, guys.
Just the first one for me is just around you know sales mix in sales allocation to different regions has there been any meaningful shift in where you're steering your tons in the last sort of six months or so I'm, just noting that the global weighted average contract seems to be shifting a little bit towards some of the lower priced regions at least that's how the math would suggest.
Not really Steve I mean, we said our supply chain on an annual basis. So we don't change our customer base all of that all of that regularly so the amount of product I'd say over the last year is a bit more going it to China than previously, but it really doesn't change within a calendar year. We're in the process now.
Sure.
Looking at what we're going to do for next year and I know our marketing team are looking.
Looking to sell more in Europe as the Russian material. The one 5 million tons of imports into Europe from Russia. Most customers are indicating they don't really want to deal with Russian product and the current current environment and are asking suppliers like us to just sell more so.
I think as we go through the contracting period in the second half of this year, we're going to try and sell more in Europe .
Less in Asia, but.
In any given year.
Maybe a quarter of our contracts come up so we don't have the ability to change things quickly, but directionally, we as much as much product as we can keep in the Atlantic basin that would be our preference, especially in the current freight environment, where.
Fuel prices are so high.
It's very it was like a 50 dollar advantage to keep the product and just not afraid alone to keep the product in Atlanta never mind, but the net backs are better as well.
Of course that makes sense and then just one follow up is just around contract structure.
Specifically Europe and reading that you know there has been some customers now finally willing to enter into monthly contracts, which is provide just a bit better.
I guess more timely.
Update to the markets have you guys contemplated moving down that road here at some point in the future we've been dealing with Europe quarterly contract for as long as I can remember.
Yes, we'd love to move to monthly and Europe , I think with all the volatility that is going on in the world quarters seems like forever. When you were setting setting a price so.
Sometimes you win sometimes you lose but I think monthly has been our preference for a long time, we just haven't been able to be successful so customers want to move to monthly with us.
You're very welcome at that kind of change.
Change.
Okay, great appreciate the color.
Thank you. The next question is from Nelson <unk> from RBC. Please go ahead.
Great. Thanks, and good morning. So my first question relates to Q3.
You are now guiding to first methanol production in Q4 of next year.
Can you just talk about how long it generally takes for the facilities to reach full commissioning. After first production like are we looking at a few months or longer.
Well the last two plants, we have conversion commission, where do you want a G tube and they took weeks. So our team is really really good at commissioning plants and that starts when you design a plant that doesn't start when you go to turn the plant on and how you build it how you design it.
The expertise we have in place to do the commissioning we are fortunate that the gentleman that did the commissioning for G. III is gonna be commissioning for G. III and he did an outstanding job on on commissioning for <unk> and we have a really talented and experienced team in place.
You know we'd be very disappointed if it took months to commission that plant.
When you Commission a flat line it out and you may take it down for a few days to fix some things that may not have been apparent, but I'm expecting the commissioning on that plant to go really well.
So we should probably expect first methanol production and full commissioning sometime in Q4.
I mean, we'll start the plant up and anticipate that it will take a number of weeks to commission the plant and.
That product starting to flow through our actual sales in the first part of 'twenty 'twenty four.
Okay got it.
And then just moving over to logistics costs like obviously that was one headwind in Q2.
Are you seeing a logistics costs moderate in Q3 or is there a bit of a lag in terms of the high oil prices and bunker field.
And how it flows into your costs.
Yeah, So I'll remind you our logistics costs with the exception of fuel are set annually with waterfront shipping for methanex. So those are in place for 2022, and there'll be renegotiated with waterfront the end of the year. So we're fixed on our shipping costs.
We've seen higher costs is really to do with the fuel that we're burning so all of the ships.
Can burn methanol are running 100% on methanol because the economics are much better than no ultra low sulfur diesel or marine gas oil.
So that's a real advantage for us with almost half of our fleet running running on methanol.
And I look at the the shipping market itself.
Petroleum products liquid carriers no. They never really benefited from all of the other like containers and dry bulk rates that went up over the last few years.
And with what's happened in and with the war in Ukraine.
Russia.
Looking to move its product of FOP farther markets like Asia, India, China, which has really tightened up that liquid shipping market quite significantly which means the rates that you would be paying on a spot basis have gone up quite substantially we're not impacted by that because we've got the rates.
<unk> with waterfront, so not only so.
Do we have a benefit of running methanol at our ships, but we have the benefit of having these.
Fixed prices on our shipping for for the year. So we're in a really good position.
Right now too.
Take advantage of even all the backhaul that we do we're getting a much higher rate for the one third of the products that we carry on our ships is not methanol clean petroleum products. So that we get that additional revenue in a market like this so we're really well positioned on our shipping sorry.
Okay. So just to clarify the the higher logistics costs seen in Q2 versus Q1 that was mainly due to <unk>.
Higher methanol costs that are in terms of fuel costs.
Well higher fuel cost than this time last year right. So if you look quarter or year over year and.
Every quarter, where are we send product based on outages based on where we think the optimize our global supply chain in an environment, where you are paying higher for.
Fuel it gets exasperate, a little bit and Thats, what we saw in the quarter.
Okay.
And then just finally on the hedges you mentioned that Youre, 85% hedged next year and 65% thereafter.
How are you hedged for the rest of this year.
Or more when you say next year is that for the next 12 months.
Starting in Q3 for.
For 2023.
We're 85% hedged for 2022 were 65% hedged or fixed price.
Okay got it.
So should we think like so from that perspective should we think of it in terms of taking.
35% of the North American production and plugging in the spot price for gas.
If you look at the change in gas costs for from a production perspective.
If we choose to run at full rates, yes, but we would have the ability to go down to 65%.
It makes more sense to byproduct in China.
To make it in North America and ship it to China that will make that decision. So if we do run at higher than minimum rates spot gas would be a good proxy for or.
For the gas price for the 35% Thats not hedged, but that's assuming we're going to not go to minimum rates.
Okay that makes sense.
I'll leave it there.
Thank you.
We ask that you please limit yourself to one question and one follow up.
The next question is from Matthew Blair from Ph. Please go ahead.
Hey.
Taking my question circling back to the 3% quarter over quarter demand improvement, which seemed like a pretty good number do you have a sense of how much.
China Lockdowns might've played a role in Q2, and I guess, what I'm getting here is.
Was that 3% actually muted due to the China Lockdowns.
Yeah. Our view is if China didn't have the COVID-19 lockdowns demand would have grown more than 3%.
The impact is really on.
Fuels for driving like EM 100 MTBE.
Youre locked down youre not getting in your car and traveling so.
So our view was if we didn't have the COVID-19 lockdowns during the quarter, we probably would have seen additional demand growth in China.
Great I'll leave it there. Thank you thank.
Thank you.
Thank you.
Question is from Josh Spector from UBS. Please go ahead.
Yeah, Hi, Thanks for taking my question.
I guess, when we looked at your realized pricing in the quarter.
It would appear does to be about 25% weighted average discount to your posted contract price maybe that's more of a normally around 20% pricing was sequentially. Similar so what was the driver of that is that more mix of where you're selling or is there anything else to consider.
What would you think about that discount into the next quarter.
Yes, well Q2 discount was 23% we guide to 20% and that was mainly caused by spot pricing in China falling quite rapidly.
Faster than the contract price, which meant we adjusted our discounts to stay competitive in that market.
Hard to predict what's going to happen in Q2, we've seen China spot prices rebound quite nicely here, even overnight another significant increase so it'll be a factor of what the Chinese spot price does which will impact our discounts so.
Again difficult to predict in this environment, but certainly spot markets in China and other markets other regions in the last week two weeks.
Bounced back nicely.
Okay. Thanks, that's helpful. And then just curious is there any point, where European gas economics matter for global.
Global methanol pricing or is that just so far at the end of the curve and there's so much other excess capacity they never really becomes a meaningful driver.
It matters today, because you have methanol production shut down in Europe .
Uneconomical, you've got in Norway.
The ability of the producers there to make methanol is a methanol or take the gas and sell it into the European market.
<unk> got a big demand for LNG in Europe as well so.
In today's environment makes a lot more sense to be making taking gas in making LNG, then, making methanol and selling it for $400 a ton. So yes high energy environment is overall very good for our business is very good for demand, but I think so.
Trying to build a new plant or getting a new plant started or it.
It would be really difficult in this environment, because you're probably unlikely to get economic gas that would allow you to make a 25 year investments. So yeah, it's really interesting what's going on how long. It lasts is anybody's question.
And like I said, we're really well positioned for the next 18 months and longer.
You know that we've locked in our cost positions. So I wouldn't want to be naked on the gas markets today.
Try to make methanol and sell it at 400 Bucks a ton and it wouldn't be very economical so we're well positioned and we'll see how things unfold.
Got it thank you.
Thank you.
Next question is from Laurence Alexander from Jefferies. Please go ahead.
Oh, Hello, just two quick ones can you give us some perspective on how the volatility in the gas market is.
Is affecting how the marine customers are thinking about incentivizing new plant construction.
Given how large the marine demand could be in the medium term.
And secondly, how is the volatility in feedstock prices affected the Chinese discussion and strategy around industrial boiler conversion to methanol.
Yes.
I'm not aware of any marine customer today, asking to have a share in a methanol.
Operation to underpin their plans to two bodies flex fuel vehicles flex fuel ships.
That's the reason is that their flex fuel, so theyre not going to be stuck into one one fuel there'll be able to switch back and forth from methanol marine gas oil ultra low sulfur diesel provided the environmental regulations are such that allows them to run diesel or mgo.
We're of mayors, signing a bunch of allo use or letters of intent.
With a number of green methanol projects.
To my knowledge, none of them are under construction none of them are made F E. None of them have come.
Come to commercial arrangements with the type of pricing thats needed to underpin those investments so not aware of anything Lawrence at this time.
And the second question was sorry, just repeat it for me sorry on the Chinese industrial boiler strategy.
Yeah, we're continuing to see developments there.
Hi, coal price in China.
1200 RMB per ton.
Certainly makes the economics of methanol, even more attractive versus natural gas or diesel.
And it's always been driven by environmental concerns on the coast. So those environmental concerns are still there and now the economics for methanol are much more attractive than diesel or natural gas. So we would continue to see positive uptake in demand not only for boilers, but for counts, which is the newest.
The application for methanol.
<unk> coal and kills I don't know if you saw those little mascot ceramic mascots during the Olympics, but they were made from a kiln that ran on methanol.
Interesting. Thank you very much.
Thank you.
Thank you.
The next question is from Hassan Ahmed from Alembic Global. Please go ahead.
Good morning, John .
Good morning.
John wanted to revisit.
Demand growth a couple of questions around the sustainability of this 3% sequential uptick you guys saw in methanol demand in Q2.
I mean, if I'm hearing correctly your commentary sounds quite quite positive and bullish despite all the sort of headwinds and tailwind just wanted to sort of think through it obviously.
High crude oil energy price environment positive from ethanol demand growth.
The ethylene polyethylene side of things seems a bit negative because pricing hasn't been great. But then again you. Obviously you have the whole sort of China lockdown easing side of things as well. So now with all these factors considered is it fair to assume that at least in the near term.
There's sort of 3% sequential uptick in demand that we saw with sustainable and also where does inventory factor in thinking through the whole sort of demand growth side of things in the near term.
Well, if I'm selling book, if I'm sounding bullish on demand it.
You need to change my tone because it's.
So there are a tailwind and headwinds when we balance them out we see based on our forecast we got from our customers today continue to be very good demand I'll remind you there's a new MTO plant being commissioned in the quarter, which will add one 8 million tonnes annualized at full operating rates that was.
There.
In previous quarters, so that'll have a nice bump a high energy environment like I mentioned all of our ships are running on methanol and I'm sure. Other ships that can are as well.
MTBE demand continues to be quite good in markets, where there is no lockdowns and we expect that to rebound.
In China as well.
But we all read the same headlines about recession and to get a recession you could see the traditional chemical derivatives not grow as quickly, but you know you'd have to see.
A real drop in demand.
Last few times, we saw methanol pricing get below 300, it's when we had the double digit kind of demand shocks around through all oil crisis in 16, the financial crisis and Covid. So we're certainly not expecting a double digit.
Demand drop in methanol, but again I can't predict the future and.
Based on our current outlook from our customers and from what we're seeing in the marketplace.
We still expect demand to be quite solid.
Mind, you as well there's two idle.
MTO plants in China that have the ability to restart and the whole dynamic on the ethylene and propylene chain.
The relative price of naphtha, we understand that some of the North Asia crackers.
Reduced rates because of the economics in there their chain as well. So I think at current methanol prices MTO continues to be okay, and running at high rates, but.
Thats something we watch very closely the affordability of methanol into MTO versus naphtha into.
Crackers. So yeah. All of these dynamics are really complicated and they they add up to what we think is a pretty good demand profile everything else being equal going going forward in Q3.
Understood very helpful and as a follow up around Europe .
I mean, it's not obviously, an insignificant amount of methanol capacity call it 10% of the buildup of capacity sitting in Europe .
The commentary coming out of places, particularly like Germany sounds sounds sounds pretty dire right with some of the producers out there and I'm not talking about methanol producers, but you know call. It produces that oh for polyurethane and the like that can use methanol as a raw material.
Talking about shutdowns and the like so the question really is that are you having some initial conversations with some of these downstream sort of produces off products like polyurethane and the like.
Maybe potentially considering outsourcing the methanol side of their operations to you guys.
They're not aware of any discussions like that but I would agree with your assessment on the dynamics there and there's a couple of refineries in Germany that make some hundreds of thousands of tons of methanol as part of their complex as well so how does that.
<unk> in the current energy environment in Europe is a big question, Mark and how does that even our customers are customers of our customers.
Survive paying $40 in F&B for gas. So there may be some shifts of where derivatives get made.
Over the coming years, but certainly hard to predict them.
The nice thing about being a global supplier with a global Internet integrated supply chain. We can move very quickly to to go where the demand ends up being if it's not in Europe . So I think we're again very well positioned to make sure that we continue to good supplier to our customers wherever that demand may end up.
Very helpful. John Thank you so much.
Thank you.
Yeah.
Thank you. The next question is from Charles Lieber from Piper Sandler. Please go ahead.
Morning, guys, just a quick one.
When do you I guess you answered this earlier, but just wanted to make sure you can or might conceivably adjust production in different areas, where the gas prices highlight if you have $9 gas on unhedged stuff in the U S. You might adjust production to another site, assuming it can be done or what purchase if it's cheaper to do it that way that's something you've.
Already done or would plan to do again.
Yes outside North America, we have the sharing mechanism in our gas contracts. So our gas prices are set and we are cash positive through the cycle and in this environment. You know 100 plus per ton at EBITDA. So I don't see us adjusting operating rates outside North America based.
Based on high priced gas.
Because of our contracts are set with a floor plus a sharing mechanism.
Inside North America.
65% of our requirements are hedged this year, 85% next year.
So take this year, if pricing of gas gets to a situation, where it's more economical to buy product in China.
And reduce operating rates in North America, mainly geismar, yeah, we would do that.
I'm not about to say today, what we've been doing what we plan to do but directionally. If it makes more sense to buy versus make that's what we'll do.
Okay, and then as a follow up.
<unk>.
How much more.
Iranian capacity is available should you have to be able to have gas I mean, I looked at the numbers of the.
Different operations that are running are there any more yet to start up or that might conceivably start up during the course of the quarter.
Our ramp.
Ramping.
No not in the short term Charlie I think we understand there is one under construction. We believe some time, maybe next year or.
Hard, it's pretty opaque, but nothing.
What we saw in the quarter was the plants that are able to operate today increased operating rates because of more available gas as they came out of their winter time, but.
This phenomenon has been going on for quite some time in Iran until monies invested in the upstream to build out the infrastructure, we would continue to see.
Restrictions on gas to the Iranian production the same pattern, we've seen in previous years in the summer they get a little bit more gas to make it a little bit more methanol in.
Until they make those investments probably that's what's going to be occurring going forward.
Okay. Thanks very much.
<unk>.
Thank you mentioned a reminder, you May press Star one if you have a question. The next question is from John fairly Chan.
From Credit Suisse. Please go ahead.
John Roberts, but hi, John .
Hi, John .
The progress on the national shifts or.
The progress on the methanol ships is impressive but theres also industry discussion about ammonia ships as well do you know if those ammonia ships are being planned is dual methanol and ammonia or maybe tri fuel flexibility with diesel as well or will the ship operators have to choose between methanol and ammonia and not both.
Yeah, I'm not aware of any dual fuel vessels with methanol and ammonia I'm aware of ammonia being discussed as a fuel for ships I think they are behind where we are I'm.
I'm aware of engine manufacturers looking at.
Producing engines that will run on ammonia.
Submit challenges with ammonia around the handling and storage is quite different in methanol a lot more.
Has to be colder it it's a bit more of it hard to handle not to mention ammonia leaks or releases are not not good for anybody. So I think that from a safety perspective, I think methanol certainly has it has advantages.
So yeah.
<unk> said its going to be 100% methanol I think.
Back in the day, when we were proving out this technology the big.
Big noises around LNG and the whole industry is going to go to LNG and we know that didn't happen for obvious reasons are handling in price and now ammonia I think will take up some of the space.
Again methanol doesn't need to have very much of a penetration to have a significant impact on methanol demand. So I would expect some ammonia ships to be built and that to be a viable product.
Going forward provided they can.
Get the engines may get.
Handling issues resolved in bunkering of ammonia and availability of ammonia at all the terminals in the world. So all doable, but I think it will take some time.
And then back onto the question if theres actually methanol rationing that occurs with some of the capacity being down what are the highest values and use of methanol or the chemical applications.
Almost always the highest value use of methanol and not fuel given how long oil prices are and fuel prices are.
Well the one that's always on the margin today is MTO and that's really depending on what happens in the olefins markets and that's really a factor of naphtha pricing and.
How much that feedstock costs for all the crackers around the world that aren't using methanol or ethane as a feedstock and that's a lot a lot of capacity so.
<unk> is the one that we watch that's on the margin.
I don't expect that to change unless you have a view of the olefin prices are going to go up.
50% from where they are and Thats certainly not argue.
Great. Thank you.
Thanks, John .
Thank you there are no further questions registered at this time I would like to turn it back over to Mr. Floren.
Okay. Thank you for your questions and interest in our company before.
Before we close the call I want to emphasize we produced an essential chemical building block, which is used in hundreds of consumer and industrial products.
<unk> is also a cleaner burning fuel that is increasing demand as a marine fuel.
We believe that the methanol industry has a positive outlook with growing demand and minimal new capacity additions are well positioned asset portfolio generates meaningful cash flow across a range of ethanol prices, which allows us to execute on our capital allocation.
Alrighty.
Excitement is growing across the organization for the startup with Geismar three in the fourth quarter of 2023.
This plant will deliver significant shareholder value and further enhance our asset portfolio.
There's a lot to look forward to and we hope that you will join US in October when we update you on our third quarter results. Thank you.
Thank you Nick.
France has now ended please disconnect your lines at this time and thank you for your participation.