Q2 2023 Methanex Corporation Earnings Call
Good morning, My name is Chris and I'll be your conference operator today at this time I'd like to welcome everyone to the Methanex Corporation 2023 second quarter results Conference call.
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After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
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I'd now like to turn the conference call over to the director of Investor Relations at Methanex Macera Herriot. Please go ahead in this area.
Good morning, everyone.
Welcome to our second quarter 2023 results conference call.
2023 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 Methanex Dot com.
I would like to remind our listeners that our comments and answers to your questions. Today may contain forward looking information. This information by its nature is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome.
Certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections, which are included in the forward looking information.
Please refer to our second quarter 2023, MD&A and our 2022 annual report for more information.
I would also like to caution our listeners that any projections provided today regarding method actually use 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 average realized price EBITDA adjusted EBITDA and cash flow 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% interest in <unk>.
Waterfront shipping. In addition, we report our adjusted EBITDA and adjusted net income excludes the mark to market impact on share based compensation and the impact of certain items associated with specific identified events. These items, our non-GAAP measures and ratios that should not have any standardized meaning.
Prescribed by GAAP, and therefore unlikely to be comparable to similar measures presented.
We report these non-GAAP measures in this way because we believe that they are 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 <unk>, President and CEO , Mr. Rich Sumner for his comments and a question and answer period.
Thank you Sarah and good morning, everyone.
We appreciate you joining us today as we discuss our second quarter 2023 results.
For the second quarter average realized price of $338 per ton and produce sales of approximately 162 million tonnes generated adjusted EBITDA of $160 million and adjusted net income of <unk> 60 per share.
Adjusted EBITDA was lower in the second quarter compared to the first quarter, primarily due to a lower average price.
The decline in the average realized price was driven by global methanol supply outpacing tobacco.
Global energy prices, leading to a decrease in the methanol cost curve and methanol to olefins affordability.
Methanol demand in the second quarter increased modestly compared to the first quarter of 2023, and we continue to monitor demand closely sounds like macro economic headwinds.
Demand for traditional chemical applications, which represents 50% of global demand increased slightly compared to the first quarter, but remains at or slightly below 2022 demand.
This is mainly due to the slower than anticipated pace of economic recovery in China, and the impact of inflation and resulting monetary policy actions on the rate of global industrial activity.
Demand for energy related applications, such as MTBE and fuel blending increased during the second quarter driven by improved mobility in China as well as continued cost competitiveness of methanol.
MTO operating rates also increased slightly compared to the first quarter. When a number of units undertook outages, although MTO affordability remains under meaningful pressure as a result of low continued low olefins prices.
On the supply side methanol production from China, and Iran faced natural gas restrictions in the first quarter.
Increased steadily throughout the second quarter and strong operating rates in other regions led to global methanol supply outpacing demand growth and higher global inventory levels.
Declining coal pricing in China in the second quarter also put some pressure on the methanol cost curve the coal prices moving from over a thousand RMB per ton levels to approximately 850 RMB per ton current.
We estimate the industry cost curve based on the marginal coal producer cost in China to be approximately 260 to $280 per metric ton.
During the second quarter of 2023, a global average realized price was $338 per metric ton compared to $371 per metric ton for the first quarter.
The declining spot prices in the second quarter, primarily in China led to a higher discount rate up 25%.
Our August posted prices in North America, Asia Pacific and China were posted at 516, 350, and $305 per metric ton, respectively, and our third quarter European price was posted at 395 euros per metric ton.
Based on our July and August posted price posted prices, we estimate our global average realized price to be approximately 290 to $300 per metric ton for these two months.
Turning to the emerging marine fuel demand.
Announcements from the shipping industry for new dual fuel vessels continue to accelerate in the second quarter Maersk announced a further 17 ships and evergreen order 24 dual fuel container ships. In addition to these new build orders. We are now seeing growing interest in dual fuel retrofits with seaspan.
Announcing to retrofit 15 vessels by 2028, we now estimate approximately 200 dual fuel methanol ships on the water with potential demand of over 6 million tons per year, which is an increase of around 2 million tons per year compared with the demand number I reported at the end of the first quarter.
We ended the second quarter in a strong financial position with approximately $600 million of cash and $300 million of Undrawn backup liquidity, we continue to carefully manage the balance sheet and our current cash position allows us to operate the business with all remaining G iii's spend fully funded.
With continued macroeconomic uncertainty and the impact of declining methanol prices through the second quarter.
Share repurchases under the normal course, issuer bid, which expires in September 2023, our intent remains to repay rather than refinanced the $300 million bond.
Due at the end of 2024 and under current market conditions and pricing levels, we will be prioritizing exit excess cash towards this repayment.
Construction of our <unk> III project is progressing safely on time and on budget with production expected in the fourth quarter of this year overall the G. III project is around 90% complete.
The <unk> team remains focused on safely and on safety and delivering a high quality and reliable plant.
The expected G III capital spend remains unchanged at one five to $1 3 billion and the remaining $240 million to $290 million of cash expenditures, including $65 million and accounts payable is fully funded with cash on hand.
Looking ahead to the third quarter of 2023, we are expecting lower adjusted EBITDA compared with the second quarter as we expect to realize a lower methanol price.
Lower production with seasonal gas restrictions in Chile, and a turnaround schedule in New Zealand, our overall production guidance for the year of $6 5 million metric tons of equity production, excluding G. III remains unchanged.
We remain focused on delivering strong operational results from our existing assets and completing that G. III projects safely on time and on budget. We are well positioned during this period of economic uncertainty with growing cash flow generation capability from G. III and a portfolio of assets that can generate cash flow across a wide range of methanol.
Yes.
We would now be happy to answer questions.
Thank you and as a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.
My first question is from Jacob bout with CIBC. Your line is open.
Good morning.
Good morning Jacob.
Another question on the discount rate little more than what we had expected and you're indicating.
Spot market in China declined a little faster than you thought.
Given the recent improvements that we've seen there does this mean that we see some backup of the year.
Yeah, I mean, where are we what what I'd say is we've got we've given the guidance. We've seen some we saw China pricing I think move down into the two kind of anywhere from $2 30 to $2 50 range and we're now back up to around $2 60 range today.
Our guidance on a normal when the market is stable as it is the 21%.
We are we're giving you kind of where we sit today based on July and August on incorporating all of the market conditions that.
$2 90 to 300, which I think is probably around 22% to 24% discount for the third.
Just on those numbers for those months. So I think there'll be slight improvement then we'll just have to see how the market trends, but our deviation from from the guidance.
So I guess around 4% is not unusual from our guidance when we do see a move in the quarter where prices declined throughout the whole quarter.
Okay.
Just on the supply demand fundamentals.
I think you're right.
In your commentary.
You noted that.
Global methanol supply outpacing demand.
And leading to some higher inventory levels in the quarter.
Just talk a bit about across regions hubbell's inventory levels look and when do you see the market rebalancing.
Yeah, I guess from a period inventory perspective, we saw really high operating rates.
Outside of China.
What that meant is safety Atlantic markets, probably sitting on high inventories customers are not carrying a lot of inventory today, they're managing space quite carefully. So we don't think that there's a lot of buildup from customers. It's more the methanol producers that are carry inventory.
China, we had a build but I would say China the coastal inventory in China is still not well above historical norms by any means but we have seen inventories.
Inventories outside of China, and what that's meant is you've had that <unk> seen trade flows moving to different jurisdictions to find homes. So.
So I would say China has increased but it's probably just above kind of historical averages, whereas outside of China because of high operating rates methanol producers are mainly carrying that inventory not saying consumers.
We're still carefully managing things given the economic situation we're in today.
And then on the balance sheet question.
On the balancing I'd say, obviously this is a peak.
This these these summer months tend to be the peak operating periods in our industry, where we see restrictions happening as we tend to as we get into the third and later in the third and into the fourth quarter, we tend to see operating rates come off naturally.
Something we see every year, so that combined with.
Stronger demand, which is something we have to continue to watch we think the balances would it would improve but again thats going to be dependent on operating rates on the strength of the map.
Okay.
Thank you.
The next question is from Joel Jackson with BMO capital markets. Your line is open.
Okay.
Alright for me I'll just go one by one.
Can you talk to me about.
It's come up before but north American prices, both spot and.
Posted prices are really trading at really high levels versus other markets is that is that sustainable.
I think what's happened Joe over time is that through contracting we've seen a big spread on discounts.
Discounts just based discounts from customers, so youre going to see it naturally a larger discount in those markets from.
Within our contracts so it naturally youre going to see a bigger disconnect between contract and spot because.
Ultimately you are trying to target a competitive price.
After considering discount so so yes.
Your observation is correct there we're going to see if it's a bigger it's a bigger spread between contract and spot.
Right now what we would say we look at our our realized pricing.
We're kind of guiding in that 290 to 300 for July and August off of our contract pricing, which again is probably that 22% to 24%. So we're not seeing a pricing going down all the way to where spot is trading globally I think average spot globally.
And that kind of $2 40 to $2 50 range, but we don't we don't expect to see that in our average realized pricing.
Okay second question.
There's been a lot of good headlines and it seems like progress on gas development in Argentina can you talk about that and where could we see maybe some legitimate.
And some of your gas allocations gas availability in Chile.
Yes.
Sure.
Yes, I agree with you what we're seeing is us.
It's really the nightcap basin, that's being developed.
And in particular, the lack of market field, where international oil companies had been developing that base.
A prolific shale play I understand that the economics are kind of similar to the Permian.
So this is this is and Theres a lot of gas there what Argentina has been working on is building pipeline connections into the grid.
To allow that gas to flow to help their balances reminder, Argentina is.
Importing audit for our base load perspective imports natural gas from Bolivia.
And then during the winter months when they get peak demand. There also have to rely on LNG imports to satisfy satisfied there.
<unk> needs. So so what they've been doing is building pipeline connections one of the big Big ones just recently got tied in.
We understand that that is kind of in anywhere from 10 to two.
The 20 million cubic meters per day.
Gas flow that represents anywhere from 10% to 20% of Argentina's total gas demand. So that that has the ability to really change the gas dynamics for the country.
There is there is a development that's happening in the middle of the country. There is gas development happening in the Austral basin, which is.
In the South which is close to our plants, which is meant to come online at the end of 2024.
All of those dynamics point to the fact that theyre going to need new theyre going to need markets for that gas. We are a natural market for that gas in the south.
Assuming that the balances get developed and get tied in so we're we're optimistic.
Right now, we don't I'm not going to I'm not going to guide to the fact until we get progress I'll guide on.
On upside to Chile as of right now we're going to continue in earnest to have those discussions to contract more gas and I think we're very well positioned.
And finally, what would what would permit you to restart the buyback what do you need to see in the past your predecessor talked about.
Amendment methanol price, maybe a liquidity buffer you want at Patriot a million dollars of debt down versus what would be the catalyst to restart the buyback.
So right now we are we feel we're in a very strong position from a balance sheet perspective.
While we've got fast enough cash to run the business, we've got G III fully funded.
We've we have the intent to repay the $300 million million.
And under current market conditions, we would be focused on that now we in the medium to long term, we still see favorable industry dynamics for methanol and we see a tight industry going forward demand outpacing supply notwithstanding we've got some near term.
I would call it near term headwinds to to sort of get through so in the in the medium to longer term, we're quite quite positive in the end if we see more favorable industry dynamics and we'll be we'll be looking at are reviewing our cash generation our capability to pay down debt as well as a start to think about share repurchase.
So I would say it will be somewhat market market determined in.
The lager medium medium term.
We're positive.
Thank you.
Yeah.
The next question is from Nelson <unk> with RBC capital markets. Your line is open.
Great. Thanks, So just a quick follow up on Joe's question on the restart of the <unk> and <unk>, So just to clarify or just to.
Yes to clarify a little bit.
In the past.
I think.
If you guys had call it $2 million to $300 million of cash on the balance sheet.
And I think if you were fully funded with the fully funded on <unk> you would allocate more.
Most of the cash flow to buybacks. So I guess going forward, if you're finished with G. III.
If you've repaid debt and if you have let's say $2 million to $300 million of cash.
On your balance sheet.
Would that be a good environment to restart.
And CIB.
No.
Probably wouldn't wouldn't want it.
Commit to that right now I think our biggest thing under the current market is to protect the balance sheet, where we are today complete G. III.
That is the focus at today's pricing levels, but certainly you Allison if you look at our cash generation with G. III.
At mid cycle pricing, we generate a lot of cash.
What we need to do is get back to there before we start kind of committing to anything on the NCB NCI V, but there'll be a lot of cash beyond the $300 million debt.
And we don't foresee a lot of near term capital expenditures.
Okay got it.
My next question relates to <unk>.
Methanol as a marine fuel. So you mentioned that by 2028, there will be about 200.
Dual fueled ships in the water.
Roughly how many are there today.
Today, we've got our 19 in the water and then I think theres another six methanol vessels or so and then there's a few other now in the water for us Theres under 30 today something like that.
And I could have my numbers wrong there.
So it's probably in the 30% to 35 something like that.
And yes.
Remaining to get to the 200 those are all going to be new builds and now retrofits for the period from now until 2028 most of those would be on the water in the 2027 2028 timeframe.
Okay, but that number again I think.
Mentum continues on this and we do expect that that number will continue to grow.
That will continue to report how that.
Each each quarter.
Okay. Thanks, and then in terms of the ships in the water today, excluding your own ships.
How do they currently run on the dual field do they.
Still use mostly bunker fuel in methanol.
When they're near the coast or how do they like what's the typical.
Pattern.
We're burning methanol, 100% on our vessels today, we don't know for sure but.
The other vessels are also methanol vessels as well so.
We would suspect that they are burning a lot of methanol as well because it's very easy for us where we lowered our fuel at the same time, we load our products. So that it becomes quite easy upgrading situation, we would suspect that.
Our competitors doing something similar in the other vessels that are on the water are quite.
Our small I think I think there's just put there.
Their vessel on the water and they did a trial with Green method also we know that they're interested in and methanol, but theyre also looking at.
How they can fuel it with with Green methanol.
Okay. That's great. Thanks for the clarification.
I'll leave it there.
The next question is from Hassan Ahmed with Alembic Global Your line is open.
Good morning Rich.
Two part question.
Two part question on the near term and maybe medium term supply situation.
On the near term I'm, sorry to see you guys, obviously talked about Q1 to Q2.
Incremental sort of production and Iran, but recently.
I've been reading a fair number of articles about.
A ridiculously hot temperatures over there and again some re directing of natural gas.
From the industrial consumer most of the residential consumers so.
So near term wise in Q3, what do you see as the supply situation in Iran. And then continuing with the supply side of it again in the past I've been reading some rumblings.
China sort of.
Foreseeing non moneymaking chemical production capacities to shut down some inefficient facilities chemical facilities to shut down are you seeing that on the methanol side as well.
Sure.
So yeah on the on the Iranian question I think your point is well taken that I think it's not just stay round. We're seeing this in a lot of jurisdictions right now with.
Extreme weather, causing a demand pull for natural gas for for for residential cooling or an industrial cooling.
And what we do know is that in the first quarter, Iran. First off is not always easy to get a full.
Thank you.
But but we do see things through the shipping and import statistics and whatnot. What we do know is in the first quarter they operate.
Our implied operating rate was less than 50%.
Through the second quarter, they got up to probably in the 60% to 70% range, which they have about 11 or 12 million tons of capacity. So a 10% increase is going to be in the one to one 5 million tons of annualized supply that certainly was led to part of the shift.
On <unk>.
Supply into the market.
We would we would also say, there's some risk to that and be able to maintain that given the dynamics. You. Just described and then and then the further out you get through Q3 and into Q4, there'll be likely a shift as well away into cooling so there.
We're under.
Under meaningful pressure and we know that it is difficult for them to keep their gas there.
Their gas system.
Supply just because of investments in compression and gas reinvestments in gas field.
It's really hard to do under sanctions environment.
You talked about your question about China.
It's always we have seen.
The shutdown of smaller scale plants, a lot of that has we've seen that happen over time, where their preferences to shut down lower inefficient plants and move and have things larger scale plants into industrial complexes, where it's more much more efficient technology and thats a lot.
About using <unk>.
Both from an environmental perspective, but also from an energy use perspective, they're quite <unk>.
Conscious of that and that is reflected in their policies around any new capacity. That's also approved so well.
And our forward view, we have capacity being added, but we netted off against a shutdown of a smaller scale plants. So to your point I think when we when we do see China capacity additions theyre not as large because there is some rationalization happening.
Very helpful and as a follow up.
And then kind of sticking to the weather side of things.
But as it relates to natural gas this time around.
Obviously, we've seen extreme volatility in natural gas prices be it within the U S.
Obviously, I know you guys aren't out in Europe .
In global natural gas prices have seen far too much.
Much higher degree of volatility, even LNG prices than ever before so now as you've seen that.
Has there been some sort of a rethink.
About your own sort of natural gas hedging program.
Right now when.
We're as you I think you and you know what we're doing but.
North America is probably the one that we are.
<unk> managing all of our other contracts are on longer term contracts with methanol sharing.
And obviously each one of those has its unique.
Characteristics.
For North America.
We continue with our hedging program and.
And right now, we're well hedged into.
Our targets for our <unk>, III and looking three year period, and looking beyond that as well.
We're going to continue to stay open to longer term contracts on a fixed basis and if there's ever any interests with doing sharing with producers in the U S. We'd be interested so yes. We continue to if we can get go longer we'd like to go longer.
Got it that's what we are.
Doing as part of our gas strategy. There, we would look to looked at to get a base load it longer term pricing if it's available given that volatility.
Very helpful. Richard Thank you so much.
The next question is from Steve Hansen with Raymond James Your line is open.
Oh, yes, good morning, guys. Thanks for the time.
First question, Richard just wanted to circle back to a question earlier I think Joe asked around the spot contract spreads can you just give us a bit of a.
A broader perspective here, so you might to interpret your comments to suggest the spot contract spreads.
We will remain excessively wide for.
The foreseeable future or how should we think about it I am just looking at the U S spread in particular as being something we've never seen so I mean, how should we think about that from a longer term perspective, and what that means for your discount rate.
Yeah, I think first and foremost it's.
It's just contractual discounts contractual discounts have gotten big I think that's the most important.
Starting point is that contractual discounts have gotten big contractual discounts or what gets us to our average realized price now you go into what's the further discounts to.
So spot.
As you know.
In North America is a heavily contracted market, it's not a spot market. So those limited volumes that trade on a spot basis are kind of not what's used to set the market price.
So so so yes in terms of contract discounts those those have continued to grow and that's part of that that is a big reason why you see that Pat.
Contract to spot number being so big is just because of the base contract discount has changed there's a further discount today because of where the spot market is trading and that is something that over time typically settles out I think we've seen one of the highest operating rate quarters in North America on record this last quarter.
The industry operated that well over 90% operating rates, which we've never seen before so.
And in those situations, where maybe producers.
Have under contracted then you see there'd be a discount of heavy heavy further discounts in the market. So I don't think Thats long term I don't think thats structural.
Those those those contract discounts are bigger.
Does that help.
Can I just ask as a follow up that's a good helpful context, a quick follow up.
Is it that's driving the contractual discounts as being larger is it volumes.
Coming in from.
It could.
Yes.
You have over time Theres been producers that have started up in North America, obviously there is.
It's very attractive to service domestic markets versus export markets and so there's been increasing competitiveness.
For marketers with.
With consumers and that is in the main point of of.
Uh huh.
<unk>.
Contract discussions is through competitive discounts and that has meant larger discount spreads overtime.
I remember when I was in North America discounts were.
You know, maybe 15% lower than they are today as an example.
Interesting okay, no that's really good perspective.
Just one quick follow up for me is just on the <unk>. Obviously, you are well advanced here Q4 start up is just around the corner effectively.
So fair to assume that no major commercial volumes really to assume were shipped in Q4 or should we expect a little bit.
How do you feel about.
I guess the timing of that Q4 shipments.
I think where we would guide to is it impacting the market and through our sales and in 2024.
So we will have an inventory build through inventory build but before it really gets into our.
Into our into our sales system it'll be in 2024.
Okay very helpful.
Yeah.
The next question is from Ben Isaacson with Scotiabank. Your line is open.
Great. Thank you and good morning.
Rich I'd like to ask a multi part question I'm just trying to figure out why prices are where they are right now you mentioned that.
China or sorry, you mentioned that the marginal cost of production is $2 60 to $2 80.
But in Europe , the prices $2 20 in China, it's below that in the U S. It's $2 30 or so.
<unk>.
Our RBC and capacity closures.
Now how much does the cost curve matter and as part of that if you go back over the last 10 15 years, how much or what percentage of time as methanol being set by the cost curve versus set by affordability and then just as a final part of that.
We always think about what mid cycle pricing and but China seems to be trying to push coal prices lower for it.
Power users and obviously you guys are sorry, the methanol on the streets and a little bit of a different boat than power, but how confident are we that we're going to get back to that kind of $3 50 ish mid cycle level in the future.
Okay, a lot to unpack.
Okay I'll start with that.
Pricing and where we are today and.
And how pricing is typically set so certainly the pricing in the industry is set by the marginal cost of production Thats in that I think is is where we've been traditionally and continue to be.
There as of today, we have pricing in.
In China cost curve, we said was $2 60 to $2 80 facing in China.
China is on the low end of that cost curve.
And it's probably around the $2 60 level I think why is it lower and why is it pressures because of the olefins market. We've got a marginal buyer there thats under pressure with all of <unk> pricing. So I would say that right now that there is a.
Blend of what's what's what's driving the price in China, which is the price setter for the for the market, it's probably a blend of.
Coal production cost plus the ability to purchase from the MTO sector, which is under pressure and there are some I think pull there just because all defense pricing has been so so low so hopefully that answers that and then when it comes to pricing outside of China, We've typically seen premiums outside of the China market.
And that is where we see things today still if you look at where China is at $2 60, we are saying that our pricing for July August we're going to realize $2 90 to 300 and implies.
A premium over that of around $30 a ton globally that that move has moved up or down depending on.
Global supply demand in the market and we've seen that as high as 50 to 60 and as low as 10 to 30, so we've seen.
That's kind of what we've seen traditionally.
In terms of mid cycle pricing no mid cycle price pricing I guess, we've seen last 10 years' average realized price of around $350 a ton I don't think it takes much stake for us to get to a $350 realized price.
It's it's as of today I think we're in a supply demand supply outpacing demand so high inventory levels we've had.
Relatively weak and historically low olefins pricing I think coal the coal price today can easily still support a $350 price it's been ranging between 809 hundred RMB.
It was well above 1000 for the last year and a half and so coal pricing that is still historically high when you look on a historical basis.
Over the years, we generated $350 realized price, so I don't see us having a heart.
It being that far from where we are today, but we have to see some more favorable things happen in the near term.
Sure.
On the what percentage of time have we has methanol kind of live off the cost curve versus being priced based on affordability.
Yes.
I think we've seen it be this blend for the last year year to year and a half.
But most previous to that I would say we've been pricing off the cost curve, there's been times when all offense.
<unk> and affordability waste are way higher on a relative basis then.
Marginal cost and we saw methanol pricing much higher than the marginal cost of production. So.
I don't know percentage wise, we'd have to probably get back to you, but it's.
Yeah.
It's been a blend of different in different places.
And then just as my follow up you mentioned that customers are not carrying inventory.
Given that prices are historically at a low right now why do you think that is why it wouldn't be kind of coming back in the market and restocking given where prices are and you've talked about an expectation that what you said in the summer operating rates are generally high and we start to see problems as we get into the back half of the year that could cause pricing to go higher so why aren't customers restock.
And right now.
I think I think it just has to do with that.
General economic outlook and manufacturing output.
Has it has not been.
Real strong.
That's the concern is that notwithstanding we see economic numbers that look okay.
When we look at what's underneath those a lot of that's being driven by consumer spending but on services and maybe not on durable goods and I think that that has meant manufacturing output is not not been as strong as we would have we would have hoped and I. If you look further.
Down the value chain and talk to our customers and see how they are talking about.
The current markets is definitely pick up that they are they are still concerned and they need to see that demand is stronger.
That's very helpful. Thanks, so much.
The next question is from Laurence Alexander with Jefferies. Your line is open.
Hey, good morning, everyone.
Actually Kevin on for Laurence Alexander.
Most of my questions have been asked but I guess I was wondering if you could give us some update your thoughts on your strategy for green or blue methanol that'd be very helpful. Thank you.
Sure.
So.
Thanks Laurence.
I think when we think about our strategy.
It's three three prong one is the demand side working with the so our low carbon solutions team is really focused on three things right now it's working with the shipping industry.
We're in discussions with all major shipping companies on what their commitment.
Decisions on vessels, but also how they're thinking about their fuel choice.
The second thing is supporting the Bunkering in infrastructure. So we've done a number of different things looking at.
We are the biggest methanol producer we've got bigger.
The biggest network in terms of.
In terms of methanol.
Delivery and infrastructure. So we certainly want to play a role in how we can support.
Getting that demand that last mile to where it needs to be for the shipping industry and then the third part is looking at the supply and the feasibility of methanol as it relates to decarbonization.
And so that that is that areas is what I'd say is sort of.
Doing in a number of different initiatives one is.
Is the immediate one which as feedstock looks.
Looking at renewable natural gas and using renewable natural gas to produce green methanol and leave.
We've done that already.
To do that so we're active in the renewable natural gas market, the others looking at carbon capture and storage.
Looking at that in Geismar because of the 45 <unk>.
Support under the inflation reduction Act.
And then the third prong is looking at Green and what I mean by that is screening.
Our renewable hydrogen and cotwo as a direct feed into our existing clients and so we think that you know.
Looking at opportunities, we may have to actually directly feed the backend of our plant could give us an advantage over building a greenfield project.
And so we're looking at the technical technological feasibility of that as well as which location would make the most sense based on government incentives available.
So we're looking at it really from the demand side, the infrastructure side and the supply side and how we bring solutions to this potential quite.
Quite significant market.
Great. Thank you very much.
The next question is from Matthew Blair with TBH. Your line is open.
Hey, good morning, Rich could you talk about your growth capital outlook. After you've finished Q3 with <unk>.
Types of projects would you be interested in.
And I guess what are the chances that you would green light potentially significant.
Green methanol or some sort of renewable methanol project.
So I think I'll start with sort of organic growth projects.
Yeah.
G III is really the focus today.
Some cleaning that safely on time on budget and it positions us really well in the medium term.
We are obviously watching.
Industry growth.
And we want to continue to grow with industry with the industry and I do think we are in a period where growth may be slower than what we had anticipated, but what we are going to do is we're going to work to create the best opportunities for growth.
So that will mean, we will be we will be spending limited capital what we'd want to look at the feasibility commercial feasibility of what is our next best project to position for organic growth.
I think timing of when we might do that will be market driven.
I think similar to what I said earlier I think we would need to see some more favorable industry dynamics before we were to commit any major capital. So don't see that happening in the next few years low carbon as is.
One that I would say is a bit we'll be opportunistic driven because I think whatever we're going to do in that space.
Does it is going to require its going to require us working with an end market.
Likely what we would do in any case this half.
Partner or an off taker or some type of meaningful derisking, if we're going to put capital in just because.
It's not going to be sort supported by by by pricing.
<unk> of our normal methanol price it will require premiums of course, we'll try to we would try to.
Capitalize on any incentives available.
But it's really difficult to say at this point because I think the marine industry in particular would be the one that would likely make any big investments.
And they are really going through a period of discovery right now on on on on methanol and.
What they want and how they want to solve.
To solve that challenge.
Challenging certainly that we're going to be positioned to have those discussions. So it's a little early to say, what we might do and when.
And but I do think it will be opportunistic opportunity driven than we would want to.
It really be working with partners.
Okay sounds good and then could you discuss current.
Economics and operate.
Versus like Q2 averages.
So are you expecting any new MTO capacity to start up in the next year or so.
Sure. So maybe just what's happened this year.
We had.
There's about 21% to 22 million tons of capacity for MTO.
Currently at 100% methanol equivalent demand at 100% operating rates during the first quarter. We had about 15 14 to 15 million tons of demand.
And during the second quarter, we had about 15 to 16 million tons of demand. So I think you're in a range at around 5% increased to 10% increase quarter over quarter and that's just based on which plants were operating at what point in time.
As of today the industry is operating at around 70%.
And it's really two very large scale plants that are not operating today and thats the plant Shanghai, Hong and Sanjay and they represent 4% to 5 million tonnes of methanol demand that is latent today and not operating so so that's kind of where every all the other MTO units are operating.
At relatively high rates as it relates to affordability we've got.
It all depends on their integrated downstream at what derivatives. They go too so it's a bit.
Complicated, but what I would say is it ranges anywhere from low two hundreds to.
Low three hundreds right in terms of affordability levels today and Thats.
What I would call very very historically, low olefins pricing relative to oil price environment. We're in.
Okay.
Great. Thanks for your comments.
Again star one if you'd like to ask you. The question. The next question is from Josh Spector with UBS. Your line is open.
Yeah, Hi, Thanks for taking my question I actually wanted to follow up on MTO and specifically just think about kind of all of the 22 million tons that are out there and we know some of the firms are also building refineries and crackers.
And may try to link up their downstream units to that supply versus MTO and bypass that operation is that something that youre seeing at any meaningful scale any feedback from customers. So that when we think two or three years from now of that 22 million tons is there some of that that actually comes out of the market because youre going to.
Feed via another route.
Yeah. So.
A really great question and it's actually goes to the two units that are down today, because those are the two units that.
Are down and I can say that.
What those units did.
So the San Jane unit, they built a they built a mixed feed cracker, but they also build downstream so their intent was not to.
Build in that shutdown have Joel it was to have a bigger downstream into eo and but what's happened in the Yo markets as those have been oversupplied because of lack of demand and so the commission there new unit and they have yet to start up their MTO unit, but theyre full slate allows them to operate both and Thats. Their stated intention is to offer.
Both but I think they are waiting to see markets on end demand come back online the Shanghai unit data that refinery expansion and they also have a mixed feed.
Cracker off their refinery theyre going into aromatics, and a whole bunch of other slate of materials. We believe it's very economic they're commissioning the plant.
And once they have everything commission they will they would bring online their MTO unit again, it was a full slate full value chain investment not just to.
To get to CTC three so both of those unit both of those businesses are in the market talking about when they may be back in the market. So we don't think long term. This is a shot of shut off of it.
Teal.
No I appreciate that's really helpful and just on the Shanghai plant is that also an E. G E. O. So we're waiting for <unk> and maybe the fibers market also improve is that the thing to watch.
No no they're going they're going into a whole bunch and I think we could take this offline, but theyre going down too.
A much broader setup.
And derivatives and we think its actually more a technical commissioning issue.
Today than it is a market driven delay in startup.
Got it really appreciate the color. Thanks.
Okay.
There are no further questions at this time I will turn it back over to Mr. Rich Sumner for any closing remarks.
Okay, well, thank you for your questions and interest in our company.
Looking forward, we're well positioned with our current asset portfolio and strong balance sheet. Our G. III project is fully funded progressing safely on time and on budget and we expect to be in production in the fourth quarter of this year, we hope you'll join US in October when we update our third quarter results.
Okay.
This concludes today's conference call you may now disconnect. Thank you.
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