Q2 2024 Methanex Corp Earnings Call
Good morning, My name is Aaron and I will be your conference operator for today.
Speaker Change: This time I would like to welcome everyone to the Methanex Corporation 2024 second quarter results Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session and if you would like to ask a question. During this time simply press star followed by the number one on your tell us.
Speaker Change: Phone keypad.
Speaker Change: If you would like to withdraw your question simply press Star followed by the number one again thank you.
Sarah Herriott: I would now like to turn our call over to the director of Investor Relations at Methanex, Miss Sara <unk>. Please go ahead Ms Harriet.
Sarah Herriott: Good morning, everyone welcome to our second quarter 2024 results conference call. Our 'twenty 'twenty four second quarter news release management's discussion and analysis and financial statements can be accessed from the financial reports tab of the Investor Relations page on our website at Methanex Dot com.
Speaker Change: 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 outcome to differ materially from the actual outcome.
Speaker Change: Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection, which are included in the forward looking information. Please refer to our second quarter 2024, MD&A and to our 'twenty two 'twenty three annual report for more information.
Speaker Change: 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 corners for clarification any references to revenue EBITDA adjusted EBITDA cash flow adjusted EBITDA.
Sarah Herriott: Our adjusted earnings per share made in today's remarks reflect our 63, 1% economic interest in the Atlas facility, our 50% economic interest in Egypt facility, and our 60% interest in the waterfront shipping in.
Sarah Herriott: In addition, we report 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.
Sarah Herriott: These items are non-GAAP measures and ratios 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 because we believe they are a better measure of underlying operating performance.
Speaker Change: 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. Rich Sumner for his comments and a question and answer period.
Speaker Change: Thank you Sarah and good morning, everyone. We appreciate you joining us today as we discuss our second quarter 2024 results are.
Speaker Change: Our second quarter average realized price of $352 per ton and produce sales of approximately one 6 million tons generated adjusted EBITDA of $164 million and adjusted net income of 62 per share adjusted.
Sarah Herriott: Adjusted EBITDA was higher compared to the first quarter of 2024, primarily due to a higher average realized price our second quarter was negatively impacted by $13 million of G. III delay cost recognized in adjusted EBITDA, which was comprised of costs associated with the utilities take or pay contracts.
Sarah Herriott: <unk> costs, excluding the genes right. These G III costs adjusted EBITDA would have been $177 million.
Sarah Herriott: The safe restart at G. III continues to be our company's top priority during the corner. The G. III team completed the repair to the auto thermal farmer and implement the conditions to allow us to progress back to startup.
Speaker Change: I'm very pleased to report that yesterday, we reached first methanol production from tier three and we expect the plant to ramp up to full rates in the coming weeks. The safety performance of our team and partners on the G. III project has been outstanding and I would like to extend my personal thanks to the team for their continued hard work and dedication.
Speaker Change: Leading this project safely.
Speaker Change: G III significantly increases our cash flow generation capability and has one of the lowest emission intensity profiles in the industry.
Speaker Change: Now turning to the second quarter methanol pricing and market dynamics are second quarter global average realized price of $352 per ton was $9 higher than the previous quarter.
Speaker Change: Through the first part of the quarter methanol markets tightened with increased demand outpacing supply leading to a significant global inventory drawdown and increasing methanol prices markets remain tight in the Atlantic Basin and rebalanced in China in June when demand slowdown with several methanol to all the.
Speaker Change: Fence or MTO units, taking maintenance or lowering operating rates. We believe operating range from MTO producers are increasingly becoming the balance on the global market.
Speaker Change: Supply struggles to keep pace with demand growth.
Speaker Change: Overall global methanol demand was higher compared to the first quarter of 2024.
Speaker Change: Additional chemical applications in energy related demand grew above 3% compared to the prior quarter driven by increased economic activity globally seasonally high construction and transportation activities and favorable energy pricing, which continues to support methanol demand into energy applications.
Speaker Change: MTO demand decreased in the quarter as planned to as plants took outages or lower operating rates in line with methanol supply constraints and increasing methanol prices.
Speaker Change: Operating rates decreased from around 85% in the first quarter, so operating rates between 50 and 60% through June and into July.
Speaker Change: With various improvements in methanol supply through the quarter. We've recently seen one large MTO unit restart of three large scale units are currently idle representing approximately four to 5 million tons of annual demand.
Speaker Change: On the supply side, we saw various planned and unplanned outages in feedstock constraints restricting supply availability in the second quarter.
Speaker Change: Limited supply from various regions globally and in particular methanol production from Iran was slower to enter the market after seasonal gas restrictions as a result global inventory levels were under pressure.
Speaker Change: 18 month lows low levels in China, and increasing prices drove operating lower operating rates from the MTO sector, which led to a more balanced market in China.
Speaker Change: Towards the end of the quarter, we've seen various improvements in methanol supply and inventories globally, although markets remain quite tight and as I already noted there remains considerable MTO demand available to restart.
Speaker Change: We are seeing methanol pricing around $290 per ton in China, and we continue to see premiums above these levels at all regional markets. We estimate the marginal cost of production based on coal pricing in China to be around 200.
Speaker Change: 70 to $280 per ton.
Speaker Change: Looking ahead to the third quarter, we expect to see continued tight methanol markets, we're seeing healthy demand growth across all traditional and in energy related downstream sectors with MTO operating rates influenced by the availability of supply. We anticipate this increasing demand will be met by increased operating rates in the industry.
Speaker Change: As well as new supply from G, III, which will be partially offset by our supply reduction in Trinidad in September when we shut down at Atlas and restart tight.
Speaker Change: Additionally, the $1 8 million ton plant in Malaysia has announced it will be starting in 2024 as always we continue to monitor the macro economic environment and its impact on global methanol demand.
Speaker Change: Now turning to our production methanex production in the second quarter was lower compared to the first quarter due to gas constraints in Chile, Egypt in New Zealand.
Speaker Change: In Chile, we're currently in the period of lower gas supply available from Argentina. So we're operating one class at less than full capacity.
Speaker Change: We continue to make progress on gas availability from Chile, and Argentina and based on production year to date, a successful turnaround in Chile for that will improve efficiency on restart.
Speaker Change: Progress, we've made securing gas from Argentina for the non winter periods. This year, we expect 2024 production will be slightly above the high end of our guidance of $1 2 million tonnes.
Speaker Change: In Egypt, the plant produced at high rates after the syngas compressor maintenance completed in mid February in early June the plant was temporarily idled one significantly increased seasonal demand for power generation.
Speaker Change: The elevated temperatures in the country led to various measures by the government to manage gas balances, including curtailments to industrial clients.
Speaker Change: <unk> restarted at reduced operating rates. Shortly thereafter, it has operated at fluctuating rates based on gas availability with current operating rates at approximately 80% we've seen some stabilization of gas balances in the country, but we expect to see some continued limitations on supply as we progressed through the third quarter.
Speaker Change: In New Zealand, we operated one plant through the second quarter due to both lower than expected gas deliveries from upstream suppliers as well as from the redirection of some of our contractual gas for use in the broader energy sector.
Speaker Change: The country's overall about energy balances are currently very tight with demand seasonally high during the southern hemisphere winter combined with low hydro levels and relatively lower gas supply in 2024 compared with previous years.
Speaker Change: As a result, we'd be believe some of our contractual gas has been redirected to the electricity and other domestic energy markets. We're in continuing discussions with our gas suppliers to ensure our contractual entitlements are being respected as well as engaging with our gas suppliers and government agencies and supporting efforts to improve.
Speaker Change: Energy balances in the country.
Speaker Change: Based on our production year to date and current gas deliveries. We expect 2024 production will be below the low end of our premiums maybe its guidance of 1 million tonnes.
Speaker Change: Now turning to our current financial position and outlook. We ended the first quarter with approximately $390 million of cash with.
Speaker Change: With the G. III <unk> now in the process of startup of the project is now complete.
Speaker Change: The total final capital cost is slightly less than one 3 billion, excluding fixed costs related to the delay and.
Speaker Change: And we do not currently have any further growth capital commitments, our primary focus for capital for the remainder of 'twenty 'twenty four is to repay rather than refinanced $300 billion bond due in December.
Speaker Change: Yeah.
Speaker Change: Turning to the third quarter, our European quarterly price was posted at 535 euros per metric ton or 10 euro per ton increase our North America Asia Pacific and China prices for August were posted at 695, 400 and $380 per ton respectively. We.
Speaker Change: Based on these posted prices our July and August averaged realized price range is between approximately 350 and $360 per metric ton.
Speaker Change: We expect adjusted EBITDA for the third quarter will be lower than the second quarter due primarily to lower produce sales from Chile, and New Zealand and G. III is initial initial inventory build post startup.
Speaker Change: We expect sales of produced product and earnings for the fourth quarter of 2024 to be more representative of the run rate of our company with G. III at full production, we'd now be happy to answer questions.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen at this time I would like to remind everyone that in order to ask a question simply press Star and then followed by the number one on your telephone keypad.
Speaker Change: Our first quest.
Speaker Change: Question comes from the line of Ben Isaacson with Scotiabank your.
Speaker Change: Your line is live.
Benjamin Isaacson: Thank you very much and good morning, everyone.
Benjamin Isaacson: Two questions for me first one is on New Zealand.
Speaker Change: Zealand seems to be disappointing on a fairly consistent basis.
Speaker Change: Does it make sense to indefinitely idle.
Speaker Change: One of the two marching Dewey plants I mean, there are several benefits for the risk profile of your portfolio of assets improves you have reduced variability of free cash flow, which may result in a higher multiple you'd take out a little bit of capacity from the market can you just comment on that thank you.
Ben: Thanks Ben.
Speaker Change: Yeah. So right now we're working through a lot of I'd say two big issues right. Now one is as you say I think that the gas from the upstream.
Ben: Investments that are being made.
Ben: Listing fields are both new wells as well as investing to enhance performance of existing wells I think we've seen gas deliveries lower than expectations.
Ben: You know I think we also are working through the short term dynamics in the industry, where we believe some of our gas that would be coming to us may not be and and that's so that's something we're also working through but certainly.
Speaker Change: Right now I think you should be thinking about in that in that foreseeable months here of one plant operation and over the next few months, we'll be assessing what our views are for the rest of the year and considering how we should be operating those assets. So I think there'll be more to come as we as we assess the rest of the year here.
Speaker Change: Thank you for that and my follow up question is on the entropy deal, which is really quite interesting.
Speaker Change: It's also a little bit scary, because there's the potential for others to do this as well. So can you run through what are the constraints for that's preventing everyone else from kind of copying what you've done in adding another 5% to 10% of supply.
Speaker Change: That would be helpful and actually if you could actually maybe give a number in terms of how much capacity is there that can be that cost would do this.
Speaker Change: Yes, maybe I'll just give a bit of background on the on that project.
Speaker Change: I think a person in front of us we're happy to be working with entropy, which is a technology provider who is already has this technology in place and gas processing plant in Alberta with sequestration.
Speaker Change: I think when you think about the framework you need to make this work you have to think about that.
Speaker Change: Jurisdictions that.
Speaker Change: One are going to have a regulatory and supportive regulatory framework.
Speaker Change: You also have to have sequestration available and so it's not I wouldn't say, it's just easy to replicate.
Speaker Change: But you know we're excited to be.
Speaker Change: Exploring this opportunity and the pre feed stage here just to give you a sense.
Speaker Change: It'll capture about 400 metric tons of Cotwo per day about two thirds of that would be used in in our production and the remaining third would be would be sequestered in underground.
Speaker Change: It's close to our plants and that's all being worked on the infrastructure on on making this a.
Speaker Change: Commercial and so we're excited to do it you know I think there's a debottlenecking will add.
Speaker Change: Like we said around 50000 tonnes of low carbon ethanol in and so yeah. We'll we'll work through everything in this pre feed stage in and are trying to get to a point of decision, making sometime in middle of 2025.
Speaker Change: Thank you very much.
Speaker Change: Thank you for your question.
Speaker Change: Our next question comes to the line of Mike We'd had with Barclays Capital. Your line is live.
Mike We'd: Great. Thanks, Good morning, guys.
Mike We'd: First question just on G. Three congrats on successfully starting that up what is your expectation for <unk>.
Speaker Change: When that can be sort of fully fully running full utilized fully flowing that.
Speaker Change: Through the P&L and you guys are getting commensurate earnings and then if we just kind of use where we are roughly today in terms of macro in oil and gas just whats your sort of latest.
Speaker Change: Best estimate of the annualized EBITDA, we should expect for this plan.
Speaker Change: Okay.
Speaker Change: So I guess the wrap I'll start with a wrap up a period you know we expect as we disclosed that we will be ramping up to full rates in the coming weeks.
Speaker Change: As of today the plants operating at 70% operating rates, which is is how we start up a plant and then we steadily increase over time, there could be points in time, where you're you know you're testing all the all the different.
Speaker Change: Elements of the plan and you made you know take it down for a period to bring it back up but as of right now we're at 70% operating rates and will be there for a period to increase steadily increase in the coming weeks here. So so that's the wrap up is relatively we plan it to be relatively quick in terms of how it will.
Speaker Change: Oh actually impact earnings I think it's safe to say, we don't expect a lot of G III coming through in the third quarter.
Speaker Change: But we would expect that to be a fairly you know sometime around the end of this quarter and the beginning of next quarter. So you know inventory flows are not all that easy to track through our system, but I wouldn't say, it's it's you know we've guided that 2020, the fourth quarter should look.
Speaker Change: Like a run rate with with with G. III.
Speaker Change: In terms of the run rate EBITDA.
Speaker Change: EBITDA from from G. Three we've guided that we're at $350 a ton, which we're we think we're slightly above that.
Speaker Change: It generates around $200 million to $250 million EBITDA per year, depending on gas between three and $4 an M b to use so.
Speaker Change: So hopefully that answers.
Speaker Change: Your questions there.
Speaker Change: Yeah. That's super helpful. And then just a couple of quick follow ups on the entropy announcement.
Speaker Change: First is that correct in hearing that if everything goes to plan.
Speaker Change: You should expect to make FY <unk> by mid 'twenty 'twenty five drew can you just speak to how dependent this project going forward is on receiving government funding and then just briefly is this sort of a one off opportunity just because of the plan and location or if this goes well. This is something you could.
Speaker Change: Seek to replicate at some of your other plants as well.
Speaker Change: Yeah, So I'll start I'll start with.
Speaker Change: Let's start with this this this.
Speaker Change: Mishel phase on the timelines here.
Speaker Change: So this is a phase this is actually this project is part of our initial.
Speaker Change: A two step phase project. The first phase is a unit that would capture 400 metric tonnes.
Speaker Change: Per day about two thirds of that would be used in our production and about a third would be sequestered underground. So that when you think about value are what we will be paying will be paying for that C. O two value in methanol production for two thirds of it and another third will be will need to.
Speaker Change: Get carbon credits for sequestering C O two and there's obviously a regime of carbon taxing and carbon credits in Canada that way it would be that that will support. This project. In addition to that there's other and incentive programs provincially and federally that this well will love to.
Speaker Change: Access and we think that it will be eligible for all of those things we'll be looking at through the pre feed stage.
Speaker Change: The phase two of the project is actually to really scale. This such that you would triple the size of it.
Speaker Change: And you would capture all of our our scope one emissions and sequester all of the effectively all of the C. O. Two from the from the scope one of the plant that will take more work more infrastructure that would be required and and a lot more certainty around.
Speaker Change: The carbon framework that would support and carbon pricing framework that would support that second phase our investment. So hopefully that helps answer your question.
Speaker Change: Great. Thank you. Thank you.
Speaker Change: Thank you for your questions. Our next question comes from the line of Josh Spector with UBS. Your line is live.
Speaker Change: Because this is James Cameron on for Josh.
James Cameron: I just wanted to.
James Cameron: Just wanted to poke on what's going on with the discount rate. It seems like while it's crept up over time. This year, it's been a lot higher so far.
Speaker Change: I think based on your comments on.
Speaker Change: Third quarter to date, it seems like were relatively stable with the last quarter's levels.
Speaker Change: But kind of looking beyond that how should we think through the rest of the year and kind of into next.
Speaker Change: Well I think I think when we look at our freight right.
Speaker Change: Okay.
Speaker Change: When we look at our pricing.
Speaker Change: You've been guiding for the second quarter, we guided to around 345 to $350 per ton.
Speaker Change: Averaged $352 per ton for the quarter.
Speaker Change: For this coming quarter, where we're guiding to 350 to $360 per ton and when I look at where pricing is.
Speaker Change: Got cost curve level that too and I need the $300 per tonne in China. So I think when we look at it we were setting price as to what a reasonable market price should be in all the regions where.
Speaker Change: We're selling into and and we're achieving.
Speaker Change: Never getting premiums I think which is reflective of tight market balances, which we expect to continue for the rest of the year as I said in the earlier remarks. So we're not as focused on the on the discount brokers on realization and I do think you've seen discounts creeping up mainly because that's the competitive way you know.
Speaker Change: Pricing into the market are not are not what we think is reflective of lower realization.
Speaker Change: Yeah.
Speaker Change: Okay got it.
Speaker Change: And then.
Speaker Change: I think through the quarter I saw some reports on curtailments to Trinidad gas I.
Speaker Change: I think you called out a couple of unplanned outages I was wondering where those related and can you comment on how you're seeing that develop through this quarter.
Speaker Change: Yeah.
Speaker Change: So those were not gas related or our outages was we had or air separation unit went down in Trinidad and we had to perform some maintenance in Trinidad.
Speaker Change: But there was gas outages in the upstream.
Speaker Change: During the quarter didnt affect our operations, but it did affect other producers in the at the point leases the state so but yeah on unrelated is for our Atlas operations.
Speaker Change: Okay. Thank you.
Speaker Change: Thanks for your questions.
Speaker Change: Our next question comes from the line of Joel Jackson with BMO capital markets. Your line is live.
Joel Jackson: Hi, rich I'm going to ask three quick questions if you'll allow me.
Joel Jackson: First on your maintained guidance for 7 million tons of Methanex produced volume how round is that 7 million tons is it you know more like six five to 7 million tons and the reason I say, it's to make all your numbers work, it's kind of hard you say Q3.
Speaker Change: Production will be little bit lower than Q2 to get that 7 million for the full year you need to run rate I don't know like a 10 million ton run rate in the fourth quarter that'd be everything going full out can you maybe talk about how round the 7 million ton number is.
Speaker Change: I think we I think we feel good about the seven 7 million ton with G. Three where it is right now and our expectation for G. III I've talked about some ups and downs as it relates to Chile, and New Zealand and I think most of the other things are factored in so we feel pretty good at the seven 7 million ton.
Speaker Change: For the quarter or for the year sorry.
Speaker Change: For the year got it.
Speaker Change: And then second question.
Speaker Change: Second question.
Speaker Change: Egypt.
Speaker Change: Repair that you had you obviously put back on line seven months ago, you've got some insurance settlement, maybe coming from that can you talk about that and that's obviously not included in your EBITDA forecast, but I imagine that would be put into EBITDA one of these quarters coming up.
Speaker Change: Yeah, we expect to collect on insurance in the coming quarter.
Speaker Change: So I think that's going to we should expect to see insurance proceeds coming in in Q3.
Speaker Change: But that's not included in your in your guidance and the outlook last night or not.
Speaker Change: Not included in the guidance.
Speaker Change: And finally, I mean now that you know you're just you know you've got <unk> started off the last day or two Oh, how public probably ramped up over the next month or so got the maturing debt later in the fourth quarter. What is the sign posts now to be comfortable to buy back stock when you're ready to go again on the buyback.
Speaker Change: Okay.
Speaker Change: I mean right now our first priority is to the debt and you know we still have some cash to build in advance of that so that's our main focus today.
Speaker Change: Once we move past that we don't have any major growth capital I think we can start looking at use of capital beyond that and we have said that.
Speaker Change: You know there'd be we've got a very strong free cash flow profile as you know and and there'll be room for for considering share repurchases along with we do think theres some room for the debt, but we think we can do things in a balanced way there post a building up for our $300 million debt repayment. So.
Speaker Change: I think what we want to do is focus on that today and and then and then once we get confident we're there we can consider other uses of cash.
Speaker Change: Capital beyond.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Steve Hansen with Raymond James Your line is live.
Steven P. Hansen: Yeah. Good morning, guys. Thanks for the time.
Steven P. Hansen: Wanted to follow up on Joel's question indirectly about the buyback I think in the past, you've said that $200 million to $250 million of cash is sort of like a comfortable position you'd like to keep on the balance sheet at any given time just to operate the business methodically I mean has that changed at all with G. III production coming online do you need slightly more than that just trying to get a sense of that comfort.
Speaker Change: And so we can think about the excess cash builds and how that might go to other uses.
Speaker Change: I think I think we were we would be in the range of $250 million to $300 million just when we look at where our cash is earned and how we need to move it around to run the business. That's that's sort of our comfort comfort level. So I wouldn't think that there's a meaningful change with good <unk> and and and and not having the.
Speaker Change: The capital spend there.
Speaker Change: But yeah, that's that's sort of a range to be to be using Steve.
Steven P. Hansen: Okay. That's helpful. And then just jumping over to Julie you've obviously been successful at procuring some additional gas there you've talked about increased availability there before but it's taken some time to ultimately execute on getting the gas is anything changed in the market down there. That's allowed you greater comfort to secure more gas or what are we seeing down there.
Speaker Change #103: Well I'm very comfortable around securing gas outside of the winter periods right. We've got a lot of gas available to us from Argentina outside in the winter period in fact more than our needs I think we're all being offered more than we need for our for our Chilean operations, which is very pause.
Speaker Change #103: The challenge will be through the winter period, because gas is restricted.
Speaker Change: From an export perspective are we are in early discussions there you know about the winter period because of the country is increasingly trying to ramp up pipeline connections and gas takeaway capability out of the Bakken water. They're also developing fields in the in the south which is going to add in another.
Speaker Change: 5 million cubic meters into the grid, that's effectively stranded and so you know where those are very logical purchaser for that gas. So I think these things are going to develop but our goal is to have year round gas.
Speaker Change: Chile, given our given the dynamics in Argentina.
Speaker Change: Okay. That's helpful. And then just one final one if I may is going back to Ben's question at the very outset. It in some of the challenges in New Zealand I mean is there an ability to move any one of those plants over time, you've done in the past those are older facilities of course, but you know is there any context around whether a move a facility you might make some sense in terms of optimization of the footprint.
Speaker Change: Yeah.
Speaker Change: Well I guess the first thing is maybe just the relocation economics and how they work relocation economics arent significant savings over on capital.
Speaker Change: And so it's usually if you're looking at that it's more trying to execute a project to grow grow methanol supply in a shorter timeframe and that's where you get value I don't think we're in a position today. These these plants are or not I don't think it would be the plants. You would look look to move and I don't think we're in a position today to.
Speaker Change: Be making that decision are being exploring that based on our on our gas outlook at this point, we want to do it.
Speaker Change: We need to get a better feel for the medium and long term in the country before we'd be looking at anything like that.
Speaker Change: Okay very good.
Speaker Change: No.
Speaker Change: Thanks for your questions. Our next question comes from the line of Hassan Ahmed with Alembic Global.
Speaker Change: Your line is live.
Speaker Change: Rich.
Hassan Ijaz Ahmed: Just wanted to revisit a you know a bunch of questions that were asked earlier about New Zealand.
Hassan Ijaz Ahmed: You know obviously you guys have you know gas contracts in place over there I'm just trying to get a sort of if you could dig a bit deeper into you know the structure of those contracts. I mean is there any restitution you know could you receive any payments maybe.
Hassan Ijaz Ahmed: For.
Hassan Ijaz Ahmed: Gas deliveries that did not happen.
Speaker Change: So I think I'm, maybe I'll start with the contracts themselves.
Speaker Change: Contracts, where we're.
Speaker Change: No we have entitlement to gas per year, but that is based off of what they are bringing to market right and and there is a there is a priority in terms of in terms of gas and so if the gas is available.
Speaker Change: And our contracts should be fulfilled yes, those restitution that they that are that should be should be should.
Speaker Change: It should be paid in and that certainly when we say we're in discussions with our gas suppliers. These are some of the discussions are being had.
Speaker Change: Now if the gas is not available in their their portfolio is not delivering that's another issue we don't have.
Speaker Change: You know deliver or pay obligations on those those those gas contracts. If the gas is not is not producing so so I think there's 222 issues there and were dealing with both of them right now.
Speaker Change: Very helpful and as a follow up you know on the demand side of things you know in in in sort of the press release, you guys talked about global methanol demand being up sequentially just wanted to get a better sense of you know what the inventory situation looks like is demand improving may.
Speaker Change: Potentially because of a restock and part and parcel with that what are you guys seeing above and beyond just the MTO side in terms of Chinese demand and maybe if you could on the China side also parlayed that with if you're possibly seeing any maybe shutdowns in Chinese capacity as well.
Speaker Change: I will thanks Hassan I.
Speaker Change #102: And in terms of overall demand, maybe I'll, just give us snapshot of the of the market globally and look to last year and where we are this year last year, we would say the market was probably around 92 million tonnes and that that does include a slow start in China, but today for the first half of 2012.
Speaker Change: Four we're probably in the 95 to 96 million tonnes, and that's with MTO flat or slightly lower than last year. So when we think about the macro with it's actually been it's been pretty strong and healthy are around the different sectors compared to last year. You know I think when we look around the markets outside.
Speaker Change: China growth rates are about 3% over last year and then what we're looking in in China, we're seeing growth rates or traditional demand at about 4% to 5% over last year and then the energy related demand in China, which is quite meaningful is also at the round for <unk>.
Speaker Change: Percent rates over last year. So I think that's actually a really putting stress on the methanol markets and the ability to to.
Speaker Change: To meet that demand with with supply and that's where the MTO sector I think is really becoming becoming.
Speaker Change: Having that balance.
Speaker Change: When we think about China demand the domestic economy is still something we watch really closely and and domestic consumption, which we don't think is strong export markets have been stronger. This year, which is has helped bring bring that demand up in terms of operating rates in China.
Speaker Change: We're seeing operating rates in China are above 60%. So that's that's actually.
Speaker Change: Reasonably high relative to past performance there and so we don't think there's a lot of latent capacity that can come on in China to meet this growing demand. So that's our view is is that we are in a tight market inventories are reflective of that there could be swings between when M. D O shuts down and when.
Speaker Change: It starts out, but I would say, we're in a pretty structurally tight market right now with where inventory is pretty tight.
Rich: Very helpful. Rich. Thank you so much.
Speaker Change #143: Thank you for your question.
Rich: Our next question comes from line of Nelson <unk> with RBC capital markets. Your line is life, great. Thanks, and good morning, everyone.
Nelson: First question is on Trinidad in terms of tightened restarting and Mothballing Atlas.
Speaker Change #101: Now that you're kind of heading up to that point.
Speaker Change: Should we expect any.
Speaker Change #108: And on one time cost to to impact EBITDA in Q3, and then also is the gas contract. The current one that is expiring does it expire like in early September or at the end of September.
Speaker Change: Yeah.
Speaker Change: So yeah. The in terms of cost you shouldn't expect any any cost and and we are planning this to be quite a seamless transition from Atlas to tightened. So we are not expecting a lot of downtime or periods, where we're not producing at all in Trinidad.
Speaker Change #100: And then when it relates to the gas contracts you can think that mid September timeframe for the for the changeover there.
Speaker Change #100: Okay, and then just to clarify on the Atlas asset are there any.
Speaker Change: Do you expect any like write downs or is there any.
Speaker Change: That still at Atlas that needs to be repaid over the next over the coming months.
Speaker Change: No debt and.
Speaker Change #118: When we think about the asset values, though we look at turn it out as a group and that's something we always review I don't think where we're gonna point towards any asset write downs at this time, but we do look at these assets or are you know theyre older assets. So we don't have a ton of book value associated with them and.
Speaker Change: But that's something we will look at our as we look at our accounts each year.
Speaker Change #107: Great. Thanks, and then my next question relates to the entropy.
Speaker Change #115: Development, So I guess big picture you're not in.
Speaker Change #105: Investing without much capital. So I think your partners will be investing most of the capex or it will be coming from grants.
Speaker Change: So from your perspective.
Speaker Change #111: Like from a cost perspective is it mostly <unk>.
Speaker Change #139: The are you paying for the operating cost and the C O two feedstock that you'll be using.
Speaker Change: So is it.
Speaker Change: Somewhat.
Speaker Change #112: Neutral from a like from a cost per metric.
Speaker Change #112: Metric ton of methanol.
Speaker Change #112: Production or is it going to cost you more because you're producing.
Speaker Change #121: Lower or less carbon intensive methanol can you just talk about the economics, assuming of the pre feed and feed and all that.
Speaker Change: Gives you the green light to move forward with the project.
Speaker Change: Yeah.
Speaker Change: Thanks.
Speaker Change: So you know all the commercial arrangements aren't finalized that's one thing I want to I don't want to start with where are part of the pre feed will also be looking at what the commercial structures should look like and so I think when we what we in our initial press release, you said <unk> would own.
Speaker Change: Construct and own the unit are obviously they are the technology provider and the experts on this technology, but where we're looking at the commercial arrangements as part of the pre.
Speaker Change: Pre feed process, but when you think about the economics, you're right like.
Speaker Change #124: As I said two thirds of the economics won't come from what we pay or the economics of producing methanol to produce incremental tons and then the remainder will come through sequestration and the value of carbon credits for restoring for storing a C O two underground.
Speaker Change:
Speaker Change: So you can think of.
Speaker Change: The methanol generating two thirds of the value and the carbon credits generating one third of the value in and as it as it relates to those pricing you know we're looking at.
Speaker Change: At what it takes to make this project work and in addition, I think what Regulus Tory support is available.
Speaker Change: Will help push this forward as well so and all of that what we're looking through the pre feed process.
Speaker Change #114: Okay. So I guess very big picture.
Speaker Change #130: For it to work from Methanex is perspective, given that you are mainly kind of paying for the C O two.
Speaker Change: Is do you want to be kind of cost neutral but.
Speaker Change: Generate lower carbon intensive.
Speaker Change #149: Methanol is that your like is that the benefit youre looking for or I think I think maybe your question is a little bit are we expecting to generate a blue premium more or something that allows us to to market. That's above cost I I don't think that the blue. If that's the question I don't think the blue there's a blue message.
Speaker Change #119: All market today that where we're where we're expecting is going to support this project that market really is undeveloped and and so what we need is the value of this methanol from a from a conventional methanol.
Speaker Change #119: To work and.
Speaker Change: And to make sense in terms of generating.
Speaker Change: Generating additional earnings or or or EBITDA from from that basketball production.
Speaker Change #122: I see that makes sense I'll leave it there. Thank you.
Speaker Change #151: Thank you for your questions.
Speaker Change #123: Our next question is from the line of Matthew Blair with T. P. H Your line is live.
Matthew Robert Lovseth Blair: Thank you good morning, Rich could you give us a sense on exactly how much inventory you're looking to build in the third quarter or any sort of metrics.
Speaker Change #106: Days of inventory that you're targeting with Q3 online.
Speaker Change #106: Yeah.
Rich: Yeah I think.
Rich: First and foremost like I think a lot of the inventory will be managed through our sales levels and we don't we don't expect that our sales levels change dramatically with G. III. What we will see is a mix of inventory will have more produced product and less purchase product in our in our system. So it's we're not targeting.
Rich: A change in inventory to support G. III and do you think what you should expect to see is is that this is lower cost inventory that that we'll be holding versus buying product on the market. So you know there could be some pause the depths on our working capital that we can look forward to on that.
Speaker Change #128: Sounds good and then B do three delay costs were $25 million in the first quarter down to 13 in the second quarter should we pencil in anything for the third quarter.
Speaker Change #128: No.
Rich: Yeah.
Speaker Change #127: Oh, well, yeah, sorry, one month's of of G III to land costs for July.
Speaker Change #147: And that will be you know got up you could take our number in that.
Speaker Change #127: And then in the second quarter divide by three.
Speaker Change #129: Great. Thank you.
Rich: Yeah.
Rich: Our next question is from the line of Laurence Alexander with Jefferies.
Speaker Change #135: Your line is live.
Laurence Alexander: Good morning could you give a quick update on sort of how quickly through the marine demand should be flowing through in the next couple of years I mean, we see kind of a longer term build rate, which is how much of an impact we should be thinking of for next year.
Speaker Change #104: And how much of them how are the those companies.
Speaker Change #104: Discussing with you sort of.
Speaker Change #104: Supply given sort of.
Speaker Change #120: The market looks to be getting.
Speaker Change #126: Yeah. Thanks, Lauren so on the marine demand, maybe maybe talk to where we are today and and then how that will how that will develop over time.
Speaker Change #124: Right now.
Speaker Change #133: We talked about last year being the first year, where methanol ships outpaced LNG and in terms of the order book.
Speaker Change #137: Right now we're expecting that order book is well over 303 hundred ships on the water in the 'twenty eight 'twenty nine time frame and I think what we what we are what we're doing is talking about demand potential because it's difficult to say exactly what the demand would be and why do we quote demand potential we're not saying this is what.
Speaker Change #120: The total demand will be but the demand potential we will start off next year probably.
Speaker Change #150: Total damage casual somewhere close to 10 million tonnes now.
Speaker Change:
Speaker Change #134: There will be a million and a half or so next year and then you build up to three and a half and then you're up to seven and then you work your way into the 10 million tons of demand, but that's now the big question is what will they actually burned because these are dual fuel vessels and to your point, we're having a lot of.
Speaker Change: Discussions with the shipping companies about supply and I think a lot of those discussions start with <unk>.
Speaker Change: Low carbon green methanol because that that's the intent here is a lot of these ships are looking to.
Speaker Change: So the methanol from a decarbonization perspective, I think they're seeing that that that one there's not a lot of availability and to adapt the cost is really high to begin with so were also we are in discussions as well as well about conventional methanol.
Speaker Change #131: I think securing supply is going to be critical in and that's what our low carbon solutions team is working on with the shipping company. So it's really hard for us to kind of give you precise numbers until we've worked through you know are starting to see secure securing some contracts end.
Speaker Change: And working with the shipping industry more as they make their decisions on on these future fuel choices, they're gonna make so we hope to be able to give you a more more insight is as this develops because we get we are getting closer to the time frames, where these ships are in the water.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change #109: Thank you for your question and ladies and gentlemen final call. If you would like to ask a question today remember its star followed by the number one.
Speaker Change #138: On your keypad, we have a question from Charles <unk> with Piper Sandler Your line is live.
Speaker Change #113: Good morning, guys.
Speaker Change #145: Talked about MTO being sort of the the tipping or balancing point for the for the industry can you talk a little bit about where the price of methanol needs to be to sort of push it out or take it back in I mean, we're sort of balancing on the line may be now can we go higher and still keep the MTO plants in ore.
Speaker Change #148: You know and this is all assuming that the ethylene and polyethylene markets stay approximately where they are but under that circumstance where are we on that pricing.
Speaker Change #116: Yeah I I.
Speaker Change #140: I'll start with the pricing were at very low pricing low like historically low so it's hard to see it getting worse as we've had in ethylene and propylene prices in Asia, you between 800 and $900 per ton for quite some time and that just that on historical basis that would be correlated to about a four.
Speaker Change #140: $40 oil price environment, and so we think that there really is a low very low cycle right now.
Speaker Change #140: That translates into a <unk> kind of straight affordability at around where the cost curve is today, so call it that to 80 level.
Speaker Change #141: These guys have integrated you know there are a lot of them are integrated downstream. So when you look at integration.
Speaker Change #116: The full value chain, there's usually more value. When you go further down and so it's higher than that but I think when we start moving into pricing for methanol.
Speaker Change #116: No kind of getting above through you know the.
Speaker Change #113: 320 to 350 range, we start to see.
Speaker Change #113: Some pressure on on on their operations and today pricings in and around that 290 level and that's holding so and we've seen one MTO year that raised at large scale. Just recently start up. So you know I think we're kind of in this where cost curve and MTO affordability is in that two eight.
Speaker Change #113: $320 kind of level and we've seen that be quite stable in China around that if there's an improvement in ethylene and propylene markets. You would expect that the ability to pay goes up and an increasingly this is a demand driven driven industry right now and so we think that that would would.
Speaker Change #113: Further support pricing.
Speaker Change #142: Okay. Thanks very much.
Speaker Change #113: Okay.
Speaker Change #144: Thank you for your question and ladies and gentlemen, there are no further questions at this time and I'll now turn the call back over to Mr. Rich Sumner.
Richard W. Sumner: Alright, well. Thank you for your questions and interest in our company, we hope you'll join US in November when we update you on our third quarter results.
Speaker Change #136: Thank you and this does conclude today's conference call. You may now disconnect have a great day.
Speaker Change #136: [music].
Speaker Change #113: Okay.
Speaker Change #109: [music].