Methanex Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 12 speakers on the call.

Operator

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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I'd now like to turn the conference call over to the Director of Investor Relations at Methanex, Ms. Sarah Harriott. Please go ahead, Ms. Harriott.

Speaker 1

Good morning, everyone. Welcome to our Q2 2023 results conference call. Our 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 at methanex.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.

Speaker 1

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 Q2 2023 MD and A and our 2022 Annual Report for more information. I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's 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 flow, adjusted income or adjusted earnings per share made in today's remarks reflects our 63.1 percent economic interest in the Atlas facility, our 50% economic interest in the Egypt facility and our 60% interest in Waterfront Shipping.

Speaker 1

In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark to market impact on share based Compensation and the impact of certain items associated with specific identified events. These items are non GAAP measures 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 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 Methanex's President and CEO, Mr. Rich Sumner for his comments and a question and answer period.

Speaker 2

Thank you, Sarah, and good morning, everyone. We appreciate you joining us today as we discuss our Q2 of 2023 results. For the Q2, average realized price of $3.38 per tonne and produced sales of approximately 1,620,000 tonnes generated adjusted EBITDA of $160,000,000 and adjusted net income of $0.60 per share. Adjusted EBITDA was lower in the 2nd quarter compared to the Q1, primarily due to a lower average price. The decline in the average release price was driven by Global methanol supply outpacing demand growth and low global energy prices leading to a decrease in the methanol cost curve and Methanol to Olefins Affordability.

Speaker 2

Methanol demand in the Q2 increased modestly compared to the Q1 of 2023 And we continue to monitor demand closely ongoing macroeconomic headwinds. Demand for traditional chemical applications, which represents 50% of global demand increased slightly compared to the Q1, 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 from 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 improved slightly compared to The Q1 when a number of units undertook outages, although MTO affordability remains under meaningful pressure as a result of low Continued low olefins pricing. On the supply side, methanol production from China and Iran faced natural gas restrictions in the first quarter, Increased steadily throughout the Q2 and strong operating rates in other regions led to global methanol supply, outpacing demand growth and higher global inventory levels.

Speaker 2

Declining coal pricing in China in the second quarter also put some pressure on the methanol cost curve With coal prices moving from over RMB1000 per tonne levels to approximately RMB850 per tonne currently, We estimate the industry cost curve based on the marginal coal producer costs in China to be approximately $2.60 $2.80 per metric tonne. During the Q2 of 2023, our global average realized price was 3.38 dollars per metric ton compared to $3.71 per metric ton for the Q1. The declining spot prices in the second quarter, primarily in China led to a higher discount rate of 25%. Our August posted prices in North America, Asia Pacific and China were posted at $5.16 $3.15 $3.05 per metric ton respectively At our Q3, European price was posted at €3.95 per metric ton. Based on our July August Posted prices, we estimate our global average realized price to be approximately $2.90 to $300 per metric ton for these 2 months.

Speaker 2

Turning to the emerging marine fuel demand. Announcements from the shipping industry for new dual fuel vessels In the Q2, Maersk announced a further 17 ships and Evergreen ordered 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 We ended the Q2 in a strong financial position with approximately $600,000,000 of cash $300,000,000 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 G3 spend fully funded.

Speaker 2

With continued macroeconomic uncertainty and the impact of declining methanol prices through the Q2, we ceased share repurchases under the normal course Issuer Bid, which expires in September 2023. Our intent remains to repay rather than refinance the $300,000,000 bond Due at the end of 2024 and under current market conditions and pricing levels, we will be prioritizing excess cash towards this repayment. Construction of our G3 project is progressing safely on time and on budget with production expected in the Q4 of this year. Overall, the G3 project is around 90% complete. The project team remains focused on safety and delivering a high quality and reliable plant.

Speaker 2

The expected G3 capital spend remains unchanged at $1,250,000,000 to $1,300,000,000 And the remaining $240,000,000 to $290,000,000 of cash expenditures, including $65,000,000 in accounts payable is fully funded with cash on hand. Looking ahead to the Q3 of 2023, we are expecting lower adjusted EBITDA compared With the Q2 as we expect to realize a lower methanol price and have lower production with seasonal gas restrictions in Chile and a turnaround scheduled in New Zealand. Our overall production guidance for the year of 6,500,000 metric tons of equity production excluding G3 remains unchanged. We remain focused on delivering strong operational results from our existing assets completing the G3 project 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 price.

Speaker 2

We would now be happy to answer questions.

Operator

Thank you. First question is from Jacob Bout with CIBC. Your line is open.

Speaker 3

Good morning.

Speaker 4

Good morning, Jacob.

Speaker 5

I had a question on the discount rate, little more than what we had expected. And you're indicating that the 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 improvement in the back half of the year.

Speaker 2

Yes. I mean, where we What I'd say is we've given the guidance. We've seen some we saw China pricing, I think move down into that To kind of anywhere from $230,000,000 to $250,000,000 range and we're now back up to around $260,000,000 range today. What we our guidance on a normal when the market is stable is the 21%. We're giving you kind of where we sit today based on July August and incorporating all of the market conditions at 290 to 300, which I think is probably around the 22% to 24% discount for the 3rd based on those numbers for those months.

Speaker 2

I think there'll be slight improvement and we'll just have to see how the market trends. But our deviation from the guidance of that, So I guess around 4%. It's not unusual from our guidance when we do see a move in the quarter where prices declined throughout the whole quarter.

Speaker 5

Okay. And then just on the supply demand fundamentals of for methanol, I think 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, How those inventory levels look and when do you see the market rebalancing?

Speaker 2

Yes. I guess from a pure inventory perspective, we saw really high operating rates outside of China. And What that meant is, I'd say the Atlantic markets are probably sitting on high inventories. Customers are not carrying a lot of inventory. Today, they're managing things quite Carefully.

Speaker 2

So we don't think that there's a lot of buildup from customers. It's more the methanol producers that are carrying 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 outside of China. And what that's As you've had that you've seen trade flows moving to different jurisdictions to find homes. 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 still carefully managing things given the economic situation we're in today.

Speaker 5

And then on the balancing question?

Speaker 2

On the balancing, I would say, obviously, This is a peak. These summer months tend to be the peak operating period in our industry, Where we see restrictions happening as we tend to as we get into the 3rd and later in the 3rd and into the 4th quarter, we tend to see operating rates come off Naturally, that's something we see every year. So that combined with stronger demand, which is something we have to We think the balances would improve, but again, it's going to be dependent on operating rates and the strength of the math.

Speaker 5

Thank you.

Operator

The next question is from Joel Jackson with BMO Capital Markets. Your line is open.

Speaker 3

A few for me. I'll just go 1 by 1. Can you talk to me about, we've this come up before, but North American prices, both spot and posted prices are really trading at Really high levels versus other markets, is that sustainable?

Speaker 2

I think what's happened to over time is that Through contracting, we've seen a big spread on discounts, discounts just base discounts So you're going to see a naturally a larger discount in those markets from within our contracts. So naturally, you're going to see a bigger disconnect between contract and spot because ultimately you're trying to target a competitive price After considering discounts. So yes, your observation is correct there. We're going to see it's a bigger spread between contract and Right now, what we'd say, we look at our realized pricing, we're kind of Guiding in that $290,000,000 to $300,000,000 for July August off of our contract pricing, which again is probably that 22% to 24%. So We're not seeing our pricing going down all the way to where spot is trading globally.

Speaker 2

I think average spot globally It's in that kind of $2.40 to $2.50 range, but we don't expect to see that in our average realized pricing.

Speaker 6

Okay. Second question, there's been

Speaker 3

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 upticks in some of your gas Allocations gas availability in Chile from that?

Speaker 2

Sure. Yes, I agree with you. What we're seeing is It's really the Noitcan Basin that's being developed and in particular the Vaca Muerta field Where international oil companies have been developing that base and it's a prolific shale play. I understand that the economics are kind of similar to the Permian. So this is and there's a lot of gas there.

Speaker 2

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's importing on a base load perspective Imports, natural gas from Bolivia. And then during the winter months when they hit peak demand, they also have to rely on LNG imports To satisfy their energy needs. So what they've been doing is building pipeline connections. 1 of the Big ones just recently got tied in.

Speaker 2

We understand that that is kind of anywhere from 10,000,000 to The 20,000,000 cubic meters per day of gas flow, that represents anywhere from 10% to 20% of Argentina's total gas demand. So that has the ability to really change the gas dynamics for the country. There's development that's happening in the middle of the country. There's gas development happening in the Oshko 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 they're going to need new they're 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.

Speaker 2

So we're optimistic. Right now, we don't I'm not going to give guide to the fact until we get progress, I'll guide 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.

Speaker 3

Okay. And then finally, what would like what would Permit you to restart the buyback, what do you need to see? In the past, your predecessor would talk about a minimum methanol price, maybe a You want to pay $300,000,000 of debt down first. What would be the catalyst to restart the buyback?

Speaker 2

So right now we are we feel we're in a very strong position from a balance sheet perspective. That's number 1. We've got Enough cash to run the business. We've got G3 fully funded. We have the intent to repay the $301,000,000 bond.

Speaker 2

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 from ethanol 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 sort of get through. So in the medium to longer term, we're Quite positive. And if we see more favorable industry dynamics, then we'll be looking at our reviewing our cash generation, our capability to Pay down debt as well as start to think about share repurchase. So I'd say it will be somewhat market Chairman, and in the longer medium term, we're positive.

Speaker 7

Thank you.

Operator

The next question is from Nelson Ng with RBC Capital Markets, your line is open.

Speaker 8

Great, thanks. So just a quick follow-up on Joel's question on the Restart of the and SABIT. So just to clarify or just to yes, to clarify a little bit. I think in the past, I think if you guys had, call it, dollars 200,000,000 to $300,000,000 of cash on the balance sheet, And I think if you were fully funded with fully funded on G3, you would allocate most of the cash flow to buybacks. So I guess going forward, if you're finished with G3, if you've repaid the Debt and if you have, let's say, dollars 200,000,000 or $300,000,000 of cash on your balance sheet, Would that be a good environment to restart the NCIB?

Speaker 2

No, I probably wouldn't want 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 G3. Debt is the focus at today's pricing levels, but certainly Nelson, if you look at our Cash generation with G3 at mid cycle pricing, we generate a lot of cash. So there and I think what we need to do is get back to there before we start Kind of committing to anything on the NCIB, but there would be a lot of cash beyond $300,000,000 debt, and we don't We foresee a lot of near term capital expenditures.

Speaker 8

Okay, got it. The next question relates to methanol as a marine So you mentioned that by 2028, there will be about 200 dual fuel ships in the water. Roughly how many are there today?

Speaker 2

Today, we've got R-nineteen in the water And then I think there's another SIP methanol vessels or so. And then there's a few other now in the water. So there's under 30 today, Something like that. And I could have my numbers wrong there. So it's probably in the $30,000,000 to $35,000,000 something like that.

Speaker 2

And yes, the remaining to get to the 200, those are all going to be new builds and now retrofits to the period from now until 2028, most of those would be on the water in the 2027, 2028 timeframe.

Speaker 8

Okay.

Speaker 2

But then again, I think Momentum continues on this and we do expect that that number will continue to grow, and we'll continue to report how That happens each quarter.

Speaker 8

Okay, thanks. And then in terms of the ships in the water today, excluding your own ships, Like how do they currently run on the dual field? Do they still use mostly bunker field and methanol When they're near the coast or how do they like what's the typical pattern?

Speaker 2

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're burning a lot of methanol as well because it's very easy for us where we load our fuel at the same time we load our product. So it becomes quite an easy bunkering situation. We would suspect that our competitors doing something similar and The other vessels that are on the water are quite are small.

Speaker 2

I think Maersk just put Their vessel on the water and they did a trial with green methanol. So we know that they're interested in methanol, but they're also looking That's how they can fuel it with green methanol.

Speaker 8

Okay. That's great. Thanks for the clarification. I'll leave it there. Thanks.

Operator

The next question is from Hassan Ahmed with Alembic Global. Your line is open.

Speaker 4

Good morning, Rich. A 2 part question on the near term and maybe medium term Supply situation. On the near term side, I'd say, you guys obviously talked about Q1 to Q2 sort of Incremental sort of production in Iran. But recently, I've been reading a fair number of articles about Ridiculously hot temperatures over there and again some redirecting of natural gas Away from the industrial consumers to the residential consumers. So near term wise in Q3, What do you see as the supply situation in Iran?

Speaker 4

And then continuing with the supply side of it, again in the press, I've been reading some rumblings About China sort of forcing non money making chemical production capacities to shut down some inefficient facilities, Chemical facilities to shut down, are you seeing that on the methanol side as well?

Speaker 2

Sure. So, yes, on the Iranian question, I think your point is well taken that I think it's not just We're seeing this in a lot of jurisdictions right now with extreme weather causing a demand pull for natural gas For residential cooling and industrial cooling. And what we do know is that In the Q1, Iran first off is not always easy to get a full But we do see things through the shipping and import statistics and whatnot. What we do know is in the Q1, 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 11,000,000 or 12,000,000 tons of capacity.

Speaker 2

So a 10% increase is going to be in the 1,000,000 to 1.5 1,000,000 tons of annualized supply. That certainly was led to part of the shift on Supply into the market. We would also say there's some risk to them being able To maintain that given the dynamics you just described. And then the further out you get through Q3 and into Q4, there will be Likely a shift as well away into cooling. So they're under meaningful pressure and we know that It is difficult for them to keep their gas system supply just Because of investments in compression and gas reinvestments in gas fields that is really hard to do under sanctions environment.

Speaker 2

When you talk 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 preference is to shut down lower inefficient plants and move And have things larger scale plants into industrial complexes where it's much more efficient technology. And that's a lot about using, both from an environmental perspective, but also from an energy use perspective. They're quite Conscious of that and that is reflected in our policies around any new capacity that's also approved. So Look, in our forward view, we have capacity being added, but we netted off against shutdown of smaller scale plants.

Speaker 2

So to your point, I think when we do see China capacity additions, they're not as large because there is some rationalization happening.

Speaker 4

Very helpful. And as a follow-up, again, 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 I obviously know you guys aren't talking Europe, but I mean global natural gas prices have seen far much higher degree of volatility even LNG prices than ever So now as you've seen that, I mean, has there been some sort of a rethink about your own sort of natural gas hedging program?

Speaker 2

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 actively managing. All of our other contracts are on longer term Contracts with methanol sharing components and we obviously each one of those has its unique characteristics. For North America, we continue with our hedging program and right now we're well hedged into it In our targets for a 3 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 interest 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 and it's kind of what we are Doing as part of our gas strategy there.

Speaker 2

We would look to get a base load at longer term pricing if it's available, given that volatility.

Speaker 4

Very helpful, Rich. Thank you so much.

Operator

The next question is from Steve Hansen with Raymond James. Your line is open.

Speaker 9

Yes. Good morning, guys. Thanks for the time. First question, Rich, is just I wanted to circle back To a question earlier, I think Joel asked around spot contract spreads. Can you just give us a bit of a broader perspective here?

Speaker 9

So Am I to interpret your comments to suggest the spot contract spreads will remain excessively wide for The foreseeable future or how should we think about it? I'm 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 TAMB perspective and what that means for your discount rates?

Speaker 2

Yes. I think 1st and foremost, 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 So what gets us to our average realized price?

Speaker 2

Now you go into what's the further discount to spot. And as you know, 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. I think So yes, in terms of contract discounts, those have continued to grow and that's part of the that is a big reason why you See that contract to spot number being so big is just because the base contract discount has changed.

Speaker 2

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 at Well over 90% operating rates, which we've never seen before. So in those situations where maybe producers Have under contracted, then you see there'd be a heavy further discount in the market. So I don't think that's long term.

Speaker 2

I don't think that's structural, but Those contract discounts are bigger. Does that help?

Speaker 9

And can I just ask as a follow-up? That's a good helpful context. As a quick follow-up, what is it that's driving the contractual discounts as being larger? Is it volumes coming in from other

Speaker 2

regions. It's the fact Steve over time that there's been producers that have started up in North America. Obviously, there is a it's very attractive to service domestic markets versus Export markets. And so there's been increasing competitiveness for marketers with consumers and that has And the main point of contract discussions is through competitive discounts and that has meant Larger discount spreads over time. I remember when I was in North America, discounts were Coins, maybe 15% lower than they are today, as an example.

Speaker 9

Interesting. Okay. No, that's really good perspective. And just one quick follow-up for me is just on the G3 cadence. Obviously, you're well advanced here.

Speaker 9

Q4 startup is just around the corner effectively. Is it still fair to assume that no major commercial volumes really to assume are shipped in Q4 or should we expect a little bit? How do you feel about, I guess the timing of that Q4 start up and shipments.

Speaker 2

I think where we would guide to is it impacting The market and through our sales in 2024. So we'll have an inventory build through inventory build, but before it really gets Into our sales system, it will be in 2024.

Speaker 9

Okay, very helpful. Appreciate that.

Operator

The next question is from Ben Isaacson with Scotiabank. Your line is open.

Speaker 6

Great. Thank you and good morning. Rich, I'd like to ask a multipart 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 price is $2.20 In China, it's Below that in the U.

Speaker 6

S, it's 230 ish. So are we seeing capacity closures right now? How much does the cost curve matter? And as part of that, if you go back over the last kind of 10, 15 years, how much is methan or what percentage of time has methanol been 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 in, but China seems to be trying to push coal prices lower for its power users.

Speaker 6

And obviously, you guys are or sorry, the metal industry is in 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 350 ish Mid cycle level in the future.

Speaker 2

Okay. It's a lot to unpack. Okay, I'll start with Pricing and where we are today and how pricing is typically set. So certainly, the pricing in the industry is set by the marginal cost Production, that's and that I think is where we've been traditionally and continue to be there. As of today, we have pricing in China.

Speaker 2

Cost curve, we said was 2.60 to 2.80. Pricing in China is on the low end of that cost curve and it's probably around the 260 level. I think why is it lower and why is it pressured is because of the olefins market. We've got a marginal buyer there that's under pressure with Olefins pricing. So I would say that right now that there's a blend of What's driving the price in China, which is the price setter for the market?

Speaker 2

It's probably a blend of the coal production cost plus The ability to purchase from the MTO sector, which is under pressure. And there's some, I think, pull there just because Olefins pricing has been 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 that implies a premium over that of around $30 Globally.

Speaker 2

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, I guess, we've seen last 10 years average realized price of around $3.50 a ton. I don't think it takes much for us to get to a $3.50 realized price. It's as of today, I think we're in a supply demand supply outpacing demand, so high inventory levels.

Speaker 2

We've had Relatively weak and historically low olefins pricing. I think the coal price today can easily still $3.50 price, it's been ranging between RMB800 and RMB900, and was well above 1,000 for the last 1.5 year. And so coal pricing, that is still historically high when you look on a historical basis. Over the years, We generated $3.50 realized price. So I don't see us having a hard it being that far From where we are today, but we have to see some more favorable things happen in the near term.

Speaker 6

Sure. And just on the what percentage of time Have we has methanol kind of lived off the cost curve versus being priced based on affordability?

Speaker 2

I think we've seen it be this blend For the last 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 Olefins Pricing and affordability is way higher on a relative basis than the 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 But it's been a blend at different places.

Speaker 6

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 wouldn't they be kind of coming back in the market and restocking given where prices are? And you talked about an expectation that or 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 restocking right now?

Speaker 6

I

Speaker 2

think it just has to do with the general economic outlook and manufacturing output Has not been real strong. And I think 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 its consumer spending, but on services and maybe not on durable goods. And I think that that has Immense manufacturing output has not been as strong as we would have hoped. And if you look Further down the value chain and talk to our customers and see how they're talking about the current markets, you definitely pick up that They're still concerned and they need to see the demand stronger.

Speaker 6

That's very helpful. Thanks so much.

Operator

The next question is from Laurence Alexander with Jefferies. Your line is open.

Speaker 7

Hey, good morning, everyone. So this is actually Kevin Estuck on for Laurence Alexander. Most of my questions have been asked, but I guess I was wondering if Could you give us some updates or your thoughts on your strategy for green or blue methanol? That would be very helpful. Thank you.

Speaker 10

Sure.

Speaker 2

So, thanks, Lawrence. I think when we think about our strategy, It's 3 prompts. 1 is the demand side working with the so our low carbon solutions team is really focused on 3 things right now. It's working with the shipping industry. We're in discussions with all major shipping companies on what their commitment on their Decisions on vessels, but also how they're thinking about their fuel choice.

Speaker 2

The second thing is supporting the bunkering and infrastructure. So we've done a number of different things Looking at, we are the biggest methanol producer. We've got the biggest network 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.

Speaker 2

And so that area is what I would say is Sort of doing a number of different initiatives. One is the immediate one, which is feedstock, Looking at renewable natural gas and using renewable natural gas to produce green methanol and We've done that already and are continuing to do that. So we're active in the renewable natural gas market. The other is looking at carbon capture and storage And we're looking at that in Geismar because of the 45Q and support under the Inflation Reduction Act. And then the 3rd prong is looking at green and what I mean by that is green Renewable hydrogen and CO2 is a direct feed into our existing plants.

Speaker 2

And so we think that Looking at opportunities we may have to actually directly feed the back end of our plant Give us an advantage over building a greenfield project. And so we're looking at the 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, Infrastructure side and the supply side and how we bring solutions to this potential quite significant market.

Speaker 7

Great. Thank you very much.

Operator

The next question is from Matthew Blair with TPH. Your line is open.

Speaker 10

Hey, good morning. Rich, could you talk about your growth capital outlook after you finished What 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?

Speaker 2

Yes. So I think I'll start with sort of organic Growth projects. G3 is really the focus today, Concluding 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 the industry and I do think we are in a period where growth may be slower than what we had anticipated. Well, what we're going to do is we're going to work to create the best opportunities for growth.

Speaker 2

So that'll mean We will be spending limited capital, but we 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. And 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 I don't see that happening in the next Few years. Low carbon is a one that I'd say is a bit, will be opportunistic Driven because I think whatever we're going to do in that space because it is going to require it's going to require us working with an end market.

Speaker 2

Likely what we would do in any case is have a partner or an offtaker or some type of Meaningful derisking if we're going to put capital in just because it's not going to be supported By pricing off of a 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 3 in particular would be the one that would likely make any big investment. And they're really going through a period of Discovery right now on methanol and what they want and how they want To solve that challenge and 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 opportunity driven and we would want to Really be working with partners.

Speaker 10

Okay. Sounds good. And then could you discuss current MTO economics And operates versus like Q2 averages? And also are you expecting any new MTO capacity to start up in the next year or so?

Speaker 2

Sure. So maybe just what's happened this year, we had there's about 20 1,000,000 to 22,000,000 tons of capacity for MTO, currently at 100%. That's methanol equivalent demand at 100 percent operating rates. During the Q1, we had about 14,000,000 to 15,000,000 tons of demand. And during the Q2, we had about 15,000,000 to 16,000,000 tons of demand.

Speaker 2

So I think you're in a range at around 5% increase The 10% increase quarter over quarter and that's just based off which plants were operating at what point in time. As of today, the industry is operating at around 70 And it's really 2 very large scale plants that are not operating today and that's the plant Shanghai and Sanjiang and they represent 4000000 to 5000000 tons of methanol demand that is latent today and not operating. 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, any it all depends on their integrated downstream and what derivatives they go to. And So it's a bit complicated, but what I would say is it ranges anywhere from low 200s to low 300s, Right.

Speaker 2

In terms of affordability levels today and that's at what I would call very, very historically low Olefins pricing relative to oil price environment we're in.

Speaker 10

Great. Thanks for your comments.

Operator

The next question is from Josh Spector with UBS. Your line is open.

Speaker 11

Yes. Hi. Thanks for taking my question. I actually wanted to follow-up on MTO and specifically just think about Kind of of the 22,000,000 tons that are out there, 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 you're seeing at any meaningful scale, any feedback from customers so that when we think 2 or 3 years from now of that 22,000,000 tons, Is there some of that that actually comes out of the market because you're going to feed me another route?

Speaker 2

Yes. So that's A really great question. And it actually goes to the 2 units that are down today, because those are the 2 units that are down. And I can say that what those units did, so the Sanjiang unit, They built a mixed feed cracker, but they also built downstream. So their intent was not to Build and then shut down MTO.

Speaker 2

It was to have a bigger downstream into EO. And but what's happened in the EO markets is those have been Oversupplied because of lack of demand. And so they commissioned their new unit and they have yet to start up their MTO unit, but their full slate allows them to operate both. And that's their stated intention is to operate both, but I think they're waiting to see markets on and demand come back online. The Shanghai Unit, they did a refinery expansion and they also have a mixed feed cracker off their refinery.

Speaker 2

They're going into aromatics and a whole bunch of other Plate of materials, we believe it's very economic. They're commissioning their plant. And once they have everything commissioned, they will They would bring online their MTO unit because again it was a full slate, full value chain investment, not just To get to CTC3. 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 shutoff of MTO.

Speaker 11

No, I appreciate that. It's really helpful. And just on the Shanghai plant, is that also an eGEO, so we're waiting for eGEO and maybe Fibers market will improve, is that the thing to watch?

Speaker 2

No, it's no. They're going into a whole bunch and I think we could take this off But they're going down to a much broader set of end derivatives and we think it's actually more a technical commissioning issue Today than it is a market driven delay in startup.

Speaker 11

Got it. I really appreciate the color. Thanks.

Operator

There are no further questions at this time. I'll turn it back over to Mr. Rich Sumner for any closing remarks.

Speaker 2

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 G3 project is fully funded, progressing safely, on time and on budget and we expect to be in production in the Q4 of this year. We hope you will join us in October when we update our Q3 results.

Operator

This concludes today's conference call. You may now disconnect. Thank you.

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Earnings Conference Call
Methanex Q2 2023
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