Methanex Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 1, 2024

There are 11 speakers on the call.

Operator

Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Methanex Corporation 2023 4th Quarter Results I would now like to turn the conference call over to the Director of Investor Relations at Methanex, Ms. Sarah Harriott.

Speaker 1

Thank you. Good morning, everyone. Welcome to our Q4 2023 results conference call. Our 2023 Q4 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.

Speaker 1

This information by its nature is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecast or projections, which are included in the forward looking information. Please refer to our Q4 2023 MD and A and to 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.

Speaker 1

For clarification, any references to revenue, our 50% economic interest in the Egypt facility and our 60% interest in Waterfront Shipping. 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 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.

Speaker 1

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 Q4 and full year 2023 results. I'm excited to report that the G III plant is in the process of starting up and we expect that commercial production is imminent. G3 significantly increases our cash flow generation capability and has one of the lowest emission intensity profiles in the industry. We're extremely proud of our global team for safely delivering this high quality addition to our asset portfolio.

Speaker 2

Turning to our results for the Q4, our average realized price of $3.22 per ton and produced sales of approximately 1,700,000 tonnes generated adjusted EBITDA of $148,000,000 and adjusted net income of $0.52 per share. Adjusted EBITDA was higher compared to the 3rd quarter due to the higher average realized price and higher produced sales. Our global team has delivered a strong year of operating results with production of 6,600,000 equity tonnes. For the full year 2023, we recorded adjusted EBITDA of $622,000,000 and adjusted net income of $153,000,000 or $2.25 per share. We estimate that global methanol demand increased in 2023 to approximately 91,000,000 tonnes.

Speaker 2

Through the Q4, market conditions strengthened with increased demand primarily in China outpacing an increase in supply leading to a drawdown on inventories and increasing methanol prices. Global methanol demand grew by over 3% compared to the 3rd quarter with significantly improved operating rates in methanol to olefins and growth in traditional demand in China. Outside of China, demand for traditional and energy applications remained relatively stable. We estimate MTO operating rates have increased from low 70s percent in Q3 to mid 80s percent in Q4, driven by the completion of planned downstream expansions and an improvement in affordability during the quarter. On the supply side, Production increased from coal based producers in China, which was offset by planned and unplanned outages in the U.

Speaker 2

S, Southeast Asia and the Middle East as well as lower production from natural gas restrictions in Iran and China. Coal pricing in China was steady during the Q4 ranging from around RMB 950 to RMB1000 per tonne. We currently estimate the marginal cost of production to be between $280 $300 per tonne based on current coal pricing in China. Overall, continued high energy pricing, low global inventories and tightening supply demand balances led to higher pricing throughout the Q4 and into the Q1. Our February posted prices in North America, Asia Pacific and China are posted at $570, $3.90 $3.60 per tonne per metric tonne respectively and our Q1 European price posted at €525 per tonne, an increase from Q4 of €150 Based on our January February posted prices, we estimate our global average realized price to be approximately 3.35 to $3.45 per metric ton for these 2 months.

Speaker 2

Looking forward, we expect 2024 demand growth rates to be similar to 2023 based on current global economic forecasts. Supply additions in 2024 include our G3 plant, a plant in Malaysia, which is expected to start up in the second half of the year and some limited new capacity in China. We expect to see increased supply from these new capacity additions to be partially offset by the rationalization of existing supply. Production in Trinidad will be lower by approximately 1,000,000 tonnes annually beginning in September 2024 when we shut down Atlas and restart Titan And we continue to monitor our competitors' operating rates in Trinidad and other factors globally that could further impact supply such as announced the announced gas diversion from methanol to LNG in Equatorial Guinea. Beyond 2024, we expect to see continued methanol demand growth and do not see any meaningful supply additions outside of China for the next few years.

Speaker 2

Looking at long term demand drivers, ship orders for dual fuel methanol vessels accelerated at a rapid rate in 2023. This was the 1st year that orders for dual fuel methanol vessels outpaced LNG powered ships and the current order book for methanol vessels would result in over 250 ships being on the water by the end of 2028. The momentum for methanol as a marine fuel is clearly very strong And we believe that methanol demand into marine applications will depend on a number of factors including availability of low carbon methanol including green methanol, green fuel regulations and the cost competitiveness of methanol versus other fuels. Our low carbon solutions team is in discussions with multiple shipping companies on how we can supply them with methanol as these ships start to come on the water in the 2025 to 2028 period. In the Q4, we had higher production with no scheduled turnarounds and both Chile plants operating at full rates with gas from Argentina.

Speaker 2

The Egypt plant had an unplanned outage in mid October due to a mechanical failure in the synthesis gas compressor. The unit was sent to its manufacturer in Germany for repair and I'm happy to report that it's now back on-site and we expect the plant to be able to start up in the first half of February. The G3 plant is in the process of starting up and we expect that commercial production is imminent. We expect the plant to ramp up to full rates over the month of February. I want to thank the project team who worked tirelessly to deliver this high quality project safely and we expect the total capital cost to come within the budget of 1 point $2,500,000,000 to $1,300,000,000 In 2024, we have one planned turnaround scheduled.

Speaker 2

Our forecasted production for 2024 is approximately 8,100,000 equity tonnes, although actual production may vary by quarter based on timing of turnarounds, gas availability, unplanned outages and unanticipated events. In Chile, both plants are currently operating at full rates with gas deliveries from Argentina. We estimate production for 2024 will be between 1.1000000 to 1,200,000 tonnes, which is underpinned by year round natural gas supply from Chile for about 30% to 35% of our requirements with the remaining 60% to 65% from Argentina during the non winter period allowing us to operate both plants at full rates. Natural gas development and related infrastructure investments in Argentina continues to progress and we're working with our natural gas suppliers on extending the period of full gas availability to our plants. In New Zealand, we're expecting lower gas deliveries and lower production in 2024 of 1,000,000 to 1,100,000 tonnes.

Speaker 2

2024 natural gas supply is expected to be impacted by a combination of our suppliers planned infrastructure maintenance outages as well as lower than expected output from existing wells. While upstream investment has been made by our gas suppliers in New Zealand over the past few years, recent production results have been lower than originally expected, which has contributed to the revised forecast for lower production 2024. We ended the 4th quarter in a strong financial position with $451,000,000 cash and $300,000,000 of undrawn backup liquidity. Our capital priorities are to pay the remaining G3 capital of approximately $60,000,000 to $110,000,000 in the 1st 2 quarters of 2024 and to repay rather than refinance $300,000,000 bond due at the end of 2024. Moving forward, we expect to generate strong free cash flow with limited maintenance capital higher production capability with G3 operating.

Speaker 2

Looking ahead to the Q1 of 2024, We're expecting slightly higher adjusted EBITDA with a higher realized price and similar produced sales as we will be building produced inventory with the G3 start up and the Egypt restart. With G3 expected to ramp up the full rates over the month of February, We expect the Q2 of 2024 to be more representative of our run rate production and cash generation capability. Our priorities for 2024 are to deliver strong operational results from our assets and supply chain, maintain a strong balance sheet including the repayment of debt and return excess cash to shareholders. We would now be happy to answer questions.

Operator

And your first question comes from the line of Joel Jackson with BMO Capital. Please go ahead.

Speaker 3

Hi, good morning. When we think about the buyback now, you talked about what your capital allocation priorities are to get through the last, I don't know, dollars 80,000,000 or $90,000,000 of spending in G3, put enough cash on the balance sheet to pay back the bond later in the year. When do you think you're in a position to you have enough cash buffer on your balance sheet and you're ready to start buying back stock?

Speaker 2

Yes. I think, Joel, we're obviously monitoring the markets. Methanol pricing certainly where it is today. Methanol pricing is We generate strong cash flows at today's methanol price. So it will be a function of our outlook on firstly is building up the cash For or at least having an outlook on the market by the time we make that decision to maybe open up a bit.

Speaker 2

But I wouldn't say we're there yet. We're going to monitor markets, we'd like to get G3 up and running and focus on getting that up to full rates. And I think if you look forward, you hold pricing where it's at today through Q2 With all of our assets running, we'll be building cash. And if we can get confidence that markets holding in, then we'll see. Maybe we don't have to wait until everything is built before we open up that flexibility.

Speaker 2

But we're not there yet, but we're going to pay attention really, really closely to how things build up over the next few quarters here.

Speaker 3

Okay. That's helpful. So when G1 and G2 came on across 2015 and early 2016, there's another plant also in the U. S. That came on.

Speaker 3

I know There's a lot of pressure on methanol inventories in the States. I think prices went quite low. They bounced back across 2016. You're about to put a bunch of new methanol volume on the market Coming out of the States, U. S.

Speaker 3

Is about to go long methanol to greater amount now. What is the team doing to make sure that you're balancing the market? We're going to run full rates in a month. How do you make sure you don't hurt the market?

Speaker 2

So, I mean, Joel, where we've been on from a sales perspective, we've really built up sales in advance of G3. So when we start up the plant, what it will be is it will be a displacement of purchase product. And like I said, we're already we're anticipating and building everything into our plans that we're getting up to full rates by the end of February. We plan our supply chain about 2 to 3 months out. So we've already pulled back on purchases and market pricing has stayed stable, if not increasing.

Speaker 2

So I would say a lot of G3 is in the market today without the plant operating. And part of this is the fact that the timing at which we're doing this is fortunate because the market is typically structurally short in this timeframe. But I would say a big portion of G3 is already in the market because of our supply chain decision making that's already there.

Operator

Your next question comes from the line of Steve Hansen with Raymond James. Your line is open.

Speaker 4

Yes. Thanks, guys. Rich, as you think about the gas opportunity in Argentina to bring on sort of those Two plants at full rate full time. What is the time frame for those discussions with the Argentine gas suppliers and the time to contract all different things you need to do in advance to get the secure supply so that you can run those, basically at full rates?

Speaker 2

Thanks, Steve. I think when we look at Argentina, it's a real positive story for us right now. And I think you have to go back to where is development, how is what's the pace of development in that country. Really good progress through 2023 with the tie ins that they made to the Vaca Muerta and Just how they're phasing that in, the first tie in happened where it added about 11 1,000,000 cubic meters a day of gas into the grid. The compression they're going to add to that pipeline is going to double that capacity.

Speaker 2

That's supposed to happen in first half of this year. And then there's a twinning of that pipeline that's going to double all of that. So that's about a third of the gas supply demand in Argentina. That twinning is supposed to happen through 2025. In addition to that, there is a project that's happening in the Southern Basin, which is Total and Wintershall and others is the El Phoenix project that's in the South as well.

Speaker 2

And that gas is meant to come online at the end of 2024 into 2025. So I see it's already positive. We're already seeing More gas availability in the non winter months and that's allowed us to operate both plants. What I see is There's going to be a lot more positive developments in the next few years. And what I would say is our goal is to contract on a longer term basis this full gas in the non winter periods And then over time, we shorten that shorten those shoulder periods to the point where we can move towards full gas supply.

Speaker 2

So I can't give you exact time frames, but I think there's going to be a lot of positive things happening in the next few years. And certainly, We're going to be working very closely with our gas suppliers there.

Speaker 4

Okay. That's great. And then just on your reference to discussions with some of the ship owners around methanol supply arrangements. Is there something you need to do to sort of carve out any stream of methanol, whether it's RNG based or some sort of carbon based, low carbon based fuel stream to provide that kind of fuel type for the methanol operators or are they just looking for the regular methanol as a starting point?

Speaker 2

It's a I would say there's a combination of discussions going on. There's regulations in Europe that are really driving the desire for low carbon and more green methanol. And so when our discussions with a lot of Those shipping companies do focus more into investments in renewable, whether that be RNG or e methanol, biomethanol or e methanol. And so those discussions are ongoing. There's also discussions about conventional methanol happening as well outside of Europe and with other shipping companies.

Speaker 2

But like I said, there's a number of different factors I think that the marine industry is working with and that will influence their ultimate choice in fuels. And certainly, our low carbon solutions team is working right along with them on how we can provide solutions be it investments in green or conventional methanol or both. So I think we're going to have more to report here as we move through this transition to have these ships on the water and it's going to evolve. So hard to give you exact timeframes and volumes as it relates to methanol. Certainly, these are dual fuel ships and there's options for traditional bunker fuels.

Speaker 2

We think that methanol looks is competitive to the alternative low carbon solutions in the diesel space, But again, that's also going to evolve.

Operator

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

Speaker 5

Good morning, Rich.

Speaker 6

You guys saw a good bump up in pricing over the last couple of months, Particularly in Europe. So my question kind of is around the variances or divergences in pricing. There still seems to be a fairly large delta between, call it, U. S./European pricing and Asian pricing. So Would love to hear your views around that delta.

Speaker 2

Thanks, Sasank. It's I think when we look at the markets, we tend to start with China. China becomes is the cost setter in the market. And today, we'd say cost curve is around $280 to $300 And we see MTO Affordability, which is a big buyer to the industry kind of in the same range. And so that we've seen that price holding, I would call it relatively firm for quite some time.

Speaker 2

And then what we see is that depending on the I call the tightness in the market, We see pricing in other regions at a premium to China, which varies depending on supply and demand into those markets and availability of methanol. So if you have unplanned outages in the U. S, then the premium Premium in the U. S. Market will go up for a period.

Speaker 2

But what we're seeing is things kind of settling in at around On average, we're in this $30 to $50 over China. And like I said, for the Q1 here, We're at $3.35 to $3.45 per tonne on an average realized basis with China in that $280,000,000 to $300,000,000 So we're very happy with the pricing that is happening in the market, which is reflective of tight market conditions.

Speaker 6

Fair enough. Fair enough. And just moving on to the natural gas side of things, particularly in the U. S. I mean, I know between sort of last year and this year, we've obviously seen natural gas prices in the U.

Speaker 6

S. Coming down a fair bit. Can you talk a bit about the differences in your hedging strategy between 2023 2024? Because I know you guys had obviously hedged out a fair amount of U. S.

Speaker 6

Natural gas last year. Where does that stand this year?

Speaker 2

Yes, we are so our strategy is kind of to have 3 to 5 year rolling hedges and we actually go beyond that, but at much lower quantities. And we target in the near term years to have about 70% of our position in North America hedged. And that's where we're at today with G3 operating at full rates. So we're effectively, you could say we're participating, it will be participating in the spot market at around 30%. We set that level based on the minimum operating rates in our plant because and We target a delivered cash cost that we're comfortable with to operate at all points in the methanol price cycle.

Speaker 2

And we've been successful in putting in those hedges. We're happy with where we are. We're not seeking to in the short term to be hedging up beyond that level and we continue to be active in the market, layering hedges in the outer years as the New Year's roll in. So hopefully that helps you with that question.

Operator

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

Speaker 5

First question is on

Speaker 2

New Zealand.

Speaker 5

Just looking back at my model, I see in 2016, you produced or sold 2,200,000 tonnes from that region. And now 8 years later, we're down about 50% to 1% to 1.1%. What should we be modeling as a run rate for New Zealand going forward, not in 'twenty four, but beyond 'twenty four? What's the The game plan there and is there an opportunity to monetize an asset that's not being used right now?

Speaker 2

So thanks, Ben. For modeling purposes, we are giving guidance right now at 1 year out And a lot of this is based off of developments that are happening in the natural gas fields in the Taranaki Basin as well as other factors. I think what we've seen, if you when you look at the decline over that time period that you reference, it's all about what's happening in the different fields in New Zealand. And we did see that there was A revision in reserve estimates at one of the major fields that brought that was quite some time ago that brought production down. Today, I wouldn't we don't forecast to have Watcher Valley, the smaller plant in our plants.

Speaker 2

We're really focused on the 2 Mata Nui plants and getting gas for those plants. I think when you look longer term, how do you think longer term for these assets is you have to look at both above ground and below ground factors. And what I mean by that above ground, we play a huge role in New Zealand and the natural gas market. The country uses most of the power is renewable power, but natural gas is an important power source When there's intermittent gas intermittent power supply and we it's a low emission power source to otherwise you're dependent on imported coal. We represent 50% of the market and we're the baseload customer for the natural gas industry.

Speaker 2

So I think that is an important factor. And the second one is the government. There's just been a new government put in place in New Zealand, the center right coalition, their platform is much more favorable towards the gas industry in comparison to what we've seen for the last 6 years. And that is a clear direction that they've set coming in into power. So that's positive.

Speaker 2

And then obviously looking at below ground, Some of the campaigns that have been run for the last year or so, they haven't delivered the results, which is what You kind of expect sometimes you're going to have results, sometimes you won't. These have not delivered results and the wells that have been producing, we've seen declines happening a little quicker. So we're working with our gas suppliers really closely on the investments they're going to be making to improve the existing wells and also the impact that has on their future campaign. So it's difficult to give you what is that going to result in for a long term run rate. What I can say is our focus is on the 2 Montanui plants and keeping those trying to improve the production from those assets.

Speaker 5

That's super helpful. And then just one more if I may. Forgive my bad math here, but you said that the world grew at an annualized rate of 3% in Q4 and ex China the world was stable or maybe about roughly flat. So does that and given that China is roughly half of global demand, Does that mean that China really grew at 5%, 6% in Q4? And if you take MTO out, what did non MTO China do?

Speaker 5

That's what I'm I think that's what investors are quite interested in because MTO will flock to it all the time, but we really want to see demand improvements from underlying China. Thank you.

Speaker 2

Ben, yes. So we did see some demand improvement in traditional applications in China as well as MTO and overall growth rates were about 6% in China quarter over quarter. Traditional applications, obviously, it is something that we're watching really closely as well. For the year in China, We saw about 5% to 10% growth rates in China across all applications. So that was MTO, other energy applications and traditional chemical applications.

Speaker 2

And traditional chemical applications were supported in industrial production in China increased by over 5% for the year. Export demand was weak, but they were exporting a meaningful amount, especially in comparison to previous year where they were in a COVID year. So in a way, we did we were coming off of a lower base coming into 2023, But 5% to 10% growth rates across all those different applications when it represents 60% to 65% a year demand, obviously, is going to be meaningful for the industry.

Operator

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

Speaker 7

Yes. Hi. Thanks for taking my questions. First, I just wanted to ask just within Europe and thinking about Red Sea and Middle East Has that had any impact on the region? I know for some other commodities, you're talking about potentially limiting supply in the Europe being an upward price, Perhaps catalyst, I know methanol floats tend to be in the other direction, but what are you seeing and what do you think plays out here near term there?

Speaker 2

That's exactly right. It hasn't been a big impact for us nor for the methanol industry broadly. Our supply chain, we don't have any Product flowing through the Suez and the Red Sea, we would if we were supplying Egypt to Asia, But Egypt is really an asset that supplies mostly our Mediterranean customers. So we're not impacted. And then as a broad industry, the flows from the Middle East have really pulled back over time and are almost negligible.

Speaker 2

And that's on the basis that there's been a lot of new Atlantic production that's come online over the past many years. And so it hasn't impacted the methanol pricing or really tightened up The market in Europe, I would say what we're continuing to monitor, which everyone will be monitoring is potential escalation in the region and the Strait of Hormuz is where probably 15% to 20% of supply because all Middle East supply flows through that region and just given recent events in our with Iran, something we're watching very closely, but that would impact many, many different commodities and so we'll continue to monitor that. But so far the impact has been pretty muted.

Speaker 7

Thanks. I appreciate that. And just a quick one on CapEx, if I could. Just as G3 winds down, mean you go more to maintenance levels, but you're talking about a little bit of growth when you think about marine fuel and some other applications. What's the range of CapEx you see the next couple of years that are going forward?

Speaker 2

When we look out, we don't see any real meaningful capital in the next few years when it comes to either organic growth opportunities or low carbon methanol investments. It will take time to develop. We're developing these opportunities, but that will take time. So we're not standing still. We're developing these.

Speaker 2

But in terms of capital spend, we don't see a lot of out close or outlays being needed in the next few years. So really when we look at free cash flow generation, The focus again is the balance sheet and then excess cash to shareholders, which we've been pretty consistent with over the years.

Operator

Your next question is from the line of Nelson Ng with RBC Capital Markets. Your line is open.

Speaker 8

Great. Thanks and good morning. My first question is, in terms of the outage in Egypt, like obviously you still need to supply Europe. Did you see materially higher transportation costs in Q4 and maybe in Q1? And if so, should we assume that things kind of normalize in Q2?

Speaker 2

Yes. So thanks, Nelson. It's yes, we did see higher logistics costs and I would say part of that was because of Egypt. Additionally, it does depend on your supply chain movements with more Chile product In our asset base, we do see more flows from Chile to Asia, so a little lengthening of the supply chain there. And we move forward, Our supply chain, it will be partially lengthened when you with G3.

Speaker 2

G3 product will be flowing to all different areas within our supply chain, but there will be likely more flows into Asia as well. Hard to say how you model all that, but we expect there could be some slight increases in our ocean freight just based on shipping days and length in the shipping in the supply chain.

Speaker 8

Okay. That's good to know. And then just one follow-up on New Zealand. You mentioned the lower supply. Like Is that like from a maintenance outage at wells versus generally lower outputs?

Speaker 8

Would you say that The generally lower trend of output is the is that the larger factor in terms of your forecast for the large decrease in methanol production in New Zealand? Or is it specifically like a Very big outage or long outage you're expecting for maintenance

Speaker 5

at the wells?

Speaker 2

It's about half and half, I would say for that, I guess about half because of the outage and half because of lower gas profile. Okay.

Speaker 8

And are those outages like every other year or once every several years? Like should we expect these outages to happen Again in 2026?

Speaker 2

Every few years. Yes. Okay. Yes, every 2 around every 2 or 3 years.

Speaker 8

Okay. So base cases, we might see a modest increase in 2025 out of New Zealand if everything else remains unchanged?

Speaker 2

We'll keep updating you on the progress and we're going to work really closely alongside and be able

Operator

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

Speaker 9

Hey, good morning. Thanks taking my questions. I had a couple of modeling questions for G III. First, are there any significant startup costs that we need to incorporate into Q1? And then second, this inventory build in Q1, Is that going to be like just a permanent part of your working capital or will it be temporary?

Speaker 9

And if it's temporary, Is that something that you think will reverse by the end of 'twenty four or something further out?

Speaker 2

Thanks for that. So I'm going to the first question was about capital. There will be no other kind of start up costs to be for us to be focused on everything in terms of starting up and commissioning the plant is included in our $1,250,000,000 to $1,300,000,000 and that's all included in the numbers, the $60,000,000 to $110,000,000 including what's in accounts payable today. So there's you shouldn't foresee anything beyond that. As it relates to inventories, What I think we'll see this year is overall inventory levels will likely stay something similar, potentially even down like We could see inventories be managed down.

Speaker 2

We're not significantly increasing our sales. So there isn't a need to increase overall inventory levels. And I would expect to see that these things moderate over time in terms of the produced inventory buildup that you're seeing today. So I wouldn't be forecasting this to be a permanent. And what we will see is that overall inventories stay the same, But there's sort of a flip between produced inventories and purchased inventories as we'll be buying a lot less proportion of purchased and producing more.

Speaker 9

Okay. And then so does that mean that for 2024 that Your sales volumes should be pretty close, maybe a little bit less than the 8.1 of production?

Speaker 2

Yes, it will be pretty it should be pretty close and it might be slightly lower because of the inventory build.

Speaker 9

Got it. And then my follow-up is just around RNG. Could you talk about what percent of your sales We're based on an RNG feedstock in 2023 and how might that change in 2024 and beyond. And what kind of customers are interested in methanol From RNG, is that mostly the shipping or anything changing on the customer front there? Thanks.

Speaker 2

Yes. So I think 1st and foremost, the overall level is quite small. We really today, we have one customer purchasing biomethanol, but there's lots of interest. So there's lots of interest in low carbon methanol and RNG based methanol. I think the challenge is about cost and availability of RNG.

Speaker 2

And RNG has other competitive alternatives that have increased the cost quite significantly in the premiums you need to pay. And so we have worked we are trying to work on Arrangements where we can maybe get a more favorable price by locking in longer term and then selling into those markets and those are the things that we continue to pursue and it's not just RNG in North America. We're looking at renewable natural gas in all of our jurisdictions to find out where we can source it economically and securely over time. In terms of the customers, it's shipping. The shipping customers are interested in RNG, but also traditional chemical applications are also interested.

Speaker 2

In fact, the one contract we have is into the traditional chemical application. And What it's really customers that are seeking to have a green or bio kind of attached to their end product. So we're seeing that in certain segments. It's consumer markets That is where we're seeing it, ultimately landing in consumer markets that would be able to demonstrate a feedstock that's more lower carbon or green. So we're continuing to develop it, lots of interest, Obviously, getting securing long term affordable renewable natural gas is the key and then working with customers on their willingness to pay.

Operator

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

Speaker 10

Good morning. Could you give a bit more detail on what you're seeing in China in DME demand and the industrial boiler applications, you mind a pull through?

Speaker 2

Yes. I mean, I'll speak to China a little bit deeper here. Maybe across all the applications, in particular, the ones you're focused on. So in other energy applications, We saw growth rates again 5% to 10% and that includes MTB, DME, other thermal applications, boilers and kilns as well as fuel other fuel applications such as cooking fuels. And so we saw a lot very strong growth rates across all of those applications.

Speaker 2

In terms of boilers and kilns, Where we see boilers at today is that these are residential and industrial applications. I would say that originally there was thought that it would replace big, big industrial boilers. We haven't seen that. Where we see is in smaller applications, commercial and smaller industrial changeovers. So it's a decent growth rate, but it's not the Some of the projections that were made early, I think, in this space were quite dramatic, but we are probably seeing 5% 10% would have seen that this year in that segment.

Speaker 2

Your question about DME, DME has been relatively flat, right? Because So that industry has kind of operated at a certain rate. It isn't growing or expanding and the existing industry sort of operates at around kind of an 80% rate. And so we don't see DME growing at all. It's really the other applications like cooking fuels, boilers and kilns, M100 vehicles.

Speaker 2

And Geely has a fleet of vehicles, but they're also developing heavy duty trucks. And so that's where we see more of the momentum is less so in the I would call it the older new application DME and more into these newer applications.

Speaker 10

And if I may just one follow-up on that and then one structural question. With respect to the kind of the frothier Expectations, I remember when the first industrial boiler discussions happened, a lot of it was about kind of the need for clear policy at the federal level to sort of force or trigger kind of the adoption at the larger sites. Did that policy ever gel or is the absence of that sort of why you're seeing sort of the shift in demand to mostly being the small applications?

Speaker 2

What happened there was that industrial sites, large industrial sites got connected to the gas grid, So it was they needed to reduce down their power by coal and we saw a lot of those As much as possible, those industrial sites got more connected to gas and we're using that as an alternative versus methanol. And so methanol is actually being developed more in spaces where connecting to gas isn't available And it tends to be in smaller industry or residential commercial applications. So, policy didn't change.

Operator

My apologies. Your next question is from the line of Steven Hansen with Raymond James. This is a follow-up. Your line is open.

Speaker 4

Yes, thanks. Just a quick follow-up. I wanted to circle back on the supply picture, Rich. I think you referenced The Malaysian facility coming on G3, of course, but I don't think you've referenced anything out of Iran this year. Just wondering if you've got sort of a view specifically on those facilities that have been sort of amused about for some time and whether they're going to be contributing at all to an incremental supply this year?

Speaker 4

Thanks.

Speaker 2

Thanks, Steve. Yes, so for Iran, it's obviously getting information out of Iran and understanding what's going on there is often opaque. So we rely mainly on what we hear in the market as well as what we see on trade flows. The news in the market that potentially the Aeryon plant started production sometime this year, We have seen some supply in the winter greater than what we've seen previous years, but we think that's more based on weather It's been a warmer weather than a lot of new supply coming out of new assets. It's something we continue to watch.

Speaker 2

We think that the when we think about Iran, we think the structural constraints are going to be the same, which is Under sanctions environment, you have it's difficult to operate these plants. A lot of them have been built With local EPC resources, difficult to run from a technical perspective and the gas grid is constrained for a big part of the year. So I think we will watch to see what happens when the winter ends And we see potentially more gas availability and it will tell us whether we see any new incremental supply coming from new plants, but we think those structural constraints are there and they're going to continue. So we don't factor in a big amount of net supply coming out of Iran irregardless of whether plants start up.

Speaker 4

That's helpful. And just the obvious follow on question is I know G3 is Just turning on, so it's probably a bit premature. But when do you start scoping the next facility? Presumably, that's probably already happening. But when does the actual Thought of hard dollars going into the ground start to enter the equation, are we talking 3 years out, 5 years out?

Speaker 4

How do you think about that longer term? Thanks.

Speaker 2

So the phases for us will be we'll be looking at doing commercial work to really explore our options and it will be partly commercial, partly technical looking at our different options that are available. That's where we are today. That process will then be narrowed down into which are the ones you want to progress. Then you'll then we would talk about a pre FEED, which would be really still Fairly limited capital. And then the next step is to move into a FEED, which you start spending more money, but Still, I don't think it's the capital you're talking about.

Speaker 2

You don't get there until you reach a final investment decision. So We're a ways away from that from a final investment decision where you start turning into spend meaningful capital on a new project.

Operator

Your next question is a follow-up from the line of Josh Spector with UBS. Your line is open.

Speaker 7

Yes, thanks. Just a quick one to clarify. When you're talking about the kind of guide or the walk to Q1, you said slightly higher sequentially. I guess pricing up is up a decent amount. Understanding G3 is probably not in the math until Q2, but Egypt was down last quarter.

Speaker 7

I guess what's Offsetting that when you're expecting Egypt to start, is it a big cost of the repair or maintenance associated with it or something else which limits your Q1 increase?

Speaker 2

Yes. I think it's really We're going to be building inventory through the Q1 rather than seeing that product flowing through Sales, so I think really when we look at our inventory as we bring G3 and Egypt up, our overall produced sales for Q1 are looking really similar to Q4, and really it's about price. So I think we're when we look at quarter over quarter, it's more of a price story than seeing that incremental. And then when we get to Q2 is where you start to see kind of what we would call the run rate production coming through the actual sales. And that's why we kind of point to Q2 as being more indicative of our run rate and cash flow capability with all our assets running.

Operator

There are no further questions at this time. I will now turn the call back over to Rich Sumner. All

Speaker 2

right. Well, thank you for your questions and interest in our company. We hope you'll join us in April when we update you on our Q1 results.

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Earnings Conference Call
Methanex Q4 2023
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