Methanex Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2025

There are 11 speakers on the call.

Operator

Good morning. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Masanex Corporation First Quarter twenty twenty five 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

Thank you. I would now like to turn the conference call over to the Director of Investor Relations at Methanex, Ms. Sarah Herriot. Please go ahead, Ms. Herriot.

Speaker 1

Good morning, everyone. Welcome to our first quarter twenty twenty five results conference call. Our twenty twenty five first 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.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 these conclusions or making the forecasts or projections, which are included in the forward looking information. Please refer to our first quarter twenty twenty five MD and A and to our 2024 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, EBITDA, adjusted EBITDA, cash flow, adjusted income or adjusted earnings per share made in today's remarks reflect our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility and our 60% interest in Waterfront Shipping.

Speaker 1

In addition, we report our adjusted EBITDA and adjusted net income 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. 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 to discuss our first quarter twenty twenty five results. Our first quarter average realized price of $4.00 $4 per tonne and produced sales of approximately 1,700,000 tonnes generated adjusted EBITDA of $248,000,000 and adjusted net income of $1.3 per share. Adjusted EBITDA was higher compared to the fourth quarter of twenty twenty four, primarily due to a higher average realized price and higher produced sales. As we entered the first quarter, methanol markets were very tight with numerous supply constraints across the industry leading to pressure on global inventories.

Speaker 2

In the Atlantic Basin, supply was restricted by planned and unplanned outages, gas feedstock constraints, and restricted flows from The Middle East caused by the conflicts in the region. In the Pacific Basin, supply was restricted primarily from very low operating rates in Iran, which we estimate at well below 50% through the first quarter. These conditions led to pressure on global inventories and high methanol pricing through most of the first quarter. Conditions in the Atlantic Basin improved through the first quarter as plants returned from planned and unplanned outages as well as increased supply flows from The Middle East into Europe. And as a result, we saw a decrease in methanol pricing in The Atlantic from high levels as we move into the second quarter.

Speaker 2

In The Pacific, we've seen some improvement in operating rates in the basin with increased production from Iran, although coastal inventories in China remained well below prior year average levels through April. In China, we've seen methanol spot pricing decrease by approximately $20 per metric ton from Q1 levels, which we believe is driven by the anticipation of increased supply into the market and some moderation in global energy pricing impacting marginal production cost and MTO affordability. We estimate the current marginal cost of production in China in the $270 to $280 per tonne range. We posted our second quarter European quarterly price at €625 per tonne, representing a €75 decrease from the first quarter. Our posted prices for North America, Asia Pacific and China were flat in April and decreased in May.

Speaker 2

We're closely monitoring the impact of potential tariffs on global economic activity and are cautiously managing our business through this period of uncertainty. Although the direct impact of tariffs on our business currently is limited, an economic slowdown would impact methanol demand. To date, we have not seen an impact on methanol demand, and we expect demand in the second quarter to be higher than the first quarter given increased seasonal activity in construction and mobility as well as higher MTO operating rates. MTO operating rates are expected to increase given increased supply availability in the market from seasonally higher operating rates from the methanol industry in the second quarter. Now turning to our operations.

Speaker 2

Methanex production in the first quarter was lower compared to the fourth quarter with lower production from Geismar, Trinidad and Egypt. In Geismar, production was lower due to a planned turnaround at G 2 and an unplanned outage at G 3 at the February. G '2 successfully restarted March and is operating at full rates. We announced this morning that g three has successfully restarted and has begun producing methanol. Our team worked closely with Johnson Matthey, the technology provider, during the outage to complete a root cause analysis and revised startup plan, which was successfully executed by the team.

Speaker 2

In Chile, I'm very happy to share that both plants have been operating at full rates, and production was higher in the first quarter due to better reliability and a and a technical constraint being removed during the outage that occurred in November 2024. We have gas contracts in place with Chilean and Argentinian producers until 02/1930 and 2027 respectively, which underpin approximately 55% of the site's gas requirements year round. We continue to expect seasonality in production but are seeing positive developments making full gas supply for a two plant operation available for longer periods. In Egypt, the first quarter production was 20,000 tonnes lower than the fourth quarter due to gas curtailments that were driven by gas supply demand balances in the country. We're monitoring the gas market closely and would expect to experience some curtailments in 2025, particularly in the summer months, depending on gas supply and demand dynamics.

Speaker 2

Now turning to our current financial position and outlook. We ended the first quarter with $1,031,000,000 of our share of cash and continued access to our $500,000,000 undrawn revolving credit facility. As a reminder, the fourth quarter, we executed our OCI acquisition financing plan, including issuing a $600,000,000 bond and securing $650,000,000 term loan A commitments from our banking partners. The completion of these financing arrangements gives us financial capacity to complete the OCI acquisition and flexibly achieve our deleveraging plan. We are continuing to progress the regulatory process and expect the transaction to close in Q2 twenty twenty five.

Speaker 2

Our 2025 priorities are to safely, reliably and efficiently operate our business, close the OCI transaction and achieve the identified synergies and direct all free cash flow to reduce leverage. We do not anticipate significant growth capital over the next few years and remain focused on maintaining a strong balance sheet and financial flexibility, paying particular attention to the prevailing economic environment. Based on our second quarter European posted price, along with our April and May posted pricing in North America, China and Asia Pacific, our April and May average realized price range is forecasted between approximately $360 and $370 per metric ton. Based on this lower forecasted average realized price coupled with lower produced sales due to the G3 outage, we expect lower adjusted EBITDA in the second quarter of twenty twenty five compared to the first quarter. We would now be happy to answer questions.

Operator

Your first question comes from the line of Dan Isaacson with Scotiabank. Your line is open.

Speaker 3

Thank you very much and good morning everyone. Have two questions. Rich, the first one is on capital allocation. I'm sure it's one you've been asked before. When the OCI deal was announced, your stock was CAD40 and the weighted average spot price was about CAD350 or so.

Speaker 3

Now the stock is CAD30, the weighted average price is getting closer to CAD300. So the buyback return opportunity has improved. And from a time value of money point of view, the OCI return has kind of taken a very slight decline. Balance sheet risk has increased slightly. I'm not asking whether or not there's an opportunity to do buybacks instead of OCI.

Speaker 3

My question is, how flexible is the board willing to be on this type of calculus? What is the threshold that they think about when deciding whether to pivot into something like buybacks versus completing this transaction without being criticized of too much short termism? Thank you.

Speaker 2

Thanks, Ben. You know, I think I think when we talk about capital allocation and we we look at our priorities for capital, number one, we want to have a strong balance sheet and be able to maintain our business through all cycles. And when we did the and the second thing is also looking at growth capital. And when we looked at both of those opportunities with with the OCI acquisition, we're very excited about the value that creates for the company. But what we what we were committed to and remain committed to is is is delevering the balance sheet, and that's that's the continued focus for all of our free cash generation right now until we get to a place where we are where we were pre deal with a much stronger asset base having brought on those assets.

Speaker 2

So that's the main focus. And right now, we're not considering share repurchases at this moment.

Speaker 3

Fair enough. And then my follow-up question is on Iran. Can you give an update for in terms of what you know about this port explosion and how it impacts methanol, whether it's trade, nearby capacity, storage? And then also, what is your latest intel in terms of the impact that sanctions or the ramp up enforcement of sanctions are having on Iran methanol flow? Thank you very much.

Speaker 2

Yes. Thanks, Ben. So first and foremost, though, that was a really tragic event that that happened in in in in Iran. And and it you know, we we we don't believe that that's impacting methanol in any way. But, obviously, that's something that, you know, they're they're going to have to review and and figure out what that does from a safety and and operational perspective, but not impacting methanol.

Speaker 2

As it relates to sanctions, I think what we saw through q four and q one is is we saw Iran probably at at some of the lowest points we've seen in from an operating, which is mainly because of the gas situation there, we believe. A lot of residential demand combined with how the gas infrastructure performs. And obviously, that has to do with the impact of sanctions on their ability to produce and explore and invest in infrastructure there. So we saw well below 50% operating rates through Q1. We are starting to see increased rates as we come out of the winter period.

Speaker 2

We we we get most of our intel by looking at trade flow statistics, so we don't have a lot of insight into actually how each bond is is is operating, and we continue to monitor that. But we are expecting an increase in in Iran flows into Coastal Al China in the coming

Speaker 4

months. Thanks.

Operator

Your next question comes from the line of Joel Jackson with BMO Capital Markets. Your line is open.

Speaker 5

Morning. So great that g three is trying to ramp back up. It lasted a while here. When you think about that plant and some of the challenges you've had on it, you know, it's a bit of a different setup and configuration than have with other plants. And I think that that's what the configuration sort of requires what's the right word?

Speaker 5

Like, more user experience, competence, getting to know the asset better. Can you talk about that as the team learns to run this asset better? You know, how much confidence do you have you can run this plant at 95% with your other plants? You know? Or if you you know?

Speaker 5

Or do you have to model for more maintenance, more downtime, more issues, you know, going forward?

Speaker 2

Oh, thanks, Joel. You know, the big the big thing for us was was getting the the right restart start up conditions for the ATR. So that was that has been the the challenges we've worked through. We worked really closely with Jay with Johnson Matthey as well as as well as bringing third parties here to to help us through that process. And what we we did is we've we've now got restart conditions.

Speaker 2

This this startup went very smooth. We've also built in validation checks that that would tell us, you know, the two issues we experienced, and all of our validation checks have have have looked really good. And these conditions can be, would also be used anytime we go to if we ever have the plant come down for maintenance or or an unplanned and unplanned maintenance. So we expect that these conditions look really good. Everything's checked out, and and, you know, we we feel really good about the ability for this plant to be up and running on a sustained basis and and planning for high reliability.

Speaker 2

So, you know, we have to we obviously have to prove that out and have a sustained run, but the start up went extremely smooth, and and we're very, very happy with where we're at right now.

Speaker 5

Okay. And then you, you know, you have a busy month or so coming up. Right? I guess you're hopefully gonna close the OCI assets in the next imminent weeks. Have you been able to get some more color around Nat Gas and Beaumont of ramp up?

Speaker 5

I've seen things that they're doing better than they have in the past, or is this you really only get on-site once you close the deal?

Speaker 2

It is more we we get on-site once we close the deal. I we we hear about industry operating rates through the same news news news reports or industry analysts that that that a lot of people read. Both those plants have come off of turnarounds recently, that's a bonus for us. But we will we're on our way to move through the regulatory process in Q2 and are excited to bring those world class assets into our into our supply chain.

Speaker 5

If I just fit one more in, it looks like you're implying about a 40% discount rate so far to post the price in q two. Is that the right level of discount rate we should be using as a base case for the rest of the year, second half of year, even after the OCI asset closes and after g three is back running normal?

Speaker 2

I you know, we gave a range of $3.60 to $3.70 for the for the posted prices, probably on the higher end of that range for the few few months. You know, giving a discount rate, I think what we're looking at right now is always what's the level over China in our in our global ARP. And I think right now, China's pricing in and around $2.70, 2 80, and we're realizing this level. So, you know, we could see some moderation in that depending on global supply demand balances and and what we see on energy pricing. But right now, we really focus on what's that realized pricing over for China.

Speaker 2

And and so hard to give you a discount rate. I mean, if you wanna use that 40%, and it's it's something we'd probably wanna get back to you on. But right now, we like the premiums that we're seeing over over the in the market, and and we'll continue to track and monitor that as we as we move forward.

Speaker 5

Thank you.

Operator

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

Speaker 6

Yes. Hi. Good morning. Thanks for taking my question. I wanted to ask two things on China.

Speaker 6

It's just one, where you talk about where prices are today, I mean, they moved down decently over the last month. How do you think about the support level given where coal has moved towards? Does that leave more room to move down? Or is there something where you'd say this is something that drives support here? And then second, just I know there's not really any direct trade flow here of US into China, but just thinking about tariffs creating friction, does that have any impact on Western Basin supply at all in terms of some of the movements or Asia, if if that's the one worth commenting on more?

Speaker 6

Thanks.

Speaker 2

No. Thanks, Josh. To answer your your your first question, the the cost curve today is at that $2.70 to two eighty level. That's a pretty firm cost curve based on coal pricing at around RMB650 per tonne. And we've seen coal pricing, it's right in kind of the range that the government kind of sets on where they target coal pricing to be.

Speaker 2

So right now, we've seen we've tested our cost curve many times in this industry, and it is quite resilient and responsive. And that's the level we see today. And it's the other data check is MTO affordability and where olefins pricing that. And I would say that's another kind of data point that is pointing to around that two eighty to slightly above level. So we think China is firmly in that space today.

Speaker 2

As it relates to product movements and friction, it we don't expect a lot of there isn't a lot of US flows moving to China today. Actually, there's there's no flows moving today. I think the biggest thing we we'd be looking at, you know, is is just the impact of of tariffs on export manufacturing out of China, and that's something we're gonna be watching, you know, because the the Chinese manufacturing, a big proportion of that is for exports. The the government's trying to stimulate domestic consumption as well. So there's there's actions being taken there, but that's something we're closely monitoring right now.

Speaker 6

Probably too tough to answer, but I'll try. It's just if you did have some downturn further from here in terms of China demand, would you see exports going into China needing to find a new home, or would you see domestic assets shutting down? Is there any one of those that you would see as a more likely scenario?

Speaker 2

It's pro I mean, what we would see is is if we got into first off, we don't see a big impact because when you really boil it down, China is a big consumer of methanol. They consume about 60,000,000 tonnes. About one third of that is into traditional chemical applications. And then if you look at how much of that is export, ballpark might be about 50% of that. And at about 15% of manufacturing from China goes into The US, you get down to a pretty small number that we're we're monitoring.

Speaker 2

So we wouldn't we wouldn't expect to see a big reaction right now on on demand. If you got into an oversupply situation, yeah, we'd probably see some moderation of of operating rates in Coastal China to balance the market, but not something we're seeing today, and we don't expect to see a big impact.

Speaker 6

Helpful. Thank you.

Operator

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

Speaker 7

Yeah. Good morning, guys. Thanks for the time. Just wanted to ask about risk mitigation as you move into the closing stages of the transaction here. What are the key steps you need to take or maybe some of the initiatives that you need to put in place to make sure you've got the risk managed as you take on these new assets?

Speaker 7

Thinking gas in particular, I know it's unhedged. Any additional operational or off take marketing type agreements? Just walk us through how you can get a hold of that and take risk down in what's still a pretty uncertain environment. Thanks,

Speaker 2

Steve. Yeah. No. We I mean, what we've done is already stood up a big integration management team that's looking at all aspects of the integration to ensure on day one, we're gonna be producing methanol safely and reliably as well as delivering to to customers. Obviously, we can't step into that business today.

Speaker 2

So but we've we've been planning as much as we can ahead of the transaction to be ready on on day one. There really isn't, I don't I don't we don't see a lot of big risks and hurdles, but we've obviously been assessing all of the risks, and and then trying to address everything we can. A big thing is, you know, getting on the systems and being able to communicate, know, early and understand information flows, being able to to to to to bill and and pay invoices, all of those things, and we're thinking through all of that. So on day one, we bring this on in a very seamless seamless way and be able to to incorporate this into our business as quickly as possible and then and then really work on on on delivering on synergies, which will take take some time. So we've had a a big team focused on this internally and working with OCI as much as possible ahead of the transaction while ensuring, you know, all sensitivities to the to the regulatory process and and that not being closed yet.

Speaker 7

Okay. Great. That's really helpful. And then just thinking back to the d three recovery and and start up now that's been been announced. Is is there is there gonna be gating milestones as it's going through this new, I'll call it, run rate process with the new catalyst in place or the new fixes to the ATR anyway?

Speaker 7

How should we think about that? Is there planned ups and downs to test out how it's going? I'm trying to get a sense of whether we should expect any sort of fluttering in the operating rate here in the next quarter or two.

Speaker 2

Well, I think one distinction, and maybe it's just something to clarify, is this has all been about start up conditions and getting the unit to full operating rates. Once we've gotten to full operating rates, the eight the auto the eight auto thermal reformer has operated really well at a % operating rates. We we operated at for for four months close to full capacity producing 600,000 tons. So once we get the unit up to full rates, it's operated extremely well. What we didn't have are start up conditions that either didn't produce soot or didn't have pressure on the system that caused the the catalyst damage.

Speaker 2

And so what we've done through this step and are feel very confident about that we validated through the process is that we now have start up conditions that allow us to get to those high levels without doing any any damage within the unit. So there is no bringing down to tests. We're we're we're we're we're got ourselves up to high operating rates, and and that's where we expect to be. Of course, anytime we we if we were to have unplanned downtime, we would go in and inspect and just validate everything that we can't do while we're online, but everything online tells us, we're in a we're in good shape.

Speaker 7

Okay, great. And then just one last one. I apologize if I missed it earlier on some of the tariff talk, but is there any issue with bringing methanol in from Trinidad as you see it here today? Is there any, I don't know, risk to the tariff structure there? And how that should impact sort of inbound flows, I guess, broadly from that from the the country?

Speaker 2

Yeah. So there there is some limited flows of of Trinidad into into North America, mainly in the on the East Coast supply chain. So there is a flat 10% tariff, right now, and, it's pretty, you know, pretty very, very minor limited impact to the business, and that's something that we're working on right now.

Speaker 7

Okay. Very good. Appreciate the time.

Operator

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

Speaker 8

Good morning, Rich. Question around demand. Over the last couple of years, as I take a look at a variety of sort of commodity chemicals out there, they've been pretty weak, maybe even some sort of customers of yours, I'm just sort of thinking in terms of like polyurethanes and the like, and I know that's a much smaller sort of piece of the pie. But I mean as I read sort of some of your near term commentary, particularly as you talked about some sequential demand declines in Q1, I mean it just appears to me that they were primarily call it for seasonal reasons, Lunar New Year and the like, maybe slightly reduced MTO operating rates. And then, if I heard you correctly, you're talking about a sequential uptick in demand in Q2.

Speaker 8

So with all of this volatility, macroeconomic volatility, some of your end markets being a little volatile, I mean, could you talk about how methanol demand has actually held up far better than some of the other commodities out there? And what your expectations are even in this sort of reduced global GDP growth environment over the next couple of quarters?

Speaker 2

Sure. Thanks, Hassan. So right now, again, I think I've talked about the makeup of demand for methanol. It's when we look about 50% is traditional chemical applications, about 30% to 35% is energy applications, and the other 15% to 20% is is methanol to olefin. So I mean, if you start with the energy applications, those have been quite quite good for us.

Speaker 2

And, you know, when we're seeing those, we haven't seen big variability or volatility, and that demand has been really stable and growing. MTO tends to be a balance on the industry. So when there's a lot of supply in the market, they tend to operate high rates. And when the supply gets tight, they tend to operate low rates. So there's a bit of a noise in our demand because of the balancing act of MTO operating rates on our industry.

Speaker 2

The traditional chemical applications vary by have varied by region, and that depends heavily on GDP in in each of their in each of the regions. And, you know, that's something we monitor really closely, and it's a lot of it goes into all the leading indicators of economic activity. And so you you go around the world, and it hasn't been particularly strong, but we haven't seen weakness in it. But it's something that we're watching, and we're we're expecting relatively flattish when we say, you know, you know, demand is gonna pick up. We're not talking about big increases in in in from a percentage basis, but it was seasonally low in q one, and it it we expect it to be seasonally higher in the second quarter.

Speaker 2

Certainly, auto, housing, all those leading indicators are things that we're tracking, and and we're gonna watch closely. But I think one of one of the things to to note about our industry relative to other petrochemical industries is is that we have seen, I would call it, lower growth than we've seen historically. What we are what we are seeing is limited supply, and I think that's one of the differentiation point. Existing supply in methanol has hard had a hard time keeping pace even with slower growth because of constraints around Iran, constraints around Russia, Venezuela. We've seen it in Trinidad, New Zealand, etcetera.

Speaker 2

Because of those gas feedstock or, geopolitical sanctions, a variety of number of factors has led existing supply to be constrained and not a lot of new capacity being added in the industry. So I think I do think there's a bit of a differentiation that even with slower demand, methanol is not getting out of balance like we do see in some of the other sectors.

Speaker 8

Understood. Very helpful. And as a follow-up on the feedstock side of things, particularly on The U. S. Natural gas side, I mean, obviously, with the close of the OCI deal, your exposure is going to get larger in The U.

Speaker 8

S. I mean, it just seems that you have arguments being made on both sides of natural gas prices. Obviously, we've seen a fair degree of volatility in nat gas prices, crude oil prices have come under pressure. There's some sort of pundits out there talking about how they're potentially in a lower oil price environment could be shut ins in the Permian. I mean, now as your exposure is rising in The U.

Speaker 8

S. With all of this sort of noise around natural gas pricing, how are you guys thinking about nat gas? How are you guys thinking about your existing hedging program? How are you guys thinking about the hedging program on a go forward basis with the OCI deal eventually closing?

Speaker 2

Yes. Cool. Thanks. Look at it very closely, obviously. And right now, as you know, we actively are in the market with our rolling hedge program targeting to get certainty around our cost structure at around 70% operating rates.

Speaker 2

So that's where we are today on our current assets. And I think when what we're seeing is we have seen volatility in the short run, and we've seen the long run end of the curve actually coming down. So when you look at where the long end of the curve is, it's at you know, we're seeing $3.50 pricing or below, which is really positive for us. So, you know, we're actively looking at what we wanna do with OCI. We haven't had we haven't we haven't taken any action on that to date, but it is trending positive to gas pricing that gives us a really good cost structure, over that longer period.

Speaker 2

In the short term, what we've seen spot gas trading down, you know, below $3.50, but when you look over '20 the remainder of '25 and into '26 and somewhat into '27, it's still in that $4 range. And so we're kind of we can be a little opportunistic with the way we layer in. So we're looking at both the short term and the longer term, but we believe there's going to be opportunities to to get a really good cost structure to underpin making our company stronger and more resilient with these assets.

Speaker 8

Very helpful, Rich. Thank you so much.

Operator

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

Speaker 9

Great. Thanks and good morning everyone. First question just relates to New Zealand. Can you just talk a bit more about the gas supply situation there? Because it looks like you diverted gas in Q1.

Speaker 9

And I think in the past, it's typically been over the summer or the Northern Hemisphere summer. Do you expect I guess the follow on question is, do you expect the diversions, the power sector to ramp up? And can you decide when to divert gas? Or does the off taker do that?

Speaker 2

Thanks. No. On New Zealand gas, you're right. We didn't we did. We produced about 160,000 tonnes during the quarter.

Speaker 2

So we're we produced, you know, less at full capacity in one plant. We are selling a small portion of gas, and that was a contract that was asked of us and and and we negotiated last year. As it relate as we move into the winter months, it's it's more likely that we could see a a big ask on on gas, which we would we'd be very responsive to if if that if if that's the case. So it's more an ask on us rather than us selling in. Gas in New Zealand, would say where we are today just with our suppliers, our continued operations are at one plant are dependent on gas production in New Zealand, and it's something we continue to work really closely with our gas suppliers there.

Speaker 2

So we're in this balance of we need the gas to continue to maintain our minimum operating rates. There's some requirements of needs for the residential power. And so we're trying to balance all of that while working with our gas suppliers on their outlook for gas supply. So it's pretty dynamic situation, and we'll be able to give you more of an update on when we get through q two as to how that power sector and drawn on gas plays out.

Speaker 9

And if methanol prices trend lower, are you able to push more into the power sector? Or like you said, it's more about them asking for it,

Speaker 2

but It's it's more about, yeah. It is more about the demand supply balances in the country and what comes to us from request. Certain certainly, we're we're we're there, and and we've always been responsive to that and will continue to be.

Speaker 9

Got it. Okay. And then just, switching topics a bit. On the OCI, transaction, can you just talk about, which, key approvals are needed and if any have been received yet?

Speaker 2

Yeah. If we're going through the regulatory review process in both U and Europe, and those continue to progress. And that's there those are the remaining steps to to to to move through approval of the transaction.

Speaker 9

Okay. Got it. I'll I'll leave it there. Thanks.

Operator

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

Speaker 4

Great. Thank you, and good morning, Rich. I want to circle back to the Q2 guide. So the $360,000,000 to $370,000,000 It seems to imply that the discount rate is getting worse in Q2 than it was in the first quarter. Are there any structural changes that would that would explain that, or is that just a function of of the geographical mix?

Speaker 2

Yeah. No. I I think, you probably shouldn't read too much into that. I I think we'll probably be on the high end of the range, so I'm not sure what where you're calculating the percentage. Again, we're we're really focused in in kind of what will be the realized pricing over over kind of what we think about the cost or the price center region, is it's China.

Speaker 2

We have seen, you know, inventories getting more healthy and and through with more supply into the market. So as we trend through q two, we'll just continue to track. And, you know, directionally, we sit have seen some moderation there. So but I I wouldn't be pointing you to a a big, you know, expansion in the discount. It's it's more pointing to where some of the spot markets have trended in the short term.

Speaker 4

Sounds good. And then you mentioned improving methanol demand in the second quarter in part due to higher MTO op rates. Is there any numbers you can share on where MTO utilization is today versus the average for the first quarter? Yes.

Speaker 2

Today, it's pretty similar to the first quarter. It's around 75% to 80% operating rates, and that's where we are. We have seen when there's lots of supply available in the market, which we do think as Iran ramps up and we start to see more coastal product available in China that we have seen them get into the above 90%. And there's again, there's about 21,000,000 tonnes of capacity. So a 10% change means, know, kind of 2,000,000 tonnes of of demand there.

Speaker 2

That will all be dependent on what's available in the market and as these plants come out of their maintenance.

Speaker 4

Great. Thank you.

Operator

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

Speaker 10

Good morning. Could you speak to as you were assessing kind of trough scenarios for the OCI merger, severe a trough you considered and what sort of liquidity metrics you focused on? And secondly, could you give an update on what you're seeing on the shipping pipeline for methanol flex fuel capacity?

Speaker 2

Sure. Thanks, Laurence. In terms of a trough scenario, we we sort of plan the company and the balance sheet around the 250 per metric ton price. This is the lowest we see pricing go in a twelve month period, and usually would only be in a sort of an economic shock type of event like a COVID or a financial crisis is where we've seen that happen. The first thing that we do in terms of planning the company is having assets that are on the low end of the cost curve and cash positive through the cycle, which we think these assets would be.

Speaker 2

And then it's also just ensuring we have access to liquidity. So our undrawn credit line is is a is available to us, and, you know, that will be actually increased to 600,000,000 post deal as well. So we have natural levers in our in our in our in our business. Typically, you see lower methanol price, our gas contracts respond. Some of them are pinned to methanol price.

Speaker 2

In those lower environments, we always see gas in North America tends to be a lot lower. We get foreign exchange on our fixed cost structure because the US dollar tends to strengthen and currencies against it, tend to tend to be weaker. And then we we also look at other things like discretionary CapEx and OpEx and other measures that we would take in those types of environments. So we feel that we've we've properly planned for any trough scenario. We're certainly way far away from that today, and and we'd have to see a lot greater impact to get to the to anything that resembles that.

Speaker 10

Okay. Great. And just on the marine flex fuel?

Speaker 2

Oh, sorry. Yeah, Marif. You know, we're we're I think we'll start with the ships. We still we still see all of the container ships and the outlook there is three fifty plus ships coming into the into the market over the next four or five years. By the end of this year, the demand potential for for all the ships that will be on the water would be close to about 3,000,000 tons of demand potential.

Speaker 2

Of course, that that that will depend on their their selection of fuel. Is it are they gonna burn burn methanol? Will they burn conventional bunker fuels? Today, gray methanol, so call it conventional methanol, is the affordability levels today. Methanol would probably be higher than than low sulfur fuel oil, probably lower than marine gas oil.

Speaker 2

So we're not sure what economic decisions shipping companies are gonna make there, but, obviously, we're in a lot of discussions with them today on on their needs. Giving you a demand forecast is is is difficult because the those decisions have not been made structurally, so we're not seeing long term contracts for for methanol quite yet. And we're working on on making sure that that, that methanol is available in all the major ports through relationships with bunkering companies. But difficult to give you a demand forecast. Discussions around low carbon methanol also continue, and, you know, that that becomes a bit more of a a cost decision.

Speaker 2

And and our regulation is going to push that, and and our customer is gonna have willingness to pay. We have seen some positive signs from the IMO regarding both their percentage of lower carbon fuels they want to see go into the global fuel pool as well as potential penalties that would be applied if shipping companies are noncompliant. Those are have not been implemented, and there's still lots of discussions. But the IMO has taken some steps to try to push forward with that, and that's something we're watching really closely.

Speaker 10

And then just lastly, The U. S. Proposals to implement fees on China made or China owned ships or fleets ordering ships from China, does that create any arbitrage opportunities for you relative to competitors?

Speaker 2

I don't I don't think it does. You know, being I guess, just being a Canadian company, do we have an opportunity to yeah. I think maybe it's it depends on what type of ships we're we're talking about. The types of ships that we're building are are medium range vessels that are smaller in size. So I think this more gets into larger container ships, but we can get back to you on on that on that question.

Speaker 3

Good. Thank you.

Operator

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

Speaker 2

Thank you for your questions and interest in our company. We hope you'll join us in July when we update you on our second quarter results.

Operator

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

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Earnings Conference Call
Methanex Q1 2025
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