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spk10: Welcome to the Methanex Corporation Q3 2021 earnings call. I would now like to turn the conference call over to Ms. Kim Campbell. Please go ahead, Ms. Campbell.
spk09: Thank you. Good morning, everyone. Welcome to our third quarter 2021 results conference call. Our 2021 third quarter news release, management 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. 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 third quarter 2021 MD&A and to our 2020 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, or income made in today's remarks reflect our 63.1% economic interest in the Atlas Facility and our 50% economic interest in the Egypt Facility. 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 that do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. We report these non-GAAP measures in this way to make them 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. John Florence, for his comments and a question and answer period.
spk06: Thanks, Kim, and good morning, everyone. This morning, a few members of our executive leadership team are joining me, including Ian Cameron, our SVP, finance, and CFO, Vanessa James, who previously led our marketing and logistics organization, and now leads our corporate development function, including the execution of our Geismar 3 project, as well as our sustainability function. And Rich Sumner, who was recently appointed to lead our marketing and logistics organization after working for many years with the company in various finance and marketing roles around the world. Mike Herz, who led our corporate development function and our Geismar 3 project, recently retired from the company after 26 years of exceptional and dedicated service. Today we will review our strong third quarter 2021 financial results, discuss our latest views on the methanol market, talk about our operational results and share our robust outlook as we enter the fourth quarter. Then we will open up the call for your questions. Turning to our financial results, we recorded adjusted EBITDA results of $264 million in the third quarter and adjusted net income of $99 million or $1.29 per share. Our adjusted EBITDA results reflect a continuing strong methanol price environment, partially offset by lower sales of Methanex-produced methanol. In the third quarter, we increased our average realized price to $390 per ton, a $14 increase compared to the second quarter. Our results illustrate the significant leverage that our earnings have to methanol prices. In addition, amid a rapidly rising energy price environment, Our results highlight our low-cost structure and the value of our natural gas arrangements, as approximately 65% of our near-term North American feedstock requirements are managed through fixed-price contracts, and the majority of our natural gas agreements across the rest of the world are linked to methanol prices. Now, turning to the methanol market, in the third quarter, methanol market conditions remain tight with ongoing industry supply challenges. Traditional methanol demand was flat as various factors, including supply chain disruptions, extreme weather events, and global energy shortages impacted industrial production levels and constrained demand growth. Demand for methanol to oilfins or MTO producers was lower in the third quarter due to planned maintenance activities and China's government-mandated industrial operating rate restrictions intended to limit energy consumption and energy intensity. Demand from other energy-related applications was steady. Methanol industry supply continues to be impacted by various factors. In North America, Hurricane Ida and technical issues affected methanol industry production. In Europe, sharply rising natural gas prices and planned and unplanned outages constrained methanol industry production. In China, limited coal supply and government-mandated industrial operating rates restrictions, as noted earlier, to manage total energy consumption and energy intensity curtailed methanol production. Over recent weeks, global energy shortages and increasing coal, oil, and natural gas prices are impacting methanol supply and methanol demand, leading to a sharp increase in methanol prices and a significant steepening of the industry cost curve. We estimate a sharp rise in the industry cost curve with an average range over the past several weeks of approximately $450 to $500 per ton. We have seen significant volatility in coal markets, and more recently we've seen downward pressure in the coal futures market as a result of announced government intervention in the coal market in China, giving historically high pricing levels. We recently posted our November prices, which increased by $83 to $692 per ton in North America, and increased by $90 to $600 per ton for Asia Pacific. We set our European contract price quarterly, and our fourth quarter posted price is €490, or approximately $575 per ton. Starting in January 2022, we are introducing a new posted price for the China market. We will continue to post the Asia-Pacific price for customers in the region, excluding China. We are making this change to better reflect the different market fundamentals in China compared with other countries in the region. Our outlook for the methanol industry is positive, and we believe that new industry supply will be needed to meet growing methanol demand over the next five years. Now turning to our operational results. Our third quarter 2021 production of 1.5 million tons was slightly lower than the second quarter. Our production in New Zealand was lower in the third quarter compared to the second quarter, primarily due to the short-term commercial arrangement to make natural gas available to support a tight New Zealand electricity market from early June to late August. Since then, we have operated both of our Montanui plants. We estimate production in New Zealand for 2021 of 1.3 million tons. The upstream gas sector is completing several field development projects that could improve gas availability over the coming years. In Geismar, during the third quarter, we shut down our Geismar 1 and 2 plants as a precautionary measure to ensure that the safety of our team members during Hurricane Ida. Fortunately, the hurricane only caused very minor damage and we restarted production after approximately two weeks. The production impact of this outage was approximately 100,000 tons. which offset higher production resulting from the completion of our Geismar 2 debottlenecking project earlier this year. In Chile, our production in the third quarter was similar to the second quarter. We typically experience lower gas deliveries in the southern hemisphere winter months, impacting our second and third quarters. We recently restarted production at our Chile 4 plant, which was idle for the last 18 months. and expect to operate both plants during the southern hemisphere summer months to the end of April 2022. We estimate production in Chile for 2021 of 800,000 tons. Our Atlas plant in Trinidad as well as our Egypt and Medicine Hat plants operated well during the quarter. Now turning to our balance sheet. We ended the third quarter in a strong financial position with over $900 million in cash and $900 million of undrawn backup liquidity. We previously announced a strategic shipping partnership with Mitsui OSK Limited, or MOL, with the proceeds of $145 million. We recently finalized definitive agreements for this partnership, and closing is expected in the coming months, subject to regulatory approval and after all the customary conditions are met. Turning to our capital allocation priorities, we generate meaningful cash flow across a wide range of methanol prices. Our capital allocation priorities remain the same. We use the cash we generate to maintain our business, pursue value accretive growth opportunities, and continue our strong track record of returning excess cash to shareholders. We recently restarted construction of our Geismar 3 project, a unique project with significant capital and operating cost advantages that will strengthen our asset portfolio and substantially improve our future cash generation capability. Our capital cost estimate for the project is $1.25 to $1.35 billion. We have committed approximately $455 million to the project as at the end of Q3 2021, and we expect approximately $800 to $900 million of remaining capital costs to be capitalized before capitalized interest, or approximately $100 million per quarter from October 2021 onward. We are confident in our ability to complete this project on time and on budget, and we have substantially reduced the project execution risk profile. Our remaining budget includes allowances and contingencies for both cost escalation and the remaining risks of the project. We are targeting commercial operations at the end of 2023 or early 2024. With our strong liquidity position and cash flow generation, we are well positioned to fund the Geismar III project from cash and build on our long-term track record of returning excess cash to shareholders. We recently announced that we reset our quarterly dividend to $0.125 per share and commenced the 5% share repurchase program. At this time, Geismar 3 is the only significant growth capital in our plans over the next few years. We expect that G3 will substantially increase our cash generation capability and support a significant increase in our future shareholder distribution potential. Now turning to our outlook for the fourth quarter, global energy shortages and escalating coal, oil, and natural gas prices are leading to a sharp increase in methanol prices. We expect realized methanol prices in the fourth quarter of 2021 will be significantly higher than the third quarter based on our current posted prices. We forecast that our higher than the third quarter as we restarted our Chile 4 plant in early October. We restarted our Mount Nui plant in New Zealand in late August, and we expect to run our Geismar plants at full rates without an unplanned two-week shutdown due to Hurricane Ida, as well as realizing the benefits of the completion of the de-bottlenecking project. As a result, we anticipate our adjusted EBITDA results in the fourth quarter to be considerably higher than the third quarter. We would now be happy to answer any questions.
spk10: Thank you. Please press star 1 at this time if you have a question. The first question is from Joel Jackson from BMO Capital Markets. Please go ahead. Hi, good morning, John.
spk13: I have a couple of questions, so I'll ask one by one if that's okay. You know, I think we're in a very complex part of the methanol cycle right now, maybe you would agree. When you look at some of the academic or theoretical numbers out there, it would seem like maybe methanol is pushing up against its theoretical maximum price. So it seems like the equivalent energy value is similar right now for methanol and, say, gasoline in China, which I think some could argue is potentially the maximum, unless oil and gasoline prices rise further. I know you don't predict the future, but all the things going on, gas, coal, cost curves rising, methanol going up, gasoline prices catching up. I mean, how do you look at that right now in terms of the methanol price environment, where we go from here?
spk06: Yeah, well, it's supply-driven. The current issues and the price rises we've seen in a number of productions, as I mentioned in my remarks, have come off around the world, which is leading to less supply and more demand. And you're right to point out when that happens, prices will rise to the marginal level. demand is impacted to get the world back in balance. What is that price today? It's probably changing every day based on all the factors you mentioned, coal, natural gas, et cetera. So, again, you know, we're a bit surprised at how quickly prices have risen here in the second half, but nobody was planning on the tight energy environment and high prices that we're seeing there. So, again, you're right to say the future's hard to predict, but, you know, I think we're enjoying the benefits of a higher energy environment and some supply challenges that we don't expect to solve themselves in the near term.
spk13: That's really helpful. And then I want to ask about the buyback. Can you be able to comment on how much stock you're able to buy back so far in October based on September public data? Let's say you're doing about 17 shares a day, which would put your 5% buyback kind of down in about a year or a little less. Is that the idea to try to hit that buyback evenly, and maybe if you want to comment on that. Can you at least comment on how much you bought back in October so far?
spk06: Yeah, I really can't comment on that, Joel. But just in general, what we've said is we want to have the cash on the balance sheet to complete G3, which we do now, and another $200 million to $300 million. And then everything above that will be distributed to shareholders. Q4 is looking really solid and we're going to generate quite a bit of cash and I think by the end of the quarter we'll reach those targets and we can then look to accelerate the buyback and other options. But right now we have around 5% out there and we think another 3% to 4% possible in the 12-month calendar period. That's our primary focus now is to complete G3 and then return all excess cash above 1.1, 1.2 to shareholders.
spk10: Thank you. Thank you. The next question is from Nelson Ng from RBC Capital Markets. Please go ahead.
spk14: Great, thanks. John, I want to follow up on your comment regarding the supply crunch. and your view that it's not going to get a result anytime soon. In China, are you seeing any easing, given I think they had some energy consumption restrictions in China, but have you seen them easing? And I guess there's the recent steps they're taking to improve or increase coal supply. So does that help the supply side at all from your perspective?
spk06: Well, I guess it depends on your timeframe. Nelson, right now we're still seeing the dual controls, as they're called, in China, which is impacting supply quite significantly and demand. We're coming into the winter months and natural gas still is a fairly large raw material for production of methanol in China. And we all know what the LNG prices have been like. And yeah, the government has stepped in and made some policy decisions around coal, but we have no idea. how long it's going to take for the coal to rebalance in China. And we're coming into their winter where they consume more coal. So we don't expect it to be, you know, a light switch and things to return to the way they were before the crisis on coal and other energy. But directionally, you know, it'll probably always get back to balance at some point, but it's probably going to take some time in our estimation.
spk14: Okay, thanks. And then my next question relates to logistics. I know this is a different shipping market, but obviously the container shipping side has seen a lot of issues, and part of that is due to tight labor markets. Have you seen any, I guess, delays from a logistics perspective on your end?
spk06: No, this is one of our key competitive advantages that we speak about quite frequently. We have our own ships that we can move around the world to wherever we want. We have terminal relationships. We have our own terminals. So nothing's really changed in the last quarter. I think I mentioned on the last call that we were seeing some slight delays because of the shortage of pilots in China. But that's adding like a week to two weeks for discharge, longer time, and really doesn't impact our ability to service our customers. So, fortunately, we're not experiencing the same supply chain issues that most of our customers are and even customers are our customers are.
spk14: Okay. And then just one last question on G3. I know you flagged that you've factored in a number of contingencies, but out of the remaining like 800 or 900 million of CapEx remaining, do you have a rough breakdown in terms of the In terms of how it breaks down into materials, labor, and equipment, I'm just wondering how large the labor component is.
spk06: Yeah, I think I've guided to that on projects before. Really, there's three big components of the project. Labor is the biggest one. Like I've said before, most of the equipment is purchased. We still have some non-strategic equipment to get on site. But it's really labor. So the two big components are labor rates, which we've guided to are about the same as when we did G2. And that's still the case today. And then productivity. And, you know, we'll know more about what we expect in productivity as we ramp up the site. So I think we have about 500, 600 workers on the site today. And I think it equals to be over 1,000. So we have a large owner's team. much larger than we had for G1 and G2, and really trying to manage the scheduling and the productivity issue, working with our KBR, who's the engineering contractor on the job.
spk14: Okay, thanks. That's a good color. I'll leave it there.
spk10: Thank you. We ask that you please limit yourself to one question and one follow-up. The next question is from Jacob Bout from CIBC. Please go ahead. Good morning.
spk06: Morning.
spk02: First question is on methanol demand destruction. I know you said in the MD&A that there was a 1% decline in global methanol demand in the third quarter. Are you seeing signs of demand destruction now? I know there's some industry reports talking about MTO being at historic low rates. How are things shaping up in the fourth quarter versus third quarter?
spk06: Yeah, we are seeing demand impacted by the controls I've mentioned in China. You know, so there's limits on how, in certain provinces, how industry can operate. So that is impacting demand from ethanol. We also knew there was quite a bit of planned maintenance in MTO in the third quarter, which has happened. Pricing is pretty volatile in that sector. So, you know, when we were up at the... 550-ish range, you know, that certainly would have been economically challenged for some of the MTO players, not all. And then the rest of the world, like I've mentioned, we've seen these high energy prices in Europe, for example. So some customers are cutting back production because the energy costs are so high. And we had some, you know, disruptions in the Gulf because of the hurricane. So... I don't expect gas prices to ease in Europe in the winter, but we're not counting on another hurricane in the Gulf, so we should see demand improvement there. We do worry about inflation as well. If you have a high inflationary environment, maybe consumer demand wanes, probably not this quarter, but that's another thing we're watching. So we're not anticipating a demand drop in Q4, but we're watching it closely.
spk02: Okay. Then my second question is just on gas costs. You touched a bit on this at the beginning of the call, but can you remind us how much of your gas right now is tied to spot versus linked methanol price and how much of your gas is hedged?
spk06: In North America, we have 65% of our gas hedged or fixed price. The rest of the world is really linked to methanol. So as methanol prices move, our gas costs move. And so about 35% of our gas in North America is related to spot pricing.
spk02: And then how far forward are you hedged?
spk06: Different lengths. We've layered in hedges, you know, for quite some years. You know, so there's a number of different hedges. And, you know, in medicine, we have fixed price for you know, another 10 years and so it's different lengths of time depending on which hedge or which fixed price deal it is.
spk10: Leave it there. Thank you, John.
spk06: Thanks.
spk10: Thank you. The next question is from Adeline Rodriguez from Jefferies. Please go ahead.
spk01: Thank you. Good morning, guys. John, quick question. I mean, with methanol prices up significantly, Are you seeing or do you believe you might see that the supply response could change in terms of guys pulling forward the supply coming in?
spk06: Well, we would have expected anybody that could run last quarter should have run hard. And we certainly didn't see a lot of new supply or idle supply come on. We're not anticipating any other supply coming on in the quarter. The cost curve, as I mentioned, is still in that 450 to 500 range today or the last weeks or so. So, you know, I think there's still a really high cost curve that's underpinning methanol pricing. So we don't expect additional supply to come on in the next few quarters.
spk01: Okay. And also related to methanol prices being up so much, like any concerns that the rate of adoption for new applications, you know, like an industrial or marine, like that could be slowed down because of prices getting up so high?
spk06: Well, you know, when we're looking at new adoption, the adoption is really being driven by environmental issues, by clean burning fuels. So there we're competing with other potential clean burning fuels, and those prices have also gone up quite substantially. We don't believe that there'll be any impact on adoption of methanol as a clean burning fuel as a result of current prices.
spk01: Okay. Thank you, guys.
spk06: Thank you.
spk10: Thank you. The next question is from Mike Leathead from Barclays. Please go ahead.
spk04: Great. Thanks. Good morning, guys, and congrats on the quarter. Thank you. First question relates related to demand. I think excluding MTO, you talked about energy-related demand being flattish in the quarter. I guess given the material move higher we've seen in all carbon prices globally, do you expect to see a pickup in some of these energy markets in the next few quarters, or is there just something about the relative pricing of methanol that's limiting some uptake right now?
spk06: No, I think those applications are really mainly for driving, like biodiesel, MTBE, and the world's not back to normal yet. People aren't driving the way they used to, so that has impacted some of the other energy demand. As things normalize and the world gets back to normal and people get back to their normal driving habits, we would expect those applications to increase for demand.
spk04: Got it. That makes sense. Just on the buyback, I want to make sure I heard you right in your answer to an earlier question. It sounds like given where the cash flow generation currently sits, you'll sort of get where you want to be by year end in terms of pre-funding G3, and then maybe you can get a bit more aggressive on the buyback. It sounds like you'd like to hit that 5% authorization, and then if I heard you correctly, maybe a few more percent within the next 12 months. Is that how you're thinking about it?
spk06: Yeah, so I'll be very clear. So we want to have around the cash on the balance sheet to complete G3, so that's $800 million to $900 million left, about $100 million a quarter. We want to have $200 million to $300 million cash on the balance sheet to run the company. Everything above that will return to shareholders, and right now it's through share buyback. So that hasn't changed, and so the more cash we generate, the more we're going to turn to shareholders, and the quicker we can do it.
spk10: Makes sense. Thank you, John.
spk15: Thank you.
spk10: Thank you. The next question is from Hassan Hamed from Alembic Global Advisors. Please go ahead.
spk00: Morning, John. Good morning. I have a question on inventories. You know, obviously it's been a very strange year, you know, with Winter Storm Yuri, then obviously Hurricane Ida. Historically, in a rising pricing environment, typically you see restocking, but with all of these events that have transpired, I would imagine inventories which were lean only got leaner. What are you guys seeing in terms of global inventories? How low are they and how long do you think a restocking exercise would take? When would we get to normal inventory levels? And how would you see that factoring into demand growth as you look into 2022?
spk06: Yeah, I'll ask Rich Sumner, our head of marketing, to take a crack at that.
spk11: Thanks, John. Yeah, we definitely see low inventories across the supply chain. And when we look to China, we also know that over time, China's growth in market demand in China has put constraints on storage capacity, especially on the coastal markets. And we see low inventories in China coastal markets, and a lot of the supply-demand balances that John talked about that we don't think is going to be cured in the short term is going to add further strength to pricing, and it will take some time before we can rebuild inventories in the industry. So that factor is definitely supporting current pricing dynamics.
spk06: Yeah, I mentioned earlier, Hassan, as well, you know, in Europe with high gas prices, you know, some of our customers have curtailed production as well, and that'll have to be rebuilt. It really comes back to demand, you know, so we believe there's pent-up demand out there still, and as we get back to normal, you know, the supply chains will at some point correct themselves, and and people will be able to get what they want when they want it. So how long that takes is a bit of a guess, but we do believe there's pent-up demand for sure.
spk00: Very helpful, John. And as a follow-up, a question around sort of medium to long-term supply growth. You know, it's very interesting last week on Selenese's earnings call, you know, and as I'm sure you know, Selenese has a pretty sizable position in China. So one of the risks that the CEO sort of flagged was around their raw materials and raw materials sourcing and supply. And particularly, Lori, the CEO, mentioned methanol and how supply growth in methanol will not be as robust in the next decade as it was in the previous decade. And rather interestingly, she talked about how commissioning is a major issue in China now, how historically the capital cost advantage that they used to enjoy isn't really there anymore, and a variety of other issues. So the point really being that she sounded quite negative, I guess, on supply growth prospects for methanol in particular in China. I mean, obviously, you guys have announced G3, you know, the timing of which, in light of these comments, seems quite interesting. So what are you guys seeing in terms of global supply growth, but particularly with a focus on China?
spk06: Yeah, we've been saying the same things for some time. I'm glad somebody's listening. You know, I think we've said in China that directionally they're not going to grow their methanol production, and where they'll grow it is in Inner Mongolia, not on the coast where a lot of the consumption is, so they're going to need imports and more imports. Energy is an issue. You can see how quickly that's turned to an issue in China, and Directionally, they're going to use their energy for heating and electricity. And they're moving up the value chain as well in all industries, not just in methanol, cement, steel, et cetera. I mean, they're moving away from those industries and more up the value chain. So those trends have been going on for some time. And then outside, China, where can you build a methanol plant today? And you have to have a price of $400 for 20 years in mind to get a double-digit return at $3 to $4 gas. So... I think everybody's faced the same issues, and that looks hard to do today. And then how do you get it financed in that kind of environment? You know, so I think that hasn't changed. And we, you know, had a period here recently of 250 pricing for some time, and banks and lenders remember that. So I think unless you have a strong balance sheet like we do and cash generation capability, financing these $1.3 to $1.5 billion projects are really difficult. As far as us, I mean, yeah, G3 is going to be perfect as far as timing, as far as cost structure, as far as emissions, CO2 emissions, et cetera. It's going to be the best in the world. So we're quite happy about it. But for our other growth, our focus is on getting our second plant in Trinidad restarted and our third plant in New Zealand restarted. That's the cheapest way we can grow our production, and that's what we're going to focus on.
spk00: Very helpful, John. Thank you so much.
spk10: Thank you. The next question is from Eric Petri from Citi. Please go ahead.
spk03: Hi, good morning, John. Good morning. Do you expect the methanol demand to return to more historical rates of 3% to 4% next year, excluding China dual control and hurricane weather events?
spk06: Yeah, it depends on your forecast for GDP. Assuming, you know, MTO operates at around you know, 70% to 80%, and we get, you know, 3% GDP growth, yes, we would expect that kind of growth. In a high inflationary market, you know, it's hard to know if GDP will probably be compressed. So, to me, those are the two things we watch is GDP and MTO rates.
spk03: Okay. And then, will your production, methamilk produced tons, grow in lockstep with that, or do you think you'll do better? the recent G1, G2 expansions, or how should we think about growth and production with your turnaround next year versus this year?
spk06: Yeah, so it depends on gas availability in Chile. That'll be what drives our production. Right now, we're running at high rates in Chile, and we'll see how it looks there next winter or next summer. But assuming it's similar to this year, You know, I think we don't telegraph turnarounds, so I always say two to three per year, and that's still the guidance. But, you know, our de-bottlenecking is done in Geismar, and provided no hurricane events, we will do better there next year than this year. And hopefully in New Zealand we won't have to sell on our gas electricity market next year, but who knows? You know, obviously we don't want the country not to have heating and electricity, so we Assuming that doesn't happen, we'll be better in New Zealand as well. So I anticipate I'd be very surprised if our production next year is not higher than this year.
spk10: Okay. Thank you. Thank you. The next question is from Matthew Blair from Tudor Pickering Holt. Please go ahead.
spk05: Hey, good morning, John. Given where methamphetamines are, are there any prospects for a short-term impact opportunistic restart at Titan in Trinidad?
spk06: Yeah, short term is not possible. We don't have the people. If you recall, we have to spend some capital. So we don't have the opportunity to start it up in an opportunistic way. And, you know, even if we did, it probably doesn't make sense. The amount of money you spend to start it up and not knowing how long high prices are going to last. So we're still focused with the government on, you know, a five-year contract that allows us to be profitable through the cycle, and that's still where we're focused.
spk05: Got it. And then I think under your original modeling assumptions, you got all the incremental production from G3 going to Asia. Is that still a good assumption? And I just ask, given the pace of the demand recovery, and also because, you know, it seems like given the size of G3, it'd probably be lower on the cost curve than from your North American peers. So just wanted to check on that.
spk06: Yeah, we're still modeling it that way, but obviously we're going to try to sell as many of those molecules closer to home because the economics are better. But I think from a modeling perspective, and we're talking about returns, et cetera, it was intellectually the right thing to do to say the worst case scenario, we have to bring 1.8 million tons to Asia or China and Asia. And so we're still modeling it that way, but... As things evolve here, if we can sell more in the Atlantic Basin, obviously the economics improve.
spk05: Great. Thank you.
spk10: Thank you. The next question is from Adam Stargo from Gulfside Asset Management. Please go ahead.
spk07: You mentioned that you're going to a separate price sheet for China at the beginning of the year. Based on past history, how will the Chinese price compare with the rest of Asia Pacific? And how does your volume break down between those markets?
spk06: Yeah, we're selling about a quarter into China and about 20% into Asia Pacific any given year. You know, in the recent history, I'd say China has been setting the cost curve. So the pricing in China has been lower by the freight differentials to the other markets like Japan, Korea, Southeast Asia, it's about $20 to $25 today. And I think on the last call, I was grilled quite hard about the discount. I know it hasn't come up today, but, you know, part of the challenge there is we were trying to maximize our overall profitability by setting an Asia-Pacific price that, you know, made sense for all the markets. And with China being on average $20 to $25 lower, it was impacting our discounts. So having the two separate prices Hopefully, we'll, you know, help with that issue. And that's why we decided to go that way.
spk07: But it's really not going to affect what you make. It's just going to be a little more transparent to us.
spk06: That's correct.
spk07: That's right. Thank you very much. Also, higher gas prices making the Trinidadians more willing to discuss a longer-term contract?
spk06: Well, the way, at least the offer that we got, I mean, even at these prices, we'd be making very little even dot based on the price sharing mechanism that we saw. So I don't know what our competitors are paying, but that's what we were offered.
spk07: Okay, because they're missing a pretty good boat right now. And in Chile, do you have, is there still potential for higher gas supplies down the road? Is there drilling going on? Is there new gas being developed?
spk06: There is. There's new gas. Yeah, there's new gas on both sides of the border, Chile and Argentina. And I think I've mentioned before we need to do some maintenance work on our Chile 1 plants in the next few years as well to get to higher rates. But the gas availability is improving in the southern basin.
spk07: Okay. Thank you very much and appreciate the outlook. Thank you.
spk10: Thank you. The next question is from Ben Isaacson from Scotiabank. Please go ahead.
spk16: Thank you very much and good morning. Two back-to-basics questions for you, John. First one is on the cost curve. You mentioned marginal cost is somewhere in the $450,000 to $500,000 range. Over the last few weeks, prices have been higher than that, which suggests we're in a demand-driven market right now where pricing is based off of affordability and not on the cost curve. So my question is, Now that we're seeing pressure by the Chinese government to push coal prices lower, and at some point we will see European gas prices coming off in the spring, will that not push methanol prices lower, or are we truly demand-driven and affordability is trumping all else right now?
spk06: Yeah, I'd call it supply kind of interruptions are driving. There's not enough supply to meet demand. We're probably saying the same thing there, Ben, in Europe. You know, you have to see gas prices fall quite substantially, even at today's prices, to allow restarts of the idle capacity there. And in China, you know, we'll see how the coal market develops. And there's many things that go into what methanol producers pay for coal in China. It's not just the index that you may read on Bloomberg or wherever. There's a lot of different factors. You're right, I'd say we've been above whatever the cost curve has been most of this year. And until supply catches up to demand, that's probably going to be the case.
spk16: Thank you for that. My second question is the relationship between oil and methanol is quite complex. There's direct relationships, there's indirect relationships, there's perceived ones, etc. And I'm just trying to understand, we're at $80 oil now. A $10 change in the price of oil, can you just remind us, what does that mean for methanol and for Methanex, whether you think about demand or pricing or cost curves or affordability, whatever it may be?
spk06: Yeah, there's not really a link between oil and methanol. There's no real substitutable products in the demand where a higher oil price or lower oil price will lead to less demand. But generally, I mentioned a higher energy complex is good for methanol pricing because the cost curve moves up, because some supply has to come out and demand for methanol into energy applications, which are really being driven by environmental issues, would continue to grow. So I think there's really no link in our minds between the price of oil and the price of methanol on any given day.
spk10: Thank you. Thank you. Thank you. The next question is from Roland Roche from Crown Extra Investments. Please go ahead.
spk15: Hey, John. It's Roland. How are you? Good. How are you, Roland? Yeah. Hey, sorry. I might be the third person here going after that share buyback disclosure, but can I just run a couple of probably common understanding points? Number one, the roughly $150 million cash-in, I assume you still expect in Q4. So if I perform on that, you are roughly at the $1.1 billion you mentioned before. Is that correct?
spk06: Yeah, and plus we're going to get some, hopefully, the money from the MOL sale as well.
spk15: Yeah. Okay, understood. And then I know you guys did a great job. And I guess it was July 16, where you laid out kind of that, I think it was 865. Actually, I'm talking about G3 CapEx. Has any of that changed? I think it was 100 in Q4. And then I think the large part 410 in 2022 and then around 300, 350 and 23. And again, I don't want to pinpoint you because I know that it's a moving target, but is that roughly still, you know, what you guys expect as CapEx layout for G3?
spk06: Yeah, so our guidance hasn't changed on the CapEx for G3. We have a large contingency, as I've mentioned, in those budget numbers. As well, I mentioned in my opening remarks, about $100 million a quarter is how you should model the spend on G3 until completion.
spk15: Okay. So basically, and again, I know you answered it in five different ways already, but if that sale proceeds come in, are you there to, you know, redeploy any free cash flow, you know, back to share buybacks or is that too aggressive to model?
spk06: No, we are buying back shares every day today. So I think as we get closer to our targets, we can accelerate that buyback and think about a second one for the next 12 months.
spk15: And just one more on this. I assume there are certain blackout periods on when you can buy back share, right?
spk06: No, there are blackout periods when we can change the rate of buybacks. So at a certain month, like getting close to quarter end, we can't change the rate, but we can give an order to buy X amount of dollars per day throughout a blackout period.
spk15: Okay. All right, that's all I had. Thanks, and best of luck for the next quarters, yeah? Thank you.
spk10: Thank you. The next question is from John Roberts from UBS. Please go ahead.
spk12: Good morning.
spk04: Morning, John.
spk12: How far out do you think the first sequestration project is for a world-scale methanol plant? Would that be more than five years out, do you think?
spk06: You know, capital, we're looking at it ourselves, especially in North America for Medicine Hat and for Geismar. And the capital cost is quite substantial. So I think without some sort of government help, subsidy, or involvement, It's probably longer than that is what I would say, John. But governments are pretty bullish on reducing carbon, and this is one way to do it. So I know the Alberta government and the Louisiana government are both very interested in carbon capture and storage. So we have a team working on it. And if and when you get the FID on it, it's probably a couple of years to build it into the plant. So five years, I would guess I'd be hopeful that within five years we'd have one in place.
spk12: Okay. And then there was some MTO in China that was being back integrated into coal. Has the coal situation in China set back those projects, or are they still proceeding on plan, do you think?
spk06: Yeah, two have been completed and they're running. We haven't seen any impact. So how we manage that is we include those in our supply additions where some of the publications include them as demand losses. So it's a little bit of eggs, apples, oranges, sorry. So those have happened. And we are expecting another MTO plant consuming 1.8 million tons of methanol to come on in the next six months. So, you know, that'll have an impact on demand as well, but we haven't seen any change in the backward integration recently based on the coal prices. Okay.
spk10: Thank you.
spk06: Thanks, John.
spk10: Thank you. As a reminder, you may press star 1 if you have a question. The last question is from Joel Jackson from BMO Capital Markets. Please go ahead. All right, thanks for squeezing one more in for me.
spk13: John, if I remember how some of your gas contracts work with your price, with your methanol price sharing mechanisms, that at the kind of the limit, like when methanol prices are very, very low, the bad part of the cycle, or methanol prices are very, very high, like I guess now at the high end of the cycle, that some of the price sharing is different. It may not be as linear. Can you just comment on that at scale? Methanol prices now versus, say, $100 lower, you know, do the contracts, the price mechanism formulas work a little bit differently?
spk06: You're right. They're all a little different. So the guidance we give is on average. And, you know, in general, I've used this for years. At $200 methanol, we're paying about $2 for gas. At $300, about $3. And at $400, about $4. So, you know, that's the guidance we give. It's not exact, obviously, because each contract is different and As we renegotiate, they're all changing depending on the price markers, et cetera, et cetera. But just in general, the higher we go for methanol, the more we're going to pay for gas. Thanks. Okay. Well, thanks very much for all the questions. We're very pleased to share our excellent financial results with you today. We generate meaningful cash flow across a wide range of methanol prices. Our capital allocation priorities remain the same. We use the cash we generate to maintain our business, pursue value accretive growth opportunities, and continue our strong track record of returning excess cash to shareholders. Thank you for joining us today, and we'll speak with you again early in 2022, and thank you for the interest in our company.
spk10: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
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