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spk06: ladies and gentlemen thank you for standing by welcome to the methenix corporation q4 2021 earnings call i would now like to turn the conference call over to miss sarah harriet please go ahead miss harriet good morning everyone welcome to our fourth quarter 2021 results conference call our 2021 fourth quarter news release management's discussion and analysis
spk04: and financial statements can be accessed from the Reports tab of the Investor Relations page on our website, MSNX.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 fourth 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 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 Floren for his comments and a question and answer period.
spk08: Thanks, Sarah. Good morning and all the best in 2022. We hope that everyone is continuing to stay safe and healthy. Today we will review our outstanding fourth quarter and full year 2021 results, provide an overview of the methanol markets, discuss our operational results, and share our near-term outlook. We will then open the call out for questions. Turning to our financial results, In the fourth quarter of 2021, we recorded our highest quarterly adjusted EBITDA in the company's history of $340 million and a record adjusted net income of $185 million or $2.43 per share. Our exceptional fourth quarter results are primarily due to higher realized prices and higher produced sales volume, highlighting the significant leverage to methanol prices. For the full year of 2021, Our financial results were significantly stronger compared to 2020 due to higher realized methanol prices. We recorded our highest annual adjusted EBITDA of $1.1 billion and robust adjusted net income of $460 million or $6.03 per share. We are extremely pleased with our record financial results this past year following a very challenging 2020. I'm proud of how our global team operated given the ongoing uncertainty of COVID-19 pandemic. Our exceptional safety performance coupled with high plant reliability and strong prices enabled us to deliver outstanding financial results for our shareholders. Now turning to the methanol market. We estimate that the global methanol demand in 2021 increased by approximately 5% to 86 million tons compared to 2020. This increase was driven by strong recovering demand for traditional chemical applications from increased manufacturing activity. Energy related demand also rebounded but was slightly offset by lower demand from methanol to olefins or MTO production. We estimate that the global methanol demand decreased by approximately 2% in the fourth quarter compared to the third quarter. Traditional demand growth in the fourth quarter was offset by lower demand for MTO producers due to planned outages and the continued impact from China's government mandated industrial operating rate restrictions. The methanol industry ran at a lower operating rate in 2021 due to various planned and unplanned outage. The run up in energy prices in 2021 impacted feedstock cost and availability. which made it difficult for production to increase back to pre-COVID levels. In the fourth quarter, there were several plant outages, particularly in Iran, due to natural gas restrictions, and in China, where natural gas and coal were diverted to meet seasonal power demand. Methanol prices fluctuated during the fourth quarter. Prices increased early in the quarter due to tight supply and rising energy prices before moderating later in the quarter. Our average realized price increased $55 per ton in the fourth quarter to $445 per ton compared to the third quarter of 2021. Entering the fourth quarter, energy prices, particularly coal and natural gas prices, increased significantly, which moved the cost curve higher. In December and into the first quarter of 2022, we have seen coal prices moderate to around 900 RMB per ton as a result of intervention in coal production in China by the Chinese government. The result has been that the industry cost curve, which continues to be set in China, decreased to approximately $350 per ton at a coal price of 900 RMB per ton. Although still robust, our February posted prices were lower in Asia Pacific and flat in North America and China at $480, $619, and $430 per ton, respectively. Our European contract price is set quarterly, and we increased our first quarter 2022 prices by 15 euros per ton to 599 euros per ton. Our fourth quarter discount rate was higher compared to our guidance for 2021. As a result of tight market conditions during the fourth quarter, we saw meaningful price premiums compared to China pricing in all markets. For Asia Pacific, where prices were $50 to $100 higher than China, We have traditionally used one posted price for the entire region, which includes China, and this resulted in a significantly higher discount for the product we sold in China. In 2022, we have introduced a separate posted pricing for China, or the CPCP, and do not expect similar volatility in our future discount rate as a result of these large pricing differentials between China and other Asia-Pacific markets. We mentioned on our Q3 quarterly call that we provide updated guidance on our discount rate to posted methanol prices. In 2022, we expect to see higher discount rates of approximately 20% on average compared to our prior 17% guidance, as we are experiencing a more competitive environment. We do not expect the higher discount to impact our overall realized price for methanol, as we make our pricing decisions are made with a view on supply and demand fundamentals and the global cost curve at any given point in time. Overall, the methanol markets remain strong. We continue to see strong traditional derivative demand, and we expect higher operating rates from the MTO sector in Q1. Today, the MTO industry is operating at approximately 80% rates. We continue to be optimistic about new methanol demand. In 2021, a number of announcements were made by container ship operators for orders of dual-fueled vessels. We estimate in the next three to four years that there'll be over 35 dual-fueled vessels on the water, sorry, 55 dual-fueled vessels on the water, including 19 of our own ships, and that the annual demand from these dual-fueled vessels will be approximately 1 million tons per year, assuming they run on methanol 100% of the time. Now, turning to our operational results, our production levels were significantly higher in the fourth quarter compared to the third quarter due to higher gas availability in Chile and New Zealand and record production at our Geismar facilities. In New Zealand, our production levels were higher in the fourth quarter following the completion of the short-term commercial arrangement we made to idle one plant and to make natural gas available to support the New Zealand electricity market. Since then, we've operated both Montanui plants, We estimate that our 2022 production in New Zealand to be approximately 1.5 million tons from the two Mount Nui plants. In Geismar, both our plants ran at full operating rates during the fourth quarter, resulting in record quarterly production for those plants. With the completion of the second low-cost de-bottlenecking project at G2, the Geismar facility's annual operating capacity has increased by 10% to 2.2 million tons. In Trinidad, our Atlas production in the fourth quarter continues to be strong and was similar to the third quarter. We continue to have discussions around opportunities for longer-term gas supply for our assets. In Chile, production levels were higher in the fourth quarter as we restarted Chile 4 in October. We expect to operate both plants during the southern hemisphere summer months to the end of April 2022. We estimate that the production in Chile for 2022 of approximately 1 million tons. In Egypt, production levels were slightly lower in the fourth quarter due to operating constraints, and in Medicine Hat, production for the fourth quarter was similar to the third quarter. Our 2022 production is forecasted to be approximately 7 million equity tons, although actual production may vary by quarter based on gas availability, planned maintenance outages, extended unplanned outages, and anticipated events. Turning to our balance sheet, We ended the fourth quarter in a strong financial position with $932 million in cash and $900 million of undrawn backup liquidity, which meets our goal of having cash on hand for the remaining G3 capital cost spent. We previously announced a strategic shipping partnership with Mitsui OSK Limited, or MOL, with proceeds of approximately $145 million. We have received all regulatory approvals for the transaction and expect it to close during the first quarter of 2022. Turning to our capital allocation priorities. Our capital allocation priorities remain the same. We will 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. Construction on our highly-advantaged G3 project is progressing to plan and is well-positioned to be completed on time and on budget by the end of 2023 or early 2024. All major equipment items are now on site, which reduces the risk of supply chain issues or inflation. Our capital cost estimate for the project is $1.25 to $1.35 billion, and we have spent approximately $508 million to the end of 2021. We expect approximately $750 to $850 million of remaining capital costs before capitalized interest. We continue to anticipate to spend approximately $100 million per quarter, understanding that the timing of expenditures may fluctuate period to period. In the fourth quarter, we spent less than the $100 million due to the timing of expenditures related to the project. With our strong liquidity position and cash flow generation, we are well positioned to fund the Geismar 3 product from cash on hand. In addition to completing our G3 project, we plan to focus on increasing our production by securing additional economic natural gas for our existing assets. Excess cash will continue to be returned to shareholders with a preference for using flexible share buybacks. In the fourth quarter, we returned $68 million to shareholders through our share repurchase program and regular dividend. Now turning to the outlook for the first quarter. Based on our current posted prices for the first two months of the first quarter and notably higher forecasted sales of produced product versus the fourth quarter of 2021, we expect the first quarter 2022 EBITDA to be similar to the fourth quarter of 2021. Methanol market fundamentals remain strong, and we are confident in our ability to generate meaningful cash flow at current methanol prices. In 2022, we remain focused on managing safely through the global pandemic, continue to progress our Advantage G3 project safely and on budget, operating our plant safely and reliably, delivering secure and reliable supply to our customers, and enhancing our strong financial position and financial flexibility. We are well positioned to continue delivering significant value to shareholders over the medium to long term. We would now be happy to answer any questions.
spk06: Thank you. Please press star 1 at this time if you have a question. We ask that you please limit yourself to one question and one follow-up question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Jacob Bout with CIBC. Please go ahead.
spk10: Good morning. Good morning. John, I wanted to maybe just start off just digging a bit more on what's going on in China. So what was the percentage of sales that you shipped to China? And was the mix higher in Ford course specifically? And how do you see this mix playing out for the next couple of years?
spk08: Yeah, no big difference, Jacob, to previous quarters.
spk10: And what would that numerically be? How much are you selling?
spk08: I have to get to that number. I don't have it right in front of me, so I don't want to quote you the wrong number, but it's around 20% to 25%, something like that, but I'll get you the exact number.
spk10: Okay. And then as far as your guidance for the discount rate, Kind of cut out there a bit. So you're saying that the discount rate will be 20% higher or will be 20% in 2022?
spk08: Yeah, we're forecasting our discount rate to be 20% in 2022. Not 20% higher, but 20% from the posted prices on average. Okay. All right.
spk10: I'll leave it there. Thank you, John. Thanks.
spk06: Thank you. The next question is from Hassan Ahmed with Olympic Global Advisors. Please go ahead.
spk01: Morning, John. John, a question around Europe. Obviously, you know, we all know and are seeing what's happening with the natural gas pricing situation over there. Egregiously high levels. Obviously, tension continues between, you know, Russia and Ukraine. So it seems that, you know, no relief is in sight in terms of gas prices. So, you know, what are you guys hearing in terms of, you know, capacity over there? How do you think that plays out, you know, at least as far as 2022 goes?
spk08: Yeah, so obviously there's capacity offline in Europe because of the higher energy complex that they've been experiencing. The tensions between NATO and Russia are certainly not helping the situation. There's lots of back and forth on what happens to the pipeline. I really am not in a position to make a call on that. Hopefully things cool down and we don't have any outbreak of any hostilities, but we'll see. As far as what we're seeing, pricing, sorry, volumes coming from really the Atlantic Basin, mainly North America, to backfill the product that we're not seeing being produced in Europe. It's hard to know when the gas price will be in a place to allow, you know, methanol production to restart. And I guess it's a factor of methanol price as well. But I think our current view is earliest in the summer of this year.
spk01: Understood. And a question now on supply-demand fundamentals as they pertain to 2022. I mean, obviously Q4 was a bit of a noisy quarter in terms of demand. You know, you guys talked about sequentially demand being down 2%, but obviously there were supply chain constraint issues, you know, obviously the European issue that we were talking about earlier. But now as you look at 2022, you know, higher crude oil prices with a bias to the upside, I would imagine inventory levels relatively low, supply chain constraints slowly sort of, you know, getting sorted out. So in terms of 2022 demand growth, should we expect demand growth to be well above normal levels? And how would that compare to what you're seeing in terms of supply growth for 2022?
spk08: Yeah, well, there's not any supply growth, Hassan, in the year. I mean, there may be some additional product coming out of Iran, depending on how they operate, how much gas they get, you know, the technical issues that they've been dealing with, sanctions, a lot of gray area there. So we're not expecting any significantly increased supply during the year. Now, having said that, we just talked about Europe. That could come back on. But when, you know, we're looking to have pretty well what we saw last in the fourth quarter continue into the first quarter. We're seeing ongoing un-planned outages again with some of the larger plants that have recently come up. So I think supply is going to continue to be a challenge in 2022, especially in a high-energy environment. I think, like I mentioned, MTO rebounded in the quarter. We expect traditional demand to continue to grow at GDP rates. So whatever numbers you're using there, And then depending on the pandemic and, you know, it looks like early signs, things are getting somewhat back to normal in some parts of the world. We expect the fuels demand to bounce back. And that's still the laggards. The fuels demand is, you know, is still whether it be MTB or biodiesel or others has been a bit of a laggard during because people just aren't driving as much because of some of the shutdowns of the pandemic restrictions. So overall, we see, you know, without a severe demand shock event that we're not anticipating a pretty robust supply-demand balance, which should lead to pretty decent pricing for methanol during 2022.
spk01: Extremely helpful, John. Thank you so much. Thank you.
spk06: Thank you. The next question is from Ben Isaacson with Scotiabank. Please go ahead.
spk14: Thank you and good morning, John. Can you just touch on the dual control energy policy in China I understand that as it relates to methanol plants, we had seen operating weights going lower. I wasn't clear if that was for the Olympics or for the Lunar New Year. Do you see that continuing throughout 2022? And could that lead to capacity shutdowns?
spk08: Well, we've seen this ongoing with not only with methanol, but with other industrial production, mainly in the east part of China, you know, as shutting down because of pollution and because we're using the energy for other applications, heating and electricity and more production coming in Inner Mongolia. That trend has been going on. We expect that to continue. When coal prices got to 2,000 RMB in the fourth quarter, obviously it didn't make economic sense to make methanol even at $450 pricing. So we saw production shut down at that time. And as you know, traditionally in the winter, natural gas is used more for heating than for making chemicals like methanol. So I'd say right now production rates in China are higher than we saw in the fourth quarter when we saw severe pressure because of high coal prices and high natural gas prices. And we would expect them to be somewhat higher in the summer months as gas is available for making methanol from natural gas and not used as much for heating. So we would expect the methanol production in China to be a little higher in the summer months than what we saw in Q4.
spk14: Thank you. That's great. And then just for my follow-up, last quarter on the call, you said that you were looking to accelerate the buyback, and you mentioned you have 5% out there now, and you thought another 3% or 4% was possible in 2022. Do you still hold that view now that methanol prices have moderated, or has your view shifted?
spk08: Yeah, moderated from an extremely high level. So if we could take these current methanol prices for the next 20 years, we'd all be very happy. But, you know, I think we can move significantly down in pricing from where we are and still complete the buyback, you know, by the end of April is our current view. So we did accelerate it. If you look at the filings, you know, around the third week of December, we increased, you know, quite substantially the amount we're buying. And that's because of the strong fourth quarter we had and our anticipated strong first quarter. So we have enough cash on the balance sheet now to complete G3. We'll get the MOL proceeds. So to me, excess cash, which we're generating a ton of now, will go back to shareholders through regular dividend, and our preference is share buybacks. And we can, as we complete the current bid, probably by around the AGM time, end of April, we have the ability to put a second bid up to 10% of the public flow. So that would be our plan with everything that we know today.
spk14: Great. Thanks so much.
spk06: Thank you. The next question is from Nelson Ng with RBC Capital Markets. Please go ahead.
spk02: Great. Thanks. Good morning, John. Hi. For Q4, can you just talk a bit about the inventory build? It was a production increase. so large that you weren't able to sell everything? Or was it shipping constraints, timing? And should we presume that the inventory, there would be an inventory reversal in Q1?
spk08: Yeah, I think my remarks kind of hinted at that. You know, we have, if you look at four of the last five quarters, we have had what we call produced inventory build. So the amount of produced inventory build in our inventories about 1.2, 1.3 million times has increased for the last five quarters. And that's not abnormal. You can go back over the last five, 10 years and quarter to quarter, it doesn't actually ever match the amount of inventories that we produce is sold because of the way our FIFO layers work and the accounting rules. So yes, you would expect a reversal at some point. of more produced inventory being sold than what we produce. So in Q1, we're anticipating to have another really strong quarter of production, and we expect to sell more produced molecules than we did in Q4, which is leading to a similar EBITDA at a lower price deck. So that's how we are forecasting it. It may not work out exactly like that, but generally that's what we're expecting in Q1.
spk02: Okay, that's good color. And then just to follow up on Europe, so in terms of the, I guess, what's happening in Ukraine, what are your methanol customers doing in Europe? Are they stockpiling? Are they essentially paying higher prices to stockpile to kind of mitigate the risk of any Any issues in terms of supply?
spk08: No, actually, we're seeing pretty low inventory levels in Europe. If you've watched the spot markets in the last week, they've kind of spiked here. And why is that? We understand one of our competitors had a delay in one of their ships coming to Rotterdam, so they're out buying the spot. And there's fuel blending happening in Africa now, so there's a company out there buying spot methanol molecules and then either blending it with other gas components or blending it in Africa. We're not exactly sure, but they're buying methanol for blending in Africa because of the high energy complex. Those two events have meant spot prices have increased quite significantly in the last week in Europe, which tells me inventories are pretty low. And as I've always said, the liquidity in both the North American and European markets is very low. And when you get a spike in demand like we've seen in the last week to 10 days, the price reacts quite quickly. So I don't think any of our customers have been stockpiling methanol, you know, at these prices.
spk02: Okay, thanks. I'll get back in the queue.
spk06: Thank you. The next question is from Lawrence Alexander with Jefferies. Please go ahead.
spk12: Good morning. Can you – if we roll up the – fuel blending demand in Africa and China, the industrial boiler trends in China, the marine demand, and then also any kind of ripple effects you're seeing from, you know, the way decarbonization initiatives are rippling through to methanol demand. If you look at the next three, five years, do you see the growth algorithm for methanol being noticeably different? from the historical, you know, either faster or slower. Can you just talk a little bit about how you see the, you know, what the trend growth for methanol is going to be depending on whatever the GDP levels are?
spk08: Yeah, a couple of variables, a couple of factors. Obviously, you know, GDP you've mentioned, that'll drive the traditional chemical. A higher energy complex traditionally has mean more demand for methanol, whether it's clean burning fuels or other fuels like we're seeing in Africa. Depending on your outlook for oil and other energy parts, the energy complex, a higher complex that we're seeing today will drive additional demand than what we've traditionally seen in the last few years in a lower oil environment. Obviously, the ships are brand new. We're running our ships on methanol, and a lot of people are now ordering ships. I mentioned up to 55 ships. If they all ran on methanol 100% of the time, they'd be a million tons just there in the next three to four years. We're continuing to see adoption in China for, you know, methanol to replace coal in boilers and kilns. Methanol is a cooking fuel. Geely continues to have these two large trials with 25,000 taxis with M100 engines. And, you know, the more that the world looks to decarbonize, methanol is part of that solution. whether it be from natural gas or a mine, your G3 facility will be 50% less CO2 emitting than a traditional methanol plant. And we all know we can produce green methanol. We've done it in Iceland. We've done it using renewable natural gas in our Geismar facility, and we can do more of that. So I think there is a future for methanol as part of the solution to go to a lower carbon economy globally. But right now, the economics are such that it's hard to get any traction from the consumer side. But I think that will change over time. And, yeah, so I think in a higher energy environment and a world moving to low carbon, the demand for those applications will only continue to increase. I think the wild card is always going to be, at least in the immediate term, the NTO and the NTO operating rates. You know, it's 15 million tons of demand today, and... Large demand, you know, one of these plants can use 1.8 million tons. So a couple of them decide to shut down for whatever reason. It does have an immediate impact on the supply-demand balance. So our view still is they'll run. They're running at 80% today. They ran through the pandemic except for the fourth quarter when methanol prices got really high in China in the 85% to 90%. And beyond the bohai plant that's coming up in the middle part of this year, another 1.8 million tons of demand, we don't expect any more MTO today. Now, if you have a view of a higher oil price and higher NAFTA prices in the future, that could change, but that's certainly not in our planning alerts.
spk12: And then are you seeing the decarbonization push starting to have an impact on approvals of methanol new projects? Are there... either designs or other regions that will be out of favor if decarbonization pushes, you know, becomes a more serious and widespread policy?
spk08: Yeah, not today, but I think there's two developments there that, you know, could impact that. Obviously, an increased carbon tax environment. You know, Canada has talked about going to $150 to $180 a ton. Well, that, you know, obviously would impact potential investments for carbon-based technologies. emitting plants like methanol from natural gas. Remind you, coal-based methanol produces five to seven times the amount of carbon as a natural gas-based plant. And I think the other thing that's being talked about are duties at borders for imported products that are being produced from high-emitting carbon production. So I think those talks are early days. I don't expect something to be developed in the next little while. But, you know, I think it's going to make it harder for companies maybe to build plants that emit carbon or CO2 because of potential taxes as well as, you know, access to capital. There's a number of firms that have said they're not going to lend money or do business with high emitters of CO2. I think we're early days here. Certainly the trends are there, and I think it's not easier to build a methanol plant from natural gas or coal today than it was three or four years ago, and it wasn't easy three or four years ago.
spk12: Okay, thank you.
spk06: Thank you. The next question is from Matthew Blair with Tudor Pickering Holtz. Please go ahead.
spk11: Hey, good morning, John. On the 10% expansion at Geismar, can you talk about where you're marketing these volumes? Are they staying in the domestic market or are they exported to Asia? And how does the incremental margin on this 10% compare to the legacy Geismar production?
spk08: Yeah, you should see it about the same. I mean, depending on the price of gas, you know, we saw spot prices of gas spike up here a and now down. So, you know, we're taking $3 to $4 gas will be the range in that area for the midterm. So, if that's true, then about the same cost structure for the additional de-bottlenecking as we have for our existing. And again, we optimize all the time where we go with our methanol, but any increments, you know, we're sending, looking to target Asia. But in this environment where we've seen our competitors have production issues, we've seen the European situation with production shut down because of high-cost feedstock and product being diverted from North America. So there's more opportunity for us to keep it closer to home. So that's only good for us.
spk11: Sounds good. And then any insight to what's going on in Iran? I know it's an opaque market. even for you, but there's been a lot of reports on natural gas shortages causing methanol plants to run at either 50% utilization or even fully shut down. Do you have any extra insights you can provide there, and is that something that's affecting global methanol supply demand?
spk08: Yeah, so we've seen this before. Again, this is not new, and it's only getting evaporated as the sanctions continue to go on longer and longer. whether it be equipment or availability of technical expertise or catalysts or gas. It's not, in our view, under a severe sanctions environment that Iran is facing, going to get any better until the sanctions are resolved and they can get free access to capital to build out their gas infrastructure and get catalysts and people and equipment, etc. We don't expect it to improve until we see a change on the sanctions, and I have no specific information on what's going to happen there either. So we continue to see Iran exporting some product, and in the past, in the wintertime, we have seen the phenomena where plants have not operated as strongly because of gas diversion, and it appears that's what's going on again this year.
spk11: Great. Thank you.
spk06: Thank you. The next question is from Joel Jackson with BMO Capital Markets. Please go ahead.
spk13: Hi, good morning, John. John, I think with the discount rate, if we go back over many, many years, you know, the discount rate goes up and down. But typically, MetaNet is realizing, you know, realized price. That's a very narrow and consistent premium over spot prices. And it can change a bit, but it's pretty consistent. So I think, is that what we should think about that? It's going to be exactly like that. And maybe as your contracts change, you know, you have higher discount rates maybe in some of them. But, you know, how you set posted prices might also change. You may end up grossing up posted prices with deeper discounts. Does that make sense what I'm saying?
spk08: Yeah, absolutely. I mean, the realized price is what really counts. That's what drives our earnings. So realized price of methanol and how much we produce, those are the two major things that drive our earnings. And we had an outstanding quarter in the fourth quarter. We're going to have another one in Q1. So there's a lot of noise around discounts. And hopefully the guidance I provided today will allow analysts to use the number that hopefully we don't see the big miss like we saw in Q4. It's a bit frustrating to have a record quarter and you know, a solid EBITDA and have a miss like that. So I think when we set prices, we don't look at the, well, we look at the discount as far as the posted price, but it's the net price that we think about. And that price, depending on whether it's a balanced market or a tight market, you set that price to, you know, have the marginal cost producer run to keep the world balanced. And that obviously changes regularly depending on feedstock price and freight. So that's how we set prices. We talk to our customers, what they're seeing, and inventory levels come into it, and lots of things and factors. So it's not really the discount that should be the attention. It should be how much are we realizing each and every quarter for our methanol, and at $440 a ton or $420 a ton, which is kind of where we are today, we generate a ton of cash and we'll send that cash back to shareholders through share buybacks and complete G3s. So those are the things we're focused on. And hopefully this discount issue will go away until we have to think about revising it up or down in the future. But if you think of our guidance on this, it doesn't change on more than every number of years. So I think we're comfortable where we are today. And- If we do have a change, I think with the change to the Chinese posted price will also take some of the noise out. I mean, it's a good news story when the rest of Asia trades up to $100 higher than China. You know, traditionally it's been $20 to $30. So for us, it's a good news story. So I think making another posted price just for China, where I think spot prices have the biggest influence of any region in the world because it's a fairly large spot market. will help take some of the noise out of our discount as well.
spk13: Thank you for that. And if I think about production for 2022, so are you expecting a two-parter here? Are you expecting a normal number of turnarounds in 22? Maybe you can compare it to what happened in 21. And then are you expecting every production facility to have higher production in 22 than 21?
spk08: Yeah, so I've given a guidance of 7 million tons of equity tons approximately. I've guided to two to three turnarounds per year. Obviously, based on my guidance for Q1 production, you should expect a turnaround in Q1, which is fantastic because we're generating a very high realized price for methanol. So all the produced product will be sold at very good pricing. And we tend to time our turnarounds with, you know, whether weather in certain places or gas availability. So no change to that guidance, Joel. And... you know, we're going to have another strong year for production based on our current forecast. Thank you.
spk06: Thank you. Once again, please press star 1 on your device's keypad if you have a question. The next question is from Steve Hansen with Raymond James. Please go ahead.
spk09: Yeah. Hey, guys. John, on the discount rate issue, you've delved into it in some degree here, but I'm just going to try and be a little bit more pointed. on the North American market specifically, because I think I understand how the new China contract will help. I'm just trying to understand the pricing decisions a little bit more. If I'm looking at your latest posting here, it was a flat roll. You still appear to be posting at a very large premium versus the spot market, somewhere in the range of 35% to 40% above the spot. Should we view that as a strength of the company and your ability to try and extract better economics out of the current tightness in the market. To me, it strikes me as a bit of an advantage you have, but I'm just trying to understand how and why that posting would be at such lofty levels relative to even the 20% discount rate you've referred to. I know they're not directly related, but they certainly have a correlation.
spk08: I think it's a good point, Steve. The discount rates are not equal throughout the world. There's competitive factors. We've seen a lot of production come on in the Atlantic Basin in the last and obviously people want to keep their molecules as close to home as possible. So to think that it's 20% all over the world would be the wrong assumption. You know, it's higher in the Atlantic Basin than in Asia, as an example. But when we look at individual region pricing decisions, the supply-demand balance, the tightness of the market, input from customers about what they're seeing, what their demand is going to be like, they all come into play. And, you know, I'd say again, just to emphasize, The spot markets in Europe and North America are extremely thin. Like, they almost trade very, very few molecules, you know, maybe 1,000, 3,000 tons a week more, you know, in Europe. Recently, as I mentioned, because of those factors, and North America is very thinly traded, so it really doesn't have much of the spot price in those regions don't have much of an influence on our pricing decisions. Where it has an influence is in China. China... is still a very large spot market, and the spot market there does have an influence on what we decide to post for China. So, you know, nothing much has changed. It's just that the regional differentials used to be based on freight from China, and for reasons of tight supply and displacements on the supply side from countries that have sanctions or now are not producing methanol, That's why now, which is really good for our business, but bad for our discounts. So we've tried to clarify that today. And hopefully as we, you know, report our Q1 results, you'll see that through our results.
spk09: Okay, very helpful. And just one follow-up. I know you've already been pretty clear on your capital allocation policies here going forward in preference towards the buyback. I'm just wondering that on the margin, whether or not you feel there's going to be a need whether it's this year or sometime down in the future, to start thinking about investing in some of the lower carbon alternatives, I suppose, in methanol. I don't like the words blue and green necessarily, but there's been a number of projects announced on sort of the green methanol front in recent years. There's obviously a broader push towards lower carbon molecules. You've got a small investment in Iceland that we all know about. I'm just thinking about over the next five years, do you feel like there will be a need for Methanex to start going down that road and investing in some of the transition or I'll just maybe call it lower carbon ammonia or lower carbon methanol over time.
spk08: Yeah, there have been lots of announcements by a lot of people, but no money being spent and no expertise. An idea is an idea and you can announce whatever you want, but not a lot of things happening. As far as what we, I mean, I think what we have in Geyser is really a good first step. I mean, we can make renewable, sorry, renewable methanol using renewable natural gas. You know, obviously, we paid $40 MMBTU for that gas, so the price you need is over $1,000 methanol, but we can increase that, you know, quite easily. So we also have a team that's looking at all of these different green technologies, and when you cut through the noise, they're all basically the same. taking some free source of hydrogen, some concentrated CO2, and making methanol, which is exactly what we've done in Iceland. And that's a small plant, as you know, 4,000 tons. We can't even sell that at premium prices. So I think it will develop. I don't know how fast. I think we're ready to invest, if it makes sense. But the order of magnitude of these investments versus a Geismar is much smaller. You're talking 25,000-ton plant, 50,000-ton plant, You know, and so you're talking, you know, a fraction of what we're spending in Geismar. So if it makes sense, there's a market. We can sign up customers that are willing to pay a price that allows us to get our normal return of 13%. You should expect us to invest somewhat in the technology, but in the short term, I think Geismar making from renewable natural gas makes the most sense. And, you know, Companies like Mayor's have been very public in saying that they want to run their ships using so-called green methanol. I mentioned the price of that green methanol is around $1,000 a ton, so we're prepared to supply. We'll see if we can get something commercial that makes sense for both parties, but we certainly don't have anything like that today.
spk09: Okay, great. That's a good, rational answer. I like it. Thanks.
spk08: But just to answer your question on capital allocation, nothing's changed. We don't anticipate... spending any significant capital over the medium term beyond our completion of our Geismar 3 project, and that we're going to, you know, focus on getting more gas for our facilities in Trinidad and New Zealand and get Chile back to full rates. That will be our major focus, and we can get a lot more production in those areas with a fraction of the capital of a new build. And we're going to return all excess cash to shareholders through our preferences, NCIB share buyback. But the regular dividend, you know, is something we'll continue to look at. We, you know, we've looked at it historically, and in the future, we'll look at it around our AGM time, which is the end of April. And I think there, you know, we shouldn't be, I'm not signaling that we're going to get it back to where it was pre-pandemic, but I think there's room to look at it as well, as we come close to the AGM this year.
spk06: Thank you. The next question is from Sherilyn Radborn with TD Securities. Please go ahead.
spk05: Thanks very much and good morning. Good morning. With respect to Gaizmar III, I appreciate that all the major equipment is on site, which gives the company good protection from supply chain issues or inflation. I'm curious how you would say that those issues are impacting the replacement cost of capacity, which I believe used to be in the range of $1,100 a ton plus for projects on the Gulf.
spk08: Yeah, so the last two projects that have been completed, which is the coke methanol plant and the nat gasoline plant, were around $2 billion plus for 1.7 million tons, so in order with what the price that you've said. The three big components of building a plant, are equipment, which is made up of steel and metals, et cetera, engineering, and then labor. So the equipment side of it is probably 20% to 25%. So whatever inflation you want to use for that portion of the overall capital cost, that's what it'll increase by. And certainly, We're today not seeing a lot of activity in the Gulf Coast for new projects. And I think that's helpful when we're building G3 because labor availability is quite good and productivity is quite good. We've got 800 to 900 people on site and moving forward quite nicely. But if there is a ramp up in activity, I think fab shops and people making equipment would increase their prices. And if they're experiencing higher raw material costs that we've all seen, then it's going to be passed on to the people that are, you know, buying the equipment. So, it's about 20 to 25% of a new build is based on equipment. Now, engineering, really haven't seen a lot of inflation in engineering, but that doesn't mean we won't in the future.
spk05: Okay, that's helpful. And then how, if at all, has supply chain congestion at ports impacted Methanex's or the industry's ability to supply customers on time? And has a shortage of shipping capacity been helpful to Methanex in attracting backhaul traffic to help to offset the higher cost of bunker fuel?
spk08: Yeah, so this is our key competitive advantage, secure, reliable supply to customers. That's why we get to deal with the very best customers in the world. I mean, the investments we've made in our own shipping and terminals over the last 25 years paid dividends during the pandemic environment. We experienced zero shipping issues. All of our customers got their product when they wanted it and the quantities they wanted it and the quality they wanted it. The only area that we could even think of was in the Shanghai area. Because of the pandemic, the amount of pilots that were available was less than... historical, which may be led to a weak delay on some of our vessels. But, you know, in the order of magnitude, we experience delays like that on a regular basis in different parts of the world. So the investments we made were, you know, certainly made for reasons of secure, reliable supply and in the environment we experienced, you know, really paid off in spades. As well, our backhaul continues to be a good part of what we do and helps with our overall freight costs. And We're making new arrangements all the time with different parties and about a third of what we carry today on our ships is not methanol. So I think that there's room to grow that in the right environment. But I think that's an outstanding achievement by our waterfront shipping team to grow it and to keep our costs much better than our competitors. We don't understand any of our competitors that are doing that kind of backhaul or if any on a regular basis. So it gives us another Key competitive advantage.
spk05: Thank you for the time.
spk08: Thanks.
spk06: Thank you. The next question is from John Roberts with UBS. Please go ahead.
spk07: Thank you. Sounds like you have a line of sight to the first million tons of demand from the marine market. Is it linear after that because it's limited by rate of ships being replaced and number of ports that have methanol storage and so forth? Or do you think it accelerates after that first million? And do you think ammonia at some point becomes competitive here and maybe impacts the growth rate of methanol for marine?
spk08: Yeah, so it has accelerated. I mean, we've had our own ships, and now there's orders for 55. So that's accelerated significantly during 2021. And we would expect, as people look at the relative advantages of different fuels to replace, existing fuels. I mean, the big advantage of methanol is its dual fuel capability with the same engine. There are other things that are being looked at, including LNG and ammonia, but everything I've read, everything that our experts have read, you know, methanol has a clear advantage over some of the other fuels. Doesn't mean those other fuels won't get adopted as well, because I don't think it's just going to be one product that dominates, but based on the choices that large companies have that know a lot about shipping, like Maersk are making, they view methanol as a preferable fuel, everything else being equal. So I don't know, John, how the adoption is going to go, but I think we've seen it accelerate in 21, and we expect it to continue to accelerate as companies order new ships. Okay. Thank you.
spk06: Thank you. The last question is from Chris Shaw with Monash Crespi Arts. Please go ahead.
spk03: Good morning, John. How are you doing? Hey, Chris. Good. I think you alluded to some of the answers on my questions in Steve's portion. But just so I'm understanding the discount, so if everything was sort of equal, nothing had changed, and you had introduced the Chinese contract price, we would have expected the I guess, guidance on the discount rate to decrease, right? Is that the right way to think of it?
spk08: No, what I said, I think if you listen to my remarks, you know, we saw significant increased competitive activity in the Atlantic Basin, which led to a widening of discounts. So when we put all the pieces together, based on our forecasts, we expect in 2022 to have about a 20% discount.
spk03: But just mechanically, introducing a Chinese contract price should have cut the discount if nothing else changed. Is that right?
spk08: Yeah, assuming nothing else changed. But, you know, we negotiate our contracts at the end of the year, and now we have all of our contracts negotiated in place, and we total up all the numbers by very smart people. It looks like it's going to be about a 20% discount, and that's the guidance you should follow.
spk03: All right, that's what I was trying to figure out. And then... To your point just before about the increased competition, explain that. It seems a little discordant with the idea that it's a tight supply and demand market. Pricing is really strong, but you're seeing this really strong competitive market. What's the disconnect there?
spk08: Well, it's regional, right, Chris? So you've had a lot of new production come up in the Atlantic Basin, mainly in the United States. And those suppliers want to sell as much as they can in the United States and closer markets. And obviously the incumbents, like us, are not going to just walk away from markets we've had for a long time. So you get a little bit of rivalry, and that's settled out now. And the competitors know where they're selling their product in the United States and elsewhere, and that's what's going on. We've seen this before when new plants start up. But, you know, the discount is, again, not the focus. The focus should be on the realized price of methanol. And at this quarter and last quarter, you know, these are outstanding realized prices. Anywhere over $400 a ton, we're really happy.
spk03: Yep. Great. Thanks so much, and congrats on the quarter. Thanks, Chris.
spk08: Okay. Well, we're pleased to share our record financial results with you today. We have continued to demonstrate the strength of our business models for the ongoing pandemic, and our competitive advantage is delivering secure and reliable supply to our customers. We believe that the long-term outlook for methanol is excellent. Methanol is a key chemical building block that is used to produce a variety of everyday consumer and industrial items. It is also used in a growing number of clean burning and economic alternative energy applications. 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 and creative growth opportunities, and continue our strong track record of returning excess cash to shareholders. We will continue to execute on our strategy to deliver significant value to our shareholders over the medium to long term. Thank you for joining us today, and we'll speak with you in April. And thank you for the interest in our company.
spk06: 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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