Methanex Corporation

This conference is being recorded.

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Q2 2022 earnings call. I would now like to turn the conference call over to Ms. Sarah Harriot. Please go ahead.

Good morning, everyone. Welcome to our second quarter 2022 results conference call. Our 2022 second quarter news release, management's discussion and analysis, and financial statements can be accessed from the Reports tab of the Investor Relations page on our website at methanx.com. I'd like to remind our listeners that our comments and answers today to your questions 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 second quarter 2022 MD&A and to our 2021 annual report for more information. I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's date. It is our policy not to comment on or update this guidance between quarters. For clarification, Any references to revenue, average realized price, EBITDA, adjusted EBITDA, cash flow, adjusted income, or adjusted earnings per share made in today's remarks reflects our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility, and our 60% interest in waterfront shipping. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation, and the impact of certain items associated with specific identified events. These items are non-GAAP measures and ratios that do not have any standardized meaning prescribed by GAAP and therefore unlikely to be comparable to similar measures presented by other companies. We report these non-GAAP measures in this way because we believe they are a better measure of underlying operating performance and we encourage analysts covering the company to report their estimates in this manner. I would now like to turn the call over to Methanex's President and CEO, Mr. John Florin, for his comments and a question and answer period.

Good morning. I hope that everyone is continuing to stay safe and healthy. Today we will review our second quarter 2022 financial results, provide an overview of the methanol markets, discuss our operational results, and share our near-term outlook. We'll also make a few remarks on the capital cost and schedule review of our Gaismar 3 project and the recent announcement to increase the quarterly dividend. We will then open up the call for questions. Our average realized price of $422 per ton generated adjusted EBITDA of $243 million, an adjusted income of $84 million, or $1.16 per share. Adjusted EBITDA was lower in the second quarter compared to the first because of lower sales of Methanex-produced product coupled with higher natural gas and higher logistics costs due to higher bunker fuel prices. I wanted to remind everyone that we have a gas hedging program in place for our North American assets, where we target hedging 65% of our gas needs to allow us to run our plants at minimal rates if spot natural gas in the United States becomes uneconomical. Next year, we are very well positioned with 85% of our gas needs hedged at significantly lower prices compared to the current spot prices. After 2023, our hedge position reverts closer to our target of 65%. Global methanol demand in the second quarter was 3% higher compared to the first quarter of 2022. Methanol to olefins or MTO plant operating rates remained high through the quarter and demand from traditional chemical applications rebounded following the seasonal slowdown of manufacturing activity during the Lunar New Year in China. Industry operating rates improved in the second quarter, with increased production from Iran as seasonal gas supply constraints eased with partial offsets with plant turnarounds in Europe and Southeast Asia. As a result, we saw an increase in availability of methanol in coastal China. This combined with weaker sentiment from global economic headwinds and the COVID lockdown risks in China has resulted in lower methanol market pricing in China and other major markets globally. We estimate the industry cost curve based on the marginal coal producer cost in China to be above $350 per ton and expect that a significant amount of production in China is under economic pressure at today's spot pricing levels. We've seen a reduction in Chinese plant operating rates over the last few weeks and affirming of spot pricing in China. Our August posted prices remain robust, but we're slightly lower in all regions. North American prices decreased by $10 per ton to $595 per ton. Asia Pacific and Chinese prices decreased by $30 and $35 per ton to $420 and $375 per ton respectively. Our European contract price is set quarterly and we decreased our third quarter 2022 price by $15 euros per ton to 555 euros per ton. Decreasing spot prices in the second quarter primarily in China led to a higher discount rate of 23% as we adjusted our discounts in this pricing environment. Entering the third quarter, our demand outlook remains stable and despite despite global economic uncertainty. We see demand growth outpacing supply growth in the medium term and a favorable market outlook, even if GDP growth rates are lower than expected. High global energy prices enhance Methadol's cost competitiveness against alternative fuels, and we continue to see growing demand in energy applications. Methadol has emerged as a top alternative marine fuel for the shipping industry as they focus on decarbonization and the transition to the low carbon economy. Demand for dual fuel vessels that can run on methanol continues to accelerate. We estimate there will be over 80 methanol dual fuel vessels on the water in the next few years, which represents potential methanol demand of approximately 1.7 million tons per year. We are currently in discussions with over a dozen shipping companies and expect the number of new methanol vessel orders to continue to grow. Our production levels were lower in the second quarter compared to the first quarter due to lower production in New Zealand and Chile. In Chile, as expected, our production in the second quarter was lower than the first quarter. We typically experience lower gas deliveries in the southern hemisphere winter months, impacting our second and third quarters. We expect to receive higher gas deliveries in the fourth quarter. In New Zealand, the Maui gas field had planned maintenance in May, which extended into June due to weather events and emergent work during the maintenance, which restricted gas availability to the plants and resulted in lower production in the second quarter. Based on our revised outlook for natural gas in New Zealand, we are lowering our guidance for the year to 1.3 million metric tons. We ended the second quarter in strong financial position with approximately $900 million in cash and $600 million of undrawn backup liquidity. Our cash balance was impacted this quarter by the timing of interest and tax payments. Our disciplined approach to capital allocation has not changed. We continue to focus on maintaining our business, pursuing economic value-added growth opportunities that exceed our cost of capital by three percentage points, and that can be executed without undue risk while returning excess cash to shareholders. Construction of our Advantage G3 project is progressing safely. The team completed a cost and schedule review in July, and we've updated our guidance for the project to begin operations and produce first methanol in the fourth quarter of 2023, and have lowered the upper band of the capital cost range by $50 million to $1.3 billion. The team has done an excellent job of de-risking the project and minimizing the impact of inflationary pressures. I'm proud that we were able to narrow our capital cost estimate downward in this inflationary environment. We have spent approximately $725 million to the end of the second quarter on G3. We expect approximately $525 to $575 million of remaining capital cost before capitalized interest, which is now fully funded with cash on hand. For those of you that were not able to visit the site at our investor day in June, I would encourage you to view the project update video on our investor relations page to see the latest drone footage of the site. I'm excited to have G3 online by the fourth quarter of next year as it will significantly enhance our cash flow generation capability and reduce our overall portfolio greenhouse gas emissions intensity. Early in July, the board approved a 20% dividend increase. our third dividend increase in the past 12 months. This increase reinforces our commitment to return cash to shareholders and highlights the strong cash flow generation capability of our assets. Our next reviews of our dividend are planned around our annual general meeting in April 2023 and after the completion of the Geismar III project in the fourth quarter of 2023. We completed our upsized share buyback program in July, and a new buyback program will be evaluated in September. With our strong cash flow generation capability, we will continue returning excess cash to shareholders through a sustainable growing dividend and share buybacks. Based on our lower posted prices for July and August, we expect lower adjusted EBITDA and earnings in the third quarter. In the medium term, the methanol market outlook is positive. And we have growing cash flow generation with G3 coming online at the end of next year. And we'll continue to deliver on our capital allocation commitments of returning excess cash to shareholders. We'd now be happy to answer any questions.

Thank you. You may press star one at this time if you have a question. First question is from Ben Isaacson from Scotiabank. Please go ahead.

Thank you very much. Good morning, John. I think you said Q2 demand was up 3% quarter over quarter. Was that right?

That's correct, Ben.

Can you just go into a little bit more color, maybe in terms of the main buckets of methanol demand and how are those playing out to get to that 3% and kind of where do you see those buckets going for the balance of the year?

Yeah, predicting the future has never been my strength. So we have not seen any impact in our forecast from our customers and you know for the for the third quarter and we have those forecasts in place um but that you know we're all aware of the economic headwinds that are certainly present out there so i think we're at a time where predicting the future demand is really really really tricky harder than most times You know, the main reason for the increase in demand Q2 over Q1, we continue to see very strong MTO operating rates, and we had a bounce back in the traditional chemical derivatives as, you know, China came out of its lunar holiday. You know, usually in the first quarter, we see less demand for traditional chemical applications in China.

And then just a follow-up question, if I may. I understand in Trinidad that there's... a bid round due in January for upstream development with awards likely in April. Is it fair to say that we probably won't hear anything from you on Atlas and or Titan for about a year because we need to see how those bid rounds develop, or is that separate?

I think that bid round, from what we understand, is for deep water, and that's probably longer-term gas than what you should expect in the next 12 months. I think what has to happen in Trinidad, we're aware that the upstream contracts are coming due over the next 12 months. They have to be renegotiated, as well as most of the downstream contracts are coming due in the same period. The government's been very clear they want to have everybody survive on the island and to find an economic situation that allows the upstream to do well, the government to do well, and the downstream to do well. Nothing's really changed. I think, you know, it's going to take some more time for this to play itself out in Trinidad. But, you know, the government's been very clear they want everybody to continue to operate. So we're still optimistic that we'll get something for Titan that allows us to stay cash positive through the cycle, but certainly won't be at the same economics as our previous deal at Titan.

Thanks so much, John.

Thanks, Ben.

Thank you. The next question is from Joel Jackson from BMO Capital Markets. Please go ahead.

Good morning, John. Good morning. John, how do you see production, attributable production, playing out in Q3 versus Q2? And in terms of a $200,000 reduction in expectations for volume out of New Zealand this year, it looks like about $100,000 of that came in Q2, if that's right, and then $100,000 left to go. Would that be more in Q3 than Q4?

Yeah, in New Zealand, we've adjusted our guidance down by 200,000 tons. And that's just based on what we've seen in Q2, with the Maui outage being extended because of weather and some additional repair work that we expect to continue into Q3. So that's why we've adjusted our guidance down to 1.3 million tons. The industry operated, as I mentioned, better in Q2 than Q1, and that's mainly as a result of Iran. coming out of their winter season and having more gas availability for methanol and other petrochemicals.

Sorry, for yourselves, Methodex, would you see your own production being lower in Q3 than Q2? And then it all sounds like your New Zealand impact, you're not expecting anything in Q4.

We don't guide on our production, Joel. We typically guide that we have two to three turnarounds per year. We didn't have any in the first half, but we don't give specific guidance on our production numbers.

My last question would be, the world around us is changing. Gas differentials have gone crazy, as you know. The fact Henry Hub is $7, $8, $9 on a given day is crazy. The fact that your PTTF is $40, $50, $60, $70 is crazier on a given day. Does this change your world, like short-term thinking on anything, how you view what you should be doing on gas contracts and hedging, how you should look at your negotiating position with Trinidad and Government for Titan? Does it look at where you want to put your next capital, your next dollars, how the methyl market may develop depending on gas spreads? What does it mean for you, kind of short-term and long-term thinking?

I think we're in really good shape. I mean, we hedged 65% of our needs in North America, whether that's on fixed price or pure hedges. And those were out of the money for six years. And getting criticism, we should have bought spot gas in a couple of quarters of what's happened. And those hedges are now in the money by quite a lot. So nothing's really changed. And our gas supply is our biggest input cost. 50% of our cost structure is gas. And we want to have gas firmed either in a fixed way or hedged way, or the sharing mechanisms that we have everywhere outside North America for these very reasons that you just pointed out, because the future is hard to predict. And when gas was at $2.50 in the United States and Canada, nobody thought it would be at $8, and here we are. So I think we're really well positioned next year with 85% of our gas hedged in North America. And, you know, when I look at our average cost of gas in North America in Q2, It was very similar to the gas price we're paying in other parts in the world with the sharing mechanism. So I think we've done a really good job in insulating us from this current energy crisis that we're seeing.

Okay, thanks, John.

Thank you. The next question is from Stephen Hansen from Raymond James. Please go ahead.

Yeah, good morning, guys. John, just the first one for me is just around, you know, sales mix and sales allocation to different regions. Has there been any meaningful shift in where you're steering your tons in the last sort of six months or so? I'm just noting that the global weighted average contract seems to be shifting a little bit towards some of the lower price regions, at least that's how the math would suggest.

Not really, Steve. I mean, we set our supply chain on an annual basis. So we don't change our customer base all that regularly. So the amount of product I'd say over the last year is a bit more going to China than previously. But it really doesn't change within a calendar year. We're in the process now of looking at what we're going to do for next year. I know our marketing team are looking to sell more in Europe as the Russian material, the 1.5 million tons of imports into Europe from Russia. Most customers are indicated they don't really want to deal with Russian product in the current environment and are asking suppliers like us to sell more. So I think as we go through the contracting period in the second half of this year, we're going to try and sell more in Europe and then less in Asia. But in any given year, about maybe a quarter of our contracts come up. So we don't have the ability to change things quickly but directionally with you know as much as much product as we can keep in the atlantic basin that would be our preference especially in the current freight environment where you know fuel pricing are so high uh it's very it's like a 50 advantage to keep the product in just on a freight alone to keep the product in atlantic never mind that the net bats are are better as well no of course that makes sense and just one follow-up is just around contract structure

Specifically in Europe, I've been reading that there's been some customers now finally willing to enter into monthly contracts, which provides just a bit better, I guess, more timely update to the markets. Have you guys contemplated moving down that road here at some point in the future? We've been dealing with Europe quarterly contracts for as long as I can remember.

Yeah, we'd love to move to monthly in Europe. I think with all the volatility that is going on in the world, a quarter seems like forever when you're setting a price. Sometimes you win, sometimes you lose, but I think monthly has been our preference for a long time. We just haven't been able to be successful. So if customers want to move to monthly with us, we'd be very welcome with that kind of change.

Okay, great. Appreciate it, Colin.

Thank you. The next question is from Nelson Ng from RBC. Please go ahead.

Great, thanks, and good morning. My first question relates to G3. You are now guiding to first methanol production in Q4 of next year. Can you just talk about how long it generally takes for the facility to reach full commissioning after first production? Are we looking at a few months or longer?

The last two plants we've commissioned were G1 and G2, and they took weeks. Our team is really, really good at commissioning plants, and that starts When you design a plant, it doesn't start when you go to turn the plant on and how you build it, how you design it, the expertise we have in place to do the commissioning. We're fortunate that the gentleman that did the commissioning for G2 is going to be commissioning for G3, and he did an outstanding job on commissioning for G2. We have a really talented and experienced team in place. We'd be very disappointed if it took months to commission that plant. There's You know, when you commission a plant, you line it out and you may take it down for a few days to fix some things that may not have been apparent, but I'm expecting the commissioning on that plant to go really well.

Okay, so we should probably expect first-month final production and full commissioning sometime in Q4.

I mean, we'll start the plant up and anticipate that it will take a number of weeks to commission the plant, and, you know, So that product's starting to flow through our actual sales in the first part of 2024. Okay, got it.

And then just moving over to logistics costs, like obviously that was one headwind in Q2. Are you seeing logistics costs moderate in Q3, or is there a bit of a lag in terms of the high oil prices and bunker fuel and how it flows into your costs?

Yeah, so I'll remind you our logistics costs, with the exception of fuel, are set annually with waterfront shipping for Methanex. So those are in place for 2022, and they'll be renegotiated with waterfront at the end of the year. So we're fixed on our shipping costs. Where we've seen higher costs is really to do with the fuel that we're burning. So all of the ships, you know, that can burn methanol are running 100% on methanol because the economics are much better than ultra-low sulfur diesel or marine gas oil. That's a real advantage for us with almost half of our fleet running on methanol. I look at the shipping market itself, the clean petroleum products, the liquid carriers, they never really benefited from all the other containers and the dry bulk rates that went up over the last few years. And with what's happened with the war in Ukraine, Russia is looking to move its product to farther markets like Asia, India, China, which has really tightened up that liquid shipping market quite significantly, which means the rates that you would be paying on a spot basis have gone up quite substantially. We're not impacted by that because we've got the rates negotiated with Waterfront. So not only... We have a benefit of running methanol in our ships, but we have the benefit of having these fixed prices on our shipping for the year. So we're in a really good position right now to take advantage of even all the backhaul that we do. We're getting a much higher rate for the one-third of the product that we carry on our ships that is not methanol, clean petroleum products. So we get that additional revenue in a market like this. So we're really well positioned on our shipping side.

Okay, so just to clarify, the higher logistics costs seen in Q2 versus Q1, that was mainly due to higher methanol costs in terms of fuel costs?

Well, higher fuel costs than this time last year, right? So if you look quarter or year over year. And, you know, every quarter, you know, where we send product based on outages, based on where we think to optimize our global supply chain, In an environment where you're paying higher for fuel, it gets exasperated a little bit, and that's what we saw in the quarter.

Okay. And then just finally on hedges, you mentioned that you're 85% hedged next year and 65% thereafter. How are you hedged for the rest of this year? Or when you say next year, is it for the next 12 months starting Q3? For 2023.

we're 85% hedged. For 2022, we're 65% hedged or fixed price.

Okay, got it. So from that perspective, should we think of it in terms of taking 35% of the North American production and plugging in the spot price for gas to look at the change in gas costs from a production perspective?

If we choose to run at full rates, yes, but we have the ability to go down to 65%. You know, if it makes more sense to buy a product in China than to make it in North America and ship it to China, then we'll make that decision. So if we do, you know, run at higher than minimum rates, spot gas would be a good proxy for the gas price for the 35% that's not hedged, but that's assuming we're going to not go to minimum rates.

Okay, that makes sense. I'll leave it there.

Thank you. We ask that you please limit yourself to one question and one follow-up. The next question is from Matthew Blair from TPH. Please go ahead.

Hey, thank you for taking my question. Circling back to the 3% quarter-by-quarter demand improvement, which seemed like a pretty good number, do you have a sense of how much China lockdowns might have played a role in Q2? And I guess where I'm getting here is Was that 3% actually muted due to China lockdowns?

Yeah, our view is if China didn't have the COVID lockdowns, demand would have grown more than 3%. The impact is really on fuels for driving, like M100, MTBE. When you're locked down, you're not getting in your car and traveling. And so our view was if we didn't have the COVID lockdowns during the quarter, we probably would have seen additional demand growth in China.

Great. I'll leave it there. Thank you. Thank you.

Thank you. The next question is from Josh Spector from UBS. Please go ahead.

Yeah, hi. Thanks for taking my question. I guess when we looked at your realized pricing in the quarter, You know, it appeared to be about a 25% weighted average discount to your posted contract price. Maybe that's more normally around 20%. Pricing was sequentially similar. So what was the driver of that? Is that more mix of where you're selling or is there anything else to consider? And what would you think about that discount into next quarter?

Yeah, well, Q2 discount was 23%. We got to 20%. And that was mainly caused by spot pricing in China falling quite rapidly. faster than the contract price, which meant we adjusted our discounts to stay competitive in that market. Hard to predict what's going to happen in Q2. We've seen China spot prices rebound quite nicely here, even overnight, another significant increase. So it'll be a factor of what the Chinese spot price does, which will impact our discounts. So, you know, again, difficult to predict in this environment, but, you know, certainly spot markets in China and other regions in the last two weeks have bounced back nicely.

Okay, thanks. That's helpful. And just curious, is there any point where your gas economics matter for global methanol pricing? Or is that just so far at the end of the curve and there's so much other excess capacity, it never really becomes a meaningful driver?

It matters today because you have methanol production shut down in europe that that's uneconomical you've got in norway you know the ability of the producer there to make methanol and sell methanol or take the gas and sell it into the european market and you've got a big demand for lng in in europe as well so uh in today's environment makes a lot more sense to be making taking gas and making lng than making methanol and selling it for 400 a ton so Yeah, high-energy environment is overall very good for our business, very good for demand. But I think, you know, trying to build a new plant or getting a new plant started would be really difficult in this environment because you're probably unlikely to get economic gas that would allow you to make a 25-year investment. So, yeah, it's really interesting what's going on. How long it lasts is anybody's question. And like I said, we're really well positioned for the next 18 months and longer that we've locked in our cost positions. So I wouldn't want to be naked on the gas markets today and try to make methanol and sell it at $400 a ton. It wouldn't be very economical. So, you know, we're well positioned and we'll see how things unfold.

Got it. Thank you.

Thank you. The next question is from Lawrence Alexander from Jefferies. Please go ahead.

Lawrence Alexander Hello. Just two quick ones. Can you give some perspective on how the volatility in the gas market is affecting how the marine customers are thinking about incentivizing new plant construction given how large the marine demand could be in the medium term? And secondly, how is the volatility in feed stock prices affected the Chinese discussion and strategy around industrial boiler conversion to methanol?

Yeah, so I'm not aware of any marine customer today asking to have a share in a methanol operation to underpin their plans to buy these flex fuel ships. And I think that's the reason is that they're flex fuel. So they're not going to be stuck into one one fuel, they'll be able to switch back and forth from methanol, marine gas, oil, ultralow, sulfur, diesel, provided the environmental regulations are such that allows them to run diesel or MGO. I'm aware of mayors signing a bunch of LOUs or letters of intent with a number of green methanol projects. To my knowledge, none of them are under construction. None of them have made FID. None of them have... come to commercial arrangements with the type of pricing that's needed to underpin those investments. So not aware of anything, Lawrence, at this time. And the second question was, sorry, just repeat it for me.

Sorry, on the Chinese industrial boiler strategy.

Yeah, we're continuing to see developments there in high coal price in China, you know, 1,200 RMB per tonne. certainly makes the economics of methanol even more attractive versus natural gas or diesel. And it's always been driven by environmental concerns on the coast. So those environmental concerns are still there. And now the economics for methanol are much more attractive than diesel or natural gas. So we would continue to see positive uptake in that demand, not only for boilers, but for kilns, which is the newest application for methanol to replace coal in kilns. I don't know if you saw those little mascots, ceramic mascots during the Olympics, but they were made from a kiln that ran on methanol.

Interesting. Thank you very much.

Thank you.

Thank you. The next question is from Hassan Hamed from Alembic Global. Please go ahead.

Morning, John. Good morning. John wanted to revisit, you know, the demand growth, you know, a couple of questions around the sustainability of this 3% sequential uptake you guys saw in methanol demand in Q2. I mean, you know, if I'm hearing correctly, your commentary sounds quite positive and bullish despite all the sort of headwinds and tailwinds. You know, just want to sort of think through it. a high crude oil slash energy price environment, positive for methanol demand growth. The ethylene, polyethylene side of things seems a bit negative because pricing hasn't been great. But then again, you obviously have the whole sort of China lockdown easing side of things as well. So now, with all these factors considered, is it fair to assume that at least in the near term, this sort of 3%-ish sequential uptake in demand that we saw was sustainable is And also, where does inventory factor in in thinking through the whole sort of demand growth side of things in the near term?

Well, if I'm sounding bullish on demand, I need to change my tone because it's very uncertain. So there are tailwinds and headwinds. And, you know, when we balance them out, we see, you know, based on our forecast we got from our customers today, continue to be very good demand. I'll remind you there's a new MTO plant being commissioned in the quarter, which will add 1.8 million tons annualized at full operating rates. That wasn't there in previous quarters, so that'll have a nice bump. A high-energy environment. Like I mentioned, all of our ships are running on methanol, and I'm sure other ships that can are as well. MTBE demand continues to be quite good in markets where there's no lockdowns, and we expect that to rebound in China as well. But we all read the same headlines about recession. And if you get a recession, you could see the traditional chemical derivatives not grow as quickly. But you'd have to see a real drop in demand. The last few times we saw methanol pricing get below 300, it's when we had the double-digit kind of demand shocks around the oil crisis in 2016, the financial crisis, and COVID. So we are certainly not expecting a double-digit drop. demand drop in methanol. But again, I can't predict the future. And based on our current outlook from our customers and from what we're seeing in the marketplace, you know, we still expect demand to be quite solid. Remind you as well, there's two idle MTO plants in China that have the ability to restart and the whole dynamic on the ethylene and propylene chain and you know, the relative price of naphtha. We understand that some of the North Asian crackers have reduced rates because of the economics in their chain as well. So I think at current methanol prices, MTO continues to be okay and running at high rates. But, you know, that's something we watch very closely, the affordability of methanol into MTO versus naphtha into crackers. So Yeah, all these dynamics are really complicated and they add up to what we think is a pretty good demand profile, everything else being equal going forward in Q3.

Understood. Very helpful. And as a follow-up around Europe, I mean, you know, it's not obviously an insignificant amount of methanol capacity, call it, you know, 10% of global capacity sitting in Europe. You know, the commentary coming out of places, particularly like Germany, you know, sounds pretty dire, right, with some of the producers out there. And I'm not talking about methanol producers, but, you know, call it producers of polyurethanes and the like that use methanol as a raw material, you know, talking about shutdowns and the like. So the question really is that are you having some initial conversations with some of these downstream sort of producers that of products like polyurethanes and the like that are maybe potentially considering outsourcing the methanol side of their operations to you guys?

Not aware of any discussions like that, but I would agree with your assessment on the dynamics there. There's a couple of refineries in Germany that make some hundreds of thousands of tons of methanol as part of their complex as well. So how does that continue in the current energy environment in Europe is a big question mark. And how do even our customers, our customers of our customers, you know, survive paying $40 an MMBTU per gas. So there may be some shifts of where derivatives get made over the coming years, but certainly hard to predict. And, you know, the nice thing about being a global supplier with a global integrated supply chain, we can move very quickly to go where the demand ends up being if it's not in Europe. So I think we're, again, very well positioned to make sure that we continue to be a good supplier to our customers wherever that demand may end up.

Very helpful, John. Thank you so much.

Thank you.

Thank you. The next question is from Charles Niebuhr from Piper Sandler. Please go ahead.

Morning, guys. Just a quick thing. I guess you answered this earlier, but just want to make sure. You can or might conceivably adjust production in different areas where the gas price is high. Like if you have $9 gas on unhedged stuff in the U.S., you might adjust production to another site, assuming it can be done, or would purchase if it's cheaper to do it that way. That's something you've already done or would plan to do again?

Yeah, outside North America, we have the sharing mechanism in our gas contracts. So Our gas prices are set and, you know, we're cash positive through the cycle. And in this environment, you know, 100 plus per ton at EBITDA. So I don't see us adjusting operating rates outside North America based on high price gas that, you know, because our contracts are set with a floor plus a sharing mechanism. Inside North America, about 65% of our requirements are hedged this year, 85% next year. So take this year, if pricing of gas gets to a situation where it's more economical to buy product in China and reduce operating rates in North America, mainly Geismar, then, yeah, we would do that. And, you know, I'm not about to say today what we've been doing, what we plan to do, but directionally, if it makes more sense to buy versus make, that's what we'll do.

Okay. And then as a follow-up... How much more Iranian capacity is available should it be able to have gas? I mean, I looked at the numbers of the different operations that are running. Are there any more yet to start up or that might conceivably start up during the course of the quarter or are starting to start ramping?

No, not in the short term, Charlie. I think we understand there's, you know, one under construction, we believe, sometime maybe next year or, you know, hard, pretty opaque, but nothing imminent. What we saw in the quarter was the plants that are able to operate today increase operating rates because of more available gas as they came out of their wintertime. But, you know, this phenomenon has been going on for quite some time in Iran. Until money is invested in the upstream to build out the infrastructure, we would continue to see restrictions on gas to the uranium production. The same pattern we've seen in previous years in the summer, they get a little bit more gas and make a little bit more methanol. And, you know, until they make those investments, probably that's what's going to be occurring going forward.

Okay. Thanks very much.

Thank you.

Thank you. As a reminder, you may press star one if you have a question. The next question is from John Fairway-Chan from Credit Suisse. Please go ahead.

It's John Roberts, but hi, John. Hi, John. The progress on the methanol ships is impressive, but there's also industry discussion about ammonia ships as well. Do you know if those ammonia ships are being planned as dual methanol and ammonia or maybe tri-fuel flexibility with diesel as well, or will the ship operators have to choose between methanol or ammonia and not both?

Yeah, I'm not aware of any dual fuel vessels with methanol and ammonia. I'm aware of ammonia being discussed as a fuel for ships. I think they're behind where we are. I'm aware of engine manufacturers looking at producing engines that will run on ammonia. A bit of challenges with ammonia around the handling and the storage, quite different than methanol, a lot more has to be colder, and it's a bit more hard to handle, not to mention ammonia leaks or releases are not good for anybody. So I think that, you know, from a safety perspective, I think methanol certainly has advantages. So, yeah, I've never said it's going to be 100% methanol. I think, you know, back in the day when we were proving out this technology, the big noises around LNG and the whole industry is going to go to LNG, and we know that didn't happen for obvious reasons, the handling and price. And now ammonia, I think, will take up some of the space. And, again, methanol doesn't need to have very much of a penetration to have a significant impact on methanol demand. So I would expect some ammonia ships to be built and that to be a viable product going forward, provided they can, you know, get the engines made, get the handling issues resolved, and then bunkering of ammonia and availability of ammonia at all the terminals in the world. All doable, but I think it'll take some time.

And then back onto the question if there's actually methanol rationing that occurs with some of the capacity being down, what are the highest values in use of methanol? Are the chemical applications, you know, almost always the highest value use of methanol and not fuel given how high oil prices are and fuel prices are?

Well, the one that's always on the margin today is MTO, and that's really depending on what happens in the olefins markets. And that's really a factor of NAFTA pricing and how much that feedstock costs for all the crackers around the world that aren't using methanol or ethane as a feedstock. And that's a lot of capacity. So it's MTO is the one that we watch that's on the margin. And I don't expect that to change unless you have a view that olefin prices are going to go up significantly. 50% from where they are, and that's certainly not our view.

Great. Thank you.

Thanks, John.

Thank you, the Honour, for the questions registered at this time. I would like to turn the meeting back over to Mr. Florin.

Okay. Thank you for your questions and interest in our company. Before we close the call, I want to emphasize we produce an essential chemical building block, which is used in hundreds of consumer and industrial products. Methanol is also a cleaner burning fuel that has increasing demand as a marine fuel. We believe that the methanol industry has a positive outlook with growing demand and minimal new capacity additions. Our well-positioned asset portfolio generates meaningful cash flow across a range of methanol prices, which allows us to execute on our capital allocation priorities. Excitement is growing across the organization for the startup of Geismar III in the fourth quarter of 2023. This plan will deliver significant shareholder value and further enhance our asset portfolio. There's a lot to look forward to, and we hope that you will join us in October when we update you on our third quarter results. Thank you.

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