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Methanex Corp
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Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Q1 2019 Earnings Call. I would now like to turn the conference over to Ms. Kim Campbell. Please go ahead, Ms. Campbell.
Thank you. Good morning, everyone. Welcome to our first quarter 2019 results conference call. Our 2019 first 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 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 first quarter 2019 MD&A and to our 2018 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, 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. We report these non-GAAP measures in this way to make them a better measure of underlying operating performance, and we encourage the 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.
Thanks, Kim. Good morning. For the first quarter, we recorded adjusted EBITDA of $194 million and adjusted net income of $56 million or $0.73 per share. As we announced at our last earnings call, starting this quarter, our financials now include the impact of IFRS 16, a substantial change to lease accounting standards. The impact of IFRS 16 increased EBITDA results by $28 million. I would highlight that IFRS 16 does not change the total cash flows or underlying economics of the business. These results compared to adjusted EBITDA of $197 million and adjusted net income of $90 million or $1.15 per share in the fourth quarter of last year. The lower EBITDA this quarter compared to our Q4 results was largely due to the lower average realized price, which was partly offset by higher proportion of produced product sales. As a reminder, in a declining methanol price environment, our margins tend to be lower than in the stable price environment due to the timing of methanol production and purchases versus the timing of sales. In addition, we incurred higher unabsorbed cost primarily related to lower operating rates at our New Zealand facility, ongoing ramp-up activities at our Chile IV facility and a planned turnaround at our Geismar 1 facility. Following a volatile fourth quarter, methanol prices stabilized as a result of steady methanol demand and combined with a number of supply outages globally. Our average realized price in the first quarter decreased to $331 per tonne compared to $401 per tonne in the fourth quarter. We posted our April Asia Pacific price at $370 per tonne, up $10 from the previous month, and our North American prices remained at $432 per tonne. Our Europe contract price is set on a quarterly basis and our second quarter contract price also remains unchanged at EUR 306 per tonne. We estimate the cost curve is in the range of $280 to $320 per tonne, and current prices in China are within this range. Overall, methanol demand in the first quarter of 2019 was approximately 3% higher compared to the first quarter of 2018 and flat compared to the fourth quarter of 2018. Traditional methanol demand was lower in the first quarter compared to the fourth quarter due to seasonally lower demand in China and downstream outages in North America. Demand for methanol into energy-related applications increased as more stable oil prices improved the affordability of methanol into various energy-related applications. Methanol-to-olefins or MTO operating rates rebounded after 2 MTO facilities completed extended maintenance activities. We continue to observe steady operating rates for most MTO facilities. We are monitoring the progress of 2 new MTO units that are currently under construction and targeted to come online in the near to medium term. We expect at least 2 MTO plants to be completed over the coming months with a combined capacity to consume 3.6 million tonnes of methanol annually at full operating rates. Methanol supply in the quarter was impacted due to a number of outages globally. Now turning to our operations. In New Zealand, we produced 437,000 tonnes during the first quarter compared to 389,000 tonnes in Q4 of last year. Production was higher in the first quarter compared to the fourth quarter as our Waitara Valley site undertook a scheduled turnaround in the fourth quarter of 2018 and resumed operations in early January. The New Zealand facilities continue to experience gas constraints primarily as a result of natural gas suppliers completing planned and unplanned maintenance activities. We expect these upstream maintenance activities to continue in the second quarter. In Geismar, we produced 405,000 tonnes during the first quarter compared to 527,000 tonnes in the fourth quarter. This quarter, we successfully completed our first major turnaround at our Geismar 1 facility and subsequently achieved a daily production record from the plant and a production record for the site. In Trinidad, we produced 429,000 equity tonnes in the first quarter compared to 448,000 equity tonnes produced in Q4 of last year. Production was lower primarily due to a scheduled turnaround at the Titan facility that began in March of 2019 and is scheduled to be complete by the end of April 2019. We continue to experience gas restrictions in Trinidad and expect to receive approximately 85% of our contracted gas supply for the foreseeable future. In Chile, we produced 241,000 tonnes during the first quarter compared to 206,000 tonnes during Q4 of last year. We are pleased that we have received reliable gas supply from our partners in Chile and Argentina over the last few months. We continue to experience small -- various small technical issues at our Chile IV plant, which we are in the process of resolving. We expect that our current gas agreements will allow for a 2-plant operation in Chile during the Southern Hemisphere summer months with lower operating rates during the winter months when gas deliveries are lower, resulting in an annual operating rate of often 75% of a 2-plant operation in the near term. In Egypt, we produced 141,000 equity tonnes in the first quarter compared to 155,000 tonnes in the fourth quarter. Our production results were impacted by a mechanical issue during the quarter. Earlier this month, an incident occurred that required the Egypt plant to be shut down. The plant remains off-line, and we expect limited production from the Egypt facility for the second quarter of 2019 as repairs are made. Now turning to our financial results. We ended the quarter with $285 million in cash on the balance sheet. Methanex share of the cash including our proportionate share of Atlas and Egypt cash was $262 million. Our balanced approach to capital allocation remains unchanged. We believe that we are well positioned to meet our financial commitments, pursue our value-adding growth opportunity -- opportunities and return excess cash to shareholders through dividends and share repurchases. Our planned maintenance capital for the remainder of 2019 is estimated to be approximately $65 million. We anticipate spending $25 million to complete the first phase of the Chile I refurbishment in mid-2019 during the Southern Hemisphere winter months when we receive lower gas deliveries. Depending on our ability to secure sufficient long-term natural gas, we will complete the second phase of the refurbishment over the coming years. Our team is continuing to make progress on the debottlenecking opportunities at our Geismar facilities to increase production by approximately 10% for a few tens of millions of dollars of capital. We completed some elements of the work required to debottleneck the Geismar 1 plant during the recent turnaround. We plan to complete the additional work required including construction of a pipeline to bring CO2 to the site and necessary work at the Geismar 2 plant over the next couple of years. We are continuing the front-end engineering and design or FEED phase of the potential Geismar 3 production facility to gain a better understanding of the capital cost and the scope of the project. We continue to believe that the Geismar 3 project is significantly advantaged relative to other projects being contemplated or under construction in the U.S. Gulf. The location of the G3 facility is adjacent to our existing Geismar plants, and the potential to integrate the production process with our other existing plants in Geismar reduces both capital and operating costs relative to a standalone project. Our team is focused on a number of work streams that need to be finalized over the coming months in order to be in a position to bring a recommendation to our board in mid-2019. We have a consistent track record of returning excess cash to shareholders. We commenced a new 5% share repurchase program on March 18. And as of March 31, we repurchased approximately 100,000 shares for $6 million. The pace to complete the repurchase program will depend on methanol prices and our ability to generate excess cash. Yesterday, we announced a 9% increase to our quarterly dividend to $0.36 per share from $0.33 per share. We are committed to a meaningful and growing dividend that's sustainable at all points of the methanol price cycle. Our outlook for second quarter is mixed. Methanol prices continue to be stable. However, we expect our production levels to be lower in the second quarter compared to the first quarter as the Egypt plant remains offline as we complete the Titan plant turnaround and we continue to experience ongoing maintenance to the gas infrastructure in New Zealand, which is impacting gas supply. As a result, we expect adjusted EBITDA to be lower in the second quarter compared to the first quarter of 2019. Finally, I want to reiterate that Methanex is committed to acting in the best interest of all shareholders and gives due consideration to constructive recommendations for strategies or actions that have the potential to create value. We are pleased to have come to an agreement with our largest shareholder earlier this month that allows us to move forward with our goal of maintaining our leadership position in the methanol industry, while generating strong returns for shareholders. I will now be happy to take questions.
[Operator Instructions] The first question is from Joel Jackson from BMO Capital Markets.
John, can you elaborate a bit more on the G3 decision process? So you're going to have some initial data in the next couple of months, maybe a month. You're going to probably be able to make a final decision around July. But with the agreement you've made now with one of your investors, it sounds like you're going to be feeding some of the data to a third-party, getting back some opinions there. What do you have to take from the outside? What do you have to agree to? What's the process? And as part of this question too, at your Investor Day 18 months ago, you laid out a 4% to 5% methanol demand growth scenario over the midterm, and we've seen kind of 3% to 4% demand growth. How does that weigh into your decision on G3?
Yes. We're still expecting the market to grow at about 5% per year. There's a number of MTO plants that have not come on yet. And when you factor in that demand as they come on that's kind of what we're going to see in the growth. So our view hasn't changed at all. We're expecting 5% growth over the next 4 to 5 years. And that's what we are focused on, growing at the same rate as the market, about 1 million tonnes every 2 years, and that was our stated strategy at our Investor Day in Louisiana. We have a number work streams to complete with the G3 project, as I have mentioned, a finance plan and capital costs, gas contract, understanding the markets for labor, productivity, all of those things. And what we've agreed is that we would have an independent financial adviser to report to our audit committee, with a separate look at the finance plan around that project. And that's what we're going to do.
Okay. And just a follow-up. What is the inventory situation right now? Like you've been mapping on the market -- I mean you've had a lot of stuff going on in a lot of your plants, right? So you had a turnaround. You had some issues with different plants. Your sales of repurchased -- purchased methanol was the lowest in 2 years in the quarter. So where are you right now in inventory position? If you can comment regionally, that will help us as well and where you think the market is.
I don't see much change quarter-over-quarter. We did see in December as prices came down, inventories getting built up a little bit as the anticipation of pricing being lower than it was at the time, which now as pricing has stabilized, we see inventory stabilize. We're on the 1.1 million tonne for our own inventories and at any given time, 1/3 of that is at the plant, a 1/3 of it is on the water and 1/3 is at the terminals to be resold -- to be sold to customers. And we're kind of comfortable at that level with our sales of around 11 million tonnes. So we still have more than 10 turns a year and we think that's an outstanding achievement for our commodity business.
Your next question is from Mike Leithead from Barclays.
So first, there were a few minor turnarounds and outages in the first quarter and they're continuing into the second quarter. So do you think your production volume will be higher or lower in the second quarter?
Yes. It would probably be slightly lower. I mean I've mentioned that Egypt facility is down and we've got ongoing gas infrastructure activity in New Zealand which is leading to less gas in the short term, and we're just completing the Titan turnaround. So we would expect it to be slightly lower.
Got it. And then I think you talked in your release about a sequential decline in traditional methanol demand seen in 1Q. I was hoping if you could characterize a bit how you're seeing Chinese traditional demand recover coming out of the Lunar New Year there?
Yes. Pretty good. I mean we see this every quarter in China. And as China becomes a bigger part of the overall market, it gets more attention to it because it's the bigger part of the overall market. But we see demand in China quite good right now. So it has bounced back after Chinese New Year, and we're seeing the normal GDP IP growth in the chemical demand that we've always guided to.
The next question is from Steve Hansen from Raymond James.
Could you just give us a bit more color on the Chile situation. I know you've been ramping modestly there. I think you described some minor technical issues. But maybe just give us a bit better sense for how the complex has been running. What's kept it back, if at all, on the production side? I know you have general guidance for the year, but I'm just trying to understand, sort of, what's the limiting factor has been there.
Yes. We've had some issues with the plant. I remind you it didn't run since 2007, so it was down for 10 years, and it's an oxygen-based plant. All of our other plants when they -- we had 4 down there, were conventional steam reforming plants, so it's a little different to run it. So we've had some issues and operator issues, and we've had some technical issues that weren't foreseen. But the plant has run at high rates during the quarter. We just haven't been able to keep it running steadily. And I'll remind you too that we did lose some gas there from Argentina for a couple of days, so we had to take the plant down. So just a number of small niggling issues, nothing serious. And I'm very optimistic, like I said, we'll be able to run both plants at high rates as we come into their spring/summer later this year.
Okay. That's helpful. And then just sticking to the operation side at Egypt. You said there's been an issue at Egypt. Can you give us any color as to what is happening there? And just -- are you just addressing that single issue or you're pulling forward any turnaround time in the future? Just maybe give us a bit of context, that would be helpful.
No, we've done -- recently done a turnaround in Egypt so it's not due for a turnaround. I remind you that we had a lot of issues with the Egypt plant based on our gas supply, and we cycled that plant up and down, I think it was 53x over the -- since it started up, and that's never good for these plants. And it looks like we have an issue related to the initial fabrication of some equipment going back to when the plant was actually built. So we're still in early days. We're investigating the repairs. And what we want to make sure is that we understand the issue. We inspect similar types of equipment in the plant to see if that issue is present elsewhere. So we're going to take our time. We're going to do it right, we're going to do it safely. And before we start up that plant, we need to assure ourselves that we have done the things to make sure that an incident like this doesn't reoccur. So that's going to take some time. And it will affect the quarter, but we're thinking long term here, and safety is our #1 priority. So we'll take our time and get it right.
Understood. And do you think that will bleed into following quarter as well or is it still too early to tell?
I think it's too early to tell, but if it does, it will be because we're taking our time to get the repair right.
The next question is from Jacob Bout from CIBC.
What prompted the cooperation agreement with M&G? And are you aligned on capital allocation and the G3 partner?
Yes. We've always been clear on our capital allocation strategy to all shareholders including M&G that we have a balanced approach, grow the company if we found projects that meet and exceeded our hurdle rate, so we've done that over the last 6 years. We've spent $2 billion to double our production. And then excess cash beyond that was for the dividend and share repurchases. And over the last 6 years, we have given $1.7 billion back to shareholders. So that's pretty balanced to me. We have an interesting project in front of us at G3. I mean we've always stated our preference is to find a suitable strategic partner for about 30% of the project. Where -- that's still our preferred preference. But what I said on the last call is that we're going to continue to move forward with all the work streams to be in a position for an FID in mid this year. So obviously, with a partner, without a partner has different risks associated with the project. And if you have a partner, you have a different set of risks than if you don't have a partner. So this is all about getting comfortable with the risks and then we can execute a project that is meeting and exceeding our hurdle rates. And then we can get a really low delivered cash cost into China or into Asia because we're modeling all this production ending up in Asia. So there's a number of work streams ongoing, and it's premature to say where we're going to end up on the project.
And then have you been -- maybe just a second question here. Have you been surprised how Methanex's -- or how methanol has lagged the oil complex? And what are your expectations going forward with the ramp in the MTO startups in China?
Yes, we're seeing, as oil prices have gone up, a bit more demand in the energy applications. But I will remind you in 2016, when oil went from $100 to $40 in a very rapid decline, we lost quite a bit of demand in the methanol-to-propylene and DME and that hasn't come back. So there is still a correlation, but it's not perfect, and it doesn't follow every time oil goes up or down that methanol goes up or down. And I think what is different as well, we've got MTO and the MTO affordability has probably a little bit different impact than just straight oil to methanol price because there is a bit of a ceiling sometimes depending on what the relative ethylene, propylene and their derivatives are trading at. So it's a bit different today than let's say 5 years ago. But certainly a higher oil price is very positive for our business overall.
Your next question is from John Roberts from UBS.
John, your new normal course issuer bid is for less than the maximum. Is that just to give you some flexibility in case a partner doesn't come along quickly for G3?
No. What we've always said about NCIB is when we announce them, we plan to complete them. So we're not a company that announces them and then just leaves them. So when we look at our excess free cash flow based on a number of different methanol prices, we thought it would be prudent to do 5% and chip away at that. That doesn't preclude us from doing another 5% between now and March 18, 2020. So we announced it because we plan to complete it. And we'll see how the methanol markets develop. Obviously, we have more excess cash at $400 than we do at $300. So we're comfortable with where we're at on it, and we'll continue to analyze it and to make decisions on what's best for cash on our balance sheet on an ongoing basis.
And then profitability for the MTO producers varies quite a bit between the guys that make certain derivatives and other derivatives so there's a wide range of profitability. Do you focus your efforts on MTO producers with certain derivatives or from your perspective, you're relatively different -- you just sell to whichever ones are operating?
Yes. I think that's a good point. We do sell a little bit into the MTO and it's really with the ones that are integrated as opposed to just making ethylene and propylene. And we look at the affordability based on a wide range of products that they might be making, the prices, and look at what the affordability is at any given point. And what we really look at is the operating rates. Affordability is one number. What's the behavior? And these plants have run at extremely high operating rates since they have come up, unless they have had technical issues or in turnaround. So overall, we see these plants continuing to operate, the ones that are running at 100%. So I think that's the good news.
Your next question is from Daniel Jester with Citi.
On Geismar 1, you said that you set a production record after the turnaround. Is that part of the 10% expansion? Or was that just because you swapped the new catalyst or something like that?
Well, when we do a turnaround, you take the opportunity to improve the production if you can, based on your knowledge that you gained over the last 5 years since the last -- or since the startup of the relocation. I'll remind you with those plants when they were in Chile ran -- production was around 800,000 to 850,000 tonnes, and we have managed to get now up to 1 million tonnes. As we -- and we found a few ways to get a few more tonnes out of them. And I know our team down there, every day, they're trying to get that extra tonne out of that plant -- out of those plants. And I think they do an outstanding job of doing so. As far as the debottlenecking, no, that -- we put in some equipment to allow us to bring CO2 onto the site and put it into the G1 plant like we -- similar to what we've done in Medicine Hat. We plan to do the same with the G2 plant as it goes through its first turnaround. But at the same time, we are building a CO2 pipeline to allow us to bring the CO2 onto the site. So we've put in the necessary equipment in G1, we'll do G2, and we'll have the ability to get another couple hundred thousand tonnes, we think, out of the site over the next few years.
Okay. And then on Trinidad, any update on your view on gas? It seems like a competitor is going to start a project there potentially later this year. Just wondering what you're thinking in terms of gas availability for your assets there.
Yes. Yes, we're guiding to 85%. We're comfortable with that. There's been some new gas that's come on from a few of the suppliers, but there is the natural declines as well. So when we talk to the suppliers down there and the NGC, even with -- as the new plant comes on later this year or early next year, we expect to receive ongoing about 85% of our allocations for the foreseeable future. So no really -- no real change.
The next question is from Hassan Ahmed from Alembic Global.
John, question on the conventional demand side of things. You mentioned that it was a bit weak in Q1 for an early -- for seasonal reasons. But covering one of the largest sort of acetic acid producers and them having recently reported earnings, they talked about some slippage in global acetic operating rates. They also talked about a shutdown at one of their large Singapore facilities and potentially delaying that shutdown and relocating some of the production to the U.S., which obviously may take time. So the question is that could sort of the acetic side of methanol demand be under pressure because of these things for the remainder of the year above and beyond the seasonal reason you cited?
Right. So we -- it could be. I mean we saw flat acetic acid demand on Q1 '19 versus Q4. But if you look year-over-year, it was about 4% growth. So that is a change. So we did notice the things that you're mentioning in acetic acid market, so we'll continue to monitor them. But acetic makes up about 10% of the overall demand for methanol. So if we see a few percentage points lower, it's not going to really have much impact as we look to have these new MTO plants come on. But it's something that we're following because it is an important derivative of methanol.
Understood, understood. And sticking to the demand side, back half of the year in the U.S. there'll be north of 4 million tonnes of ethylene capacity coming online, and the expectation is that the ethylene market may get a bit sloppy in the back half of the year. So how does that sort of bake into your calculus about MTO, and again, what global demand may look like in '19?
Yes. I think it's going to get down to affordability. So if ethylene gets a little sloppy and prices are under pressure, then that will limit the affordability of methanol into some of those plants. So I think we'd rather see people run than not run, so it may just impact the methanol price. But it's really hard to predict the future and 4 million tonnes is a lot of capacity. How's it going to come on, how's it going to run, where is it going to end up, what else gets rationalized, really early to tell. But certainly we want to see the MTO guys run, and we want them to continue to consume methanol.
The next question is from Nelson Ng from RBC Capital Markets.
John, quick one on G3. So you mentioned that $35 million still needs to be spent on the FEED out of the $50 million to $60 million. So it seems like the costs are very back ended. And I was just wondering whether the FID could kind of slip into like later in the year rather than in midyear, given that a lot of the costs are still -- haven't been incurred yet. Can you just give some comment on that?
No. Yes, I think our teams -- we reviewed the project yesterday with the Board and everything seems to be on plan. And our plan is to review this project with the Board in mid-July as we've stated. A lot of work to be done, I know a lot of teams working really hard on the different work streams, and a lot of activity in the company as we look to get to FID midyear. But we're -- I don't know what the decision will be midyear. There's a lot of work to be done, and we've got to do a lot more analysis on this project. And again, our preference is to have a strategic partner for this project. So a number of things that will be done over the next 90 days, but we're not anticipating a delay to an FID at this point.
Okay. And then my second question relates to, I think, all the noise we've been seeing in the market in terms of flooding, the ITC explosion, I guess the Iranian -- yes, the issues with the -- with Iran. Could -- has there been any logistics disruptions or any -- like any of your customers have been negatively impacted? And has deliveries been pushed back at all?
Yes. That ITC facility is the key terminal not only for methanol but for a number of different chemicals and petrochemicals. It's right there in the Houston ship channel and it's -- I think everybody in that area uses that terminal. Our competitors that store methanol, they have declared force majeure because the terminal is still closed, and we don't have any insight into when that terminal is going to reopen. We store methanol there. But our competitive advantage is we have methanol in Geismar, Medicine Hat and other terminals, which were keeping our customers fully supplied during this difficult period. Having said that, it's one thing if you can get methanol, but if you can't get your other raw materials, then you can't make the products that you want to make. So I think there has been a significant disruption in supply chains. And I know everybody is trying to work hard and work together to make sure everybody gets what they need. But I think when you have a major event like that where there is so much storage in one particular place that it's inevitable that there's going to be demand that won't get met or won't get met therefore, maybe the product will have to be made somewhere else in the world or it will just run down inventories. But certainly, it's a big disruption, and I think the unknown of when it's going to restart or open up again is really causing a lot of companies and their people in supply chain a lot of headaches. And I know everybody is working hard to make sure that, that terminal comes up and can be operated safely into the future because that's the kind of incident that you don't want to ever see, and it's not good for the industry and it's not good for the chemicals industry. So we're all working together to try and make sure that we can have this terminal up as soon as possible in a safe manner.
So from your -- like in terms of the financial impact to Methanex, it's -- is it going to have any material impact?
No. We are probably incurring a bit extra logistics cost, but in the short term, it's rounding error. Our goal is to keep our customers whole. Our customers buy from us because we're the most reliable supplier in that we have multiple points where we can deliver. So that's our value proposition to our customers. And I think these kinds of incidents and events that happen far too frequently, whether they be floods or hurricanes or whatever, we demonstrate time and time and time again that we don't declare force majeure and that we keep our customers fully supplied. So I think these incidents are really, really bad because of the impact on the industry and the reputation of the industry. And we try to make sure that we run these terminals as safe as possible, but in this case we don't know the cause. There's been no information, but certainly we are going to take the learnings that -- from this incident and apply it to all of our operations around the world.
[Operator Instructions] The next question is from Jonas Oxgaard from Bernstein.
I was curious about your comment on having a financial adviser to advice on Geismar 3. Maybe it's just a choice of words, a financial adviser. I mean the finances seems to be pretty straightforward. It's a strategic question. If you think methanol price is going to stay the exact same today forever, then it's probably not the highest return on investment. But if you have any kind of view that methanol will at some point go up, then it makes sense. How do you bridge that gap between -- or not really gap, but how do you resolve the difference in strategic opinions between you and some of your bigger shareholders?
Well, this is going to be an adviser that will advise our audit committee and our Board, so it's got nothing to do with the shareholders. So independent adviser, which we use on an ongoing basis anyways to give us views on what -- the balance sheet and cash flows and different things. So it's nothing uncommon that we haven't done before. And our Board obviously spends a lot of time looking at the stress levels on the company as you build out a significant project like this to the tune of $1.3 billion. So it's nothing that really that is extraordinary.
Okay. And then as a follow-up on that, there's been reports that SABIC is interested in OCI's methanol units for about $4 billion -- up to $4 billion for 4.3 million tonnes of capacity. On a per tonne basis, that is less than what you have talked about Geismar costing. How do you think about the build versus buy decision here? And could there be an interest in bidding for these assets?
I think the rumors -- and they are rumors. So what we saw is the same as you said. It was $4 billion for about 2 million tonnes of capacity in the United States and possibly -- it wasn't clear, maybe 800,000 tonnes of capacity in Holland that runs intermittently, depending on the gas price. So my math -- I'm not an accountant but my math says that's probably $1,500 a tonne for buying that capacity versus what we're thinking about $700 to $800 for Geismar. So my math says we're going to build for about half of what we could buy. But if you have different math, then please share it with me, I'd like to see it.
My impression was there was more capacity than that. I think in the past you've mentioned $1,100 for Geismar, but your current estimates are saying $700 to $800?
I think what we said very clearly $1,100 is for production that's just been completed for Natgasoline or under construction, Yuhuang. And that's been publicly -- public data so that's nothing that were -- so that's $1,100. We said a range of $700 to $800 for Geismar 3, but we have to complete the FEED, which we're in the process of doing. So if we can build a project in Geismar with lower operating cost for $700 to $800 versus buying a plant -- and their total production of methanol is 2.8 million, so I don't know how they can get more production if they don't have the assets. But maybe you have some information I don't have, that they have secret assets somewhere. $1,500 versus $700 to $800 seems like even for me, I'm not very smart, a pretty good decision, but we'll see.
The next question is from Matthew Blair with Tudor, Pickering, Holt.
There are some reports that Shanghai is looking to implement higher ethanol blends starting in the fourth quarter of this year. Do you see that pushing out any methanol blending in China?
Yes. So the focus in China for us over the last years has been at the high-level blend, so we reported M100 taxis and cars being produced by Geely and being widely introduced into the country. The country recently came out with M100 national standard, which we think is extremely positive for the adoption. Our focus has always been at the high-level blends. The low-level blends were really, from an economics point of view, a first step. The Chinese have said publicly that they have excess corn that they want to kind of monetize through ethanol. We see the impact more possibly on the growth of MTBE as opposed to a substitution or a decline in methanol demand into fuel. So we see methanol demand continue to grow especially in the high-level blends but at the M100 as more and more of these vehicles make their way to the market. So I guess our current view is as ethanol gets more widely used, that it could impact future growth on MTBE.
Sounds good. And then I was curious if you're seeing any incremental interest in methanol as a bunker fuel just given the upcoming IMO 2020 regulations.
Yes, a lot of interest. And I think like I've said, this demand probably is a mid next decade issue as the reality of IMO comes. The shipping industry is sometimes a little slow to move. And I think everybody's looking to use ultralow sulfur diesel in the first stage, but raises a lot of interest in what we're doing on our ships. We have 7 ships running on methanol that can also run on ultralow sulfur diesel. We're taking possession of another 4 this year. The results we've had on the emissions have been excellent as well as the efficiencies, and we're sharing all that data with the industry. And we're optimistic this will become another nice little source of demand for methanol. But I wouldn't be thinking about significant tonnes till mid next decade. Having said that, our Waterfront Shipping group here is becoming a nice customer of Methanex. So we have to be nicer to them now than we were before because they are getting to be a nice sized customer.
The next question is from Charles Neivert from Cowen.
A couple of questions. One on -- in Chile. Number 4 -- Chile IV is no longer tied to any other production there, meaning when it was its old mechanism, it needed the hydrogen from the others, but now it can run completely independently going forward.
Yes and yes. So Chile I is still tied to Chile IV but we put in a unit there that we can run it on its own. But from an optimization point of view, we still like to run them both together. But as we go and do the turnaround for -- or the refurbishment for Chile I in their wintertime, we'll be able to run Chile IV on its own.
Got it. And then just 2 quick other things. When you do -- you've done some upgrading around Geismar 1. Have you -- are you doing -- in some of the costs that you incurred to do that, is that also doing some of the work that eventually will be needed for G2 if you do the same upgrade, pipeline stuff, things that have already sort of been put in place that won't have to be repeated necessarily, you sort of overbuilt it a little?
Yes. Well, the Geismar 1 turnaround, we put in the necessary equipment to be able to inject CO2, so that's done. And when we do the G2 turnaround, we'll do the same. And the other work that has to be done is the pipeline, which is underway. That will take some time to build, and so that's the tens of millions I've talked about.
Okay. And then last question, has Egypt yet created any issues in the Med around pricing? Have you seen any move -- spot price movement on methanol that would -- that seems to indicate the lack of Egypt product is creating a problem? Or any sort of problem yet?
Yes. So there is no spot price in the Med. The only spot price in Europe is around Rotterdam and Antwerp, and there we saw a little bit of an increase last week, but it's few euros per tonne. But our plans will be to keep our customers whole. A lot of that product goes into the Mediterranean, but we have other ways to service the Mediterranean other than Egypt. And our plant will continue to service our customers like we always do and that's the beauty of having 11 plants at 6 sites around the world, that we have this flexibility.
[Operator Instructions] The next question is from Laurence Alexander from Jefferies.
This is Nick Cecero on for Laurence. So it seems like China may be increasing their focus even further in regards to environmental and safety regulation based on some recent commentary. I was wondering if you've seen anything in regards to this, if you can provide some color. And if you are seeing a substantial step up in regulation, how do you think this affects your supply-demand dynamics going forward over the next few years?
Yes. We've seen this trend for some time now. I think it was in the last 5-year plan, it's been very clear especially on the east coast of China that they want to clean up the environment, namely the air, and that will lead to anything that is consuming coal to be under pressure from an environmental point of view. So whether it's power or methanol or ammonia or other fuel, we would expect plants to shut down and look to -- relocate or to shut down on a permanent basis. You are right to point out it's not just a supply issue, it's a demand issue as well. So they had a number of accidents in their chemical industry as well, which is leading to more inspections, which at points can impact demand, and we saw a little of that -- a little bit of that in Q1 as well. But directionally, we -- as they tighten up environmental regulations, we would expect less and less coal-based methanol to be produced in the east part and probably more coal-based methanol to be produced in the Western part of the country. So overall, our focus in China is on the East Coast. That's where we import products, and that's where we sell products. So net-net probably fairly positive for us as an importer.
The next question is from Cherilyn Radbourne from TD Securities.
Most of my questions have been asked. So maybe I'll just go with one. In New Zealand, you have indicated that you expect to be impacted by some gas constraints again in the second quarter. Just curious whether there's any greater visibility today as to when that issue may be resolved.
Well, we can only go by what we've been told by our suppliers. I remind you that Shell sold their assets to OMV down there and the deal closed late last year. We've been told beyond Q2 that they believe most of the issues will be resolved, but we've been told that before as well. So it's not our business. We can only do based on what we've been told, and we're optimistic that they'll get these issues behind them. But from our point of view, we want the gas supply to be safe as well. So if there's work that needs to be done to ensure the integrity of the system and to make it safe, then we're right behind the suppliers to do the right thing to think long-term and have a sustainable gas infrastructure on a long-term basis. Again, we're not thinking quarter-over-quarter. It's inconvenient, it's a little annoying, but if they're making the investments to make the infrastructure good and safe over the long term, we think that's a wise decision. It should bode well for our operations and medium to long term.
The next question is from John Roberts from UBS.
Just a little bit of a crazy question, but Linde sold 2 syngas plants early in the year. And I know it's not a great fit with you, but they went at pretty low prices, I think. Were you interested in those assets?
No. Our focus, John, is 100% on methanol. We like methanol. We think we have a strategic advantage and competitive advantage in methanol. We don't know much about oxygen plants or other gas-based plants so we'll stay on methanol.
[Operator Instructions] The next question is from Adam Starr from Gulfside Asset Management.
Yes. You gave sort of forecast for second quarter and for the rest of the year. Is that assuming that methanol prices remain more or less where they are in March, the last quotation at the end of March?
Yes. I think what I said, Adam, is that we're looking at Q2 -- we're not guiding for the whole year, just for Q2 and that if prices stay -- kind of stay where we -- where they are today, which is it's hard to predict, but if they stay where we are today based on our production, our earnings will be slightly lower in Q2 versus Q1. But as you know in this industry, there is a lot of moving parts and things can change week to week. So that's our best guess at this time. And that's our guidance for Q2. But that -- you shouldn't think of that guidance for the whole year.
I get you. And when you give your price forecast as a blended price, Asia comprises about half your sales. Would that be a fair guestimate?
Yes. That's right. Today, Asia would be about half the sales; and then North America, 30%, including South America; and then Europe, 20% roughly. So...
There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Floren.
Thank you very much. Methanol industry fundamentals remain good. The strategic investments we've made in our business have strengthened our asset base, significantly increased our global production capacity, enhanced our ability to serve customers and substantially improved our earnings capabilities and cash generation potential over a wide range of methanol prices. Our balanced approach to capital allocation remains unchanged. Our priorities are to meet our financial commitments, pursue our value-added growth opportunities and return excess cash to shareholders through dividends and share repurchases. Our Annual General Meeting will follow later this morning at 10:30 a.m. Pacific time. This meeting will be focused on the business items outlined in our information circular. Thank you for the interest in our company.
Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.