Earnings Call: Q1 2020

May 6, 2020

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Q1 twenty twenty Earnings Call. Would now like to turn the conference call over to Ms. Kim Campbell. Please go ahead. Welcome to our first quarter 2020 results conference call. Our 20 21st 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 nephinex.com. I would like to remind our listeners that our This information, by its nature, is subject to risks and uncertainties that may cause a stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusion or making the forecast or projections, which are included in the forward looking information. Please refer to our first quarter 2020 MD and A and to our 2019 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 percent economic interest in the Atlas Facility and their 50% economic interest in the EBIT facility. In addition, we report our adjusted EBITDA and adjusted net income through include 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 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. Thank you, Kim. Good morning, everybody. I hope everyone is safe and staying healthy during this extraordinary time. This morning, I'd like to start with a few comments about the current situation. I will then comment briefly on our Q1 results, provide an overview of what we are seeing in the methanol markets today. And discuss how we're managing our business to navigate this challenging environment. Our number one priority is the safety of our employees contractors, communities where we work. And I am thankful that our team is safe and healthy today. We are fortunate that our manufacturing operations have been allowed to operate in all of our regions. Our operations and global supply chain are running effectively and have not been significantly impacted by COVID 19. We are continuing to produce methanol with a limited number of team members on-site. And are managing the rest of our business to deliver secure and reliable supply to our customers, mostly working remotely. I wanted to acknowledge and thank our team members from all around the world who have demonstrated tremendous dedication and agility over the past weeks as we've faced multiple challenges from the COVID 19 pandemic and low oil price environment. Now turning to the first quarter results. We recorded adjusted EBITDA of $138,000,000, and adjusted net income of $8,000,000 or $0.10 per share in the first quarter of 2020. These results are similar to our fourth quarter of 2019 results of adjusted EBITDA of $136,000,000 and adjusted net income of 10,000,000 dollars or $0.13 per share. Our first quarter results reflect a higher average realized price partially offset by lower sales volume of Methanex produced methanol. In addition, our fourth quarter 2019 results benefited from a $25,000,000 insurance recovery associated with the production outage experienced in Egypt in 2019. We recorded $5,000,000 of additional insurance proceeds in the first quarter of 2020 In the first quarter, we saw global methanol demand decline by approximately 7% compared to the fourth quarter of 2019. Due to the impacts from traditional chemical applications declined as manufacturing activity was severely curtailed starting in China in late January, and later in other countries as a result of the COVID-nineteen pandemic. Methanol to Olin or MTO demand declined due to several planned and unplanned outages. Demand into other energy related applications also declined due to government restrictions, which limited ground transportation and service industry operations. Methanol Industry supply declined in the first order due to various outages in North America, the Middle East, Southeast Asia, and particularly in China. Where government restrictions related to the operations and movement of people substantially disrupted domestic methanol production. Our overall production results in the first quarter were 117,000 tons lower than the fourth quarter of 2019. Primarily due to the outages in New Zealand, Chile and Egypt, which were partially offset by strong production in Geismar. In addition, as we previously announced, we idled our Titan plant in Trinidad in mid March, which also reduced our first quarter production volume in our Chile IV plant as of April 1st. Both plants were idled for an indefinite period in anticipation of lower methanol demand. In Q1, we continue to progress our Geismar 1 deep bottlenecking project. However, this incremental production from Our Geismar 1 facility will be delayed as we have moved to minimum staffing levels at our plant sites to ensure the safety of our team members. Now turning to what we're seeing in the methanol market midway through the second quarter. We expect to see a decline in methanol demand in the second quarter 2020 compared to the first quarter. We are seeing a substantial reduction in manufacturing activity in North America, Europe and Latin America, combined with continued weakness in Asia Pacific outside of China, where we're starting to see a slow recovery with our customers. This decline in manufacturing activity is impacting methanol demand into all traditional chemical applications, with products going into automotive and construction markets being the most impacted. We're also seeing government mandates restrict ground transportation and curtailed fuel demand, which reduces methanol demand into methanol tear met methyl tertiary butyl ether or MTBE and biodiesel derivative. We also expect demand into the MTO sector to decline in the second quarter as 3 facilities are undergoing maintenance activities. In addition, a sharp, lean lower oil price environment indirectly affects methanol prices as oil prices impact the price of product that methanol goes into, including MTBE, dimethyl ether, biodiesel, olefins, and olefins derivatives. We estimate that the industry cost curve, which continues to be set in China is approximately 220 dollars per tonne, which is a decline as a result of a slight decline in coal prices. Current methanol spot prices in China are below this range. In previous methanol price cycles, when methanol prices fall below the marginal cost of production, high cost production shuts down To date, in addition to our own production cuts, we have seen some other production rationalization globally. We believe that North America price, which decreased by 13 percent to $3.13 per tonne, and our Asia Pacific price would decreased by 13 percent to $2.25 per ton. Our European contract price is set quarterly at an 2nd quarter posted price is per tonne. At this stage, we don't believe it is possible to accurately predict the full extent of the duration of COVID 19 and the low oil price environment. As a result, we are planning for a wide range of scenarios, including situations we see a deeper and more prolonged reduction in methanol demand and low prices, while positioning ourselves the global economy recovers. We have taken several prudent steps to further strengthen our balance sheet and preserve liquidity through this uncertain economic environment. First, we have placed our Geismar 3 project on temporary care and maintenance and deferred approximately $500,000,000 in capital spending for up to 18 months. This proactive step will enable us to further strengthen our balance sheet while maintaining long term value and financial flexibility. This action will also allow us to complete this highly advantage project when market conditions improve. Up to this point, the project had been significantly derisked and execution was safe on time and on budget. We continue to explore partnership arrangements for the Geismar III project and we plan to continue those discussions. However, in the current environment and with most companies focused on navigating the significant uncertainty in the global economy and with the project on temporary care and maintenance, We're not expecting these discussions to progress meaningfully until market conditions improve. In addition, the greater financial flexibility and preserve liquidity, we have reduced our 2020 maintenance capital spending by $30,000,000. Increased financial flexibility throughout the $436,000,000 draw on our credit facilities. Reduced our quarterly dividend to 3 point $7.5 from $0.36 per share, which represents approximately $100,000,000 in annualized cash savings. We're also working with our banking partners to obtain flexibility on certain financial covenants for an existing $300,000,000 committed revolving credit facility and an $800,000,000 non revolving construction facility. We have agreed on key parameters with our LEAP Bank and are working with other members of bank syndicate to finalize these changes to the credit facilities, which is expected in the second half of May. We have a flexible cost structure as the price for approximately 60% of our natural gas supply, which is our most significant operating cost is linked to methanol pricing. This means that our operating costs moved down as methanol prices reduced, although there is a time lag of up to 1 quarter. Also, we expect to see lower logistics costs, primarily through lower fuel prices for our methanol shipping fleet in a low oil price environment. Have a strong liquidity position and ended the quarter with over $800,000,000 in cash we only need to maintain a minimum cash balance of approximately $150,000,000 to run the business. We are focused on cash preservation to undertake share buybacks in this environment as any excess cash will be used to further strengthen our balance sheet. Before I comment on the second quarter outlook and pause for questions, I'd like to highlight a couple of points regarding the resilience of our business. First, methanol is an essential ingredient that is used in countless industrial and consumer products, including building materials, foams, resins, plastics, paints, polyester, and a variety of health and pharmaceutical products. Continuing to grow as a clean burning and alternative economic fuel. These are essential products and we expect demand will recover after the pandemic as and be the case with prior global economic downturns. 2nd, we have a low cost structure and our assets are positioned on the low mid portion of the industry cost curve, which allows us to be competitive across a wide range of prices and economic scenarios and serves us well in the current 3rd, we benefit from our integrated global capabilities with a network of production sites around the world and global supply chain. Which are a competitive advantage enable us to deliver secure and reliable methanol supply to our customers around the world. Now turning to our outlook for the second quarter. We expect the coming months will be challenging, and we expect that the headwinds we face from COVID 19 pandemic and a sharply lower oil price environment will be significant in the second quarter. With lower methanol prices and lower production levels, as we've idled our Titan and Chile floor plants. We expect that adjusted EBITDA will be substantially lower in the 2nd quarter compared to the 1st quarter. As a reminder, in the declining methanol price environment, our margins tend to be lower than in a stable price environment due to the timing of methanol production and purchases versus the timing of sales. We continue to monitor the impact of COVID-nineteen pandemic and low oil price environment and regularly review our plans across a variety of scenarios in order to respond quickly as conditions change. We're focused today on keeping our team safe, running our plants safely and reliably, delivering secure and reliable supply to our customers, and protecting our balance sheet to navigate this unpredictable environment. With our strong liquidity position and the resilience of our business model, We are confident that we are well prepared to weather this global pandemic and its impact on methanol demand. I would now be happy to answer any questions. Thank you. Please limit your inquiry The first question is from Ben Isaacson of Scotiabank. Please go ahead. A good feedback on the call, and I'm glad to hear everyone's doing well. John, you said that, demand was down 7% in Q1. What's your early read on how, April has played out? It's down more, Ben. It's very difficult. It's changing daily. But if we saw a 7% reduction in Q1, I think where you should expect a much greater reduction in demand in Q2. Certainly, when we look at our own demand, we're down significantly. We don't know what our competitors are doing, but, you know, when you freeze the global economy, all man or a lot of manufacturing ceases, I think, demand for methanol is gonna follow, right behind. Thanks. And, just as a follow-up, I've noticed that the, the discount rate has been widening out over the last few quarters, 16, 17, 18%. How do you see that progressing, in a normal cycle, going forward? Is that gonna kind of go back towards that 15%? Yes, our guidance is unchanged there. In a normal, whatever, you hopefully see a stable environment, which we haven't seen much of in the last few years. 15% is the right guiding guidance. But, you know, as we go rapidly down, that tends to widen as we've seen in the last quarters, but I can point to 2018 when, you know, when prices went up quite quickly that it shrunk. So I'm still comfortable with 15, but it's in this environment. You should be planning for higher than 15, as prices have come down in Q2 again, from Q1. Thank you. The following question is from Steve Hansen of Raymond James. Please go ahead. Yeah. Good morning, guys. Just very quickly, you know, John, you guys have taken some pretty proactive and certain measures here thus far. I applaud you for that. I'm just trying to get a sense for whether we should expect any additional actions on the production front. Is there any other facilities that you had contemplate taking down to help balance out the market on your side, or is that going to be left to others? Well, the reason we took Titan and Chile 4 down is because those were the only really 2 plants where we had total flexibility where we didn't have to take or pay gas. All of our other sites we have take our big apps. We have some ability to reduce Geismar, by about 30 percent where we're buying spot gas, but spot gas is under 2 bucks. So, hopefully prices don't deteriorate to such a level that we would have to take that action, but anything's possible in this environment. I think we some app we have some other opportunities as gas contracts expire here over the coming months but we're not anticipating today to take any additional production out, but we're looking to try and create as much flexibility in our supply chain as we can. To allow us to prepare for any any eventuality that we might see in the markets. You know, I think other others in the industry need to take some supply out as well. You know, there's a lot of material today that are well above, from a cost, delivered cash cost perspective, where we're seeing pricing around the world. So, I I don't think people like to lose cash. Certainly, we don't. So hopefully we'll see some of the high cost producers that are still operating, curtailed over the coming weeks months. Yeah. That's helpful. And just as a follow-up to that, is it is it fair to say that your discussions with the NGC and turn it at or or currently at a at a pause? No. We're still discussing with the NGC. You know, all countries are really dealing with the COVID 19. So whether it's our discussions on a gas contract or any other discussions with the government are taking a back seat as they deal with the pandemic, but we're still negotiating. We're negotiating a good faith. We'd to secure a contract that makes sense for us, the government and the upstream, and that's our intention. So we're gonna continue to to to work towards that. Very helpful guys. That's it for me. Thanks. The following question is from Jacob Bout of CIBC. Please go ahead. Good morning. Hey, Jacob. I wanted to review the total CapEx spend expectations. We're calculating around $310,000,000 in 20.20, 330 and 2021. Is that the right order of magnitude and and what type of wiggle room, do you would you have there? Yeah. So we've cut maintenance spending for this year by about $30,000,000. We've, reduced the G Three project by about $500,000,000 over the next 18 months. We said we're gonna spend up up to 200,000,000 over that period for G Three. We're we're hoping we're we're we're planning and challenging the team to spend less. And, our maintenance capital is under review, at at all the time. I mean, we will reduce maintenance capital where where it makes sense where we're not you know, putting our plants in a state where they're, they're unsafe. So we're gonna spend the money to keep, our plants safe and, and, If there's opportunities to reduce maintenance capital and it doesn't impact safety, then we'll look at it. I'll remind you most of our maintenance capital to deal with turnarounds. Statutory turnarounds, turnarounds. We've delayed turnarounds because we couldn't execute them in this environment because we couldn't get people to where they need to be. So, you know, we're going to learn a lot, around, how much maintenance capital we can defer. If we can't do a turnaround and, you know, we can't run the plant safely, then we'll shut it down. But right now, we're comfortable that the turnarounds we've delayed. We can run those plants safely and they're performing okay. So I don't want to give you definitive numbers, but we're going to look at each and every bucket, including operational expenses to see what we can defer or cancel. So we'll we'll continue to do that as as we go forward and and see how the markets turn out. And then how much liquidity do you have available today and and what type of covenant relief are you looking for? Yeah. So we have $800,000,000 of cash on our balance feet at the end of the q q 1. I I've said we need probably a 150,000,000 to run the company. So that that guidance is still there. And, maybe I'll ask our CFO, Ian Cameron, his comment about the covenants and the bank really. So, Jacob, there's probably three things we're looking for in terms of flexibility. One is we have 2 covenants interest coverage and EBITDA to interest test. And we have a funded debt ratio, which is like a leverage test. And, today and, we're, we're in compliance with those covenants. But if we saw a sustained lower price environment, those covenants could come under pressure. So we're trying to get some short term relief around and flexibility around those 2 covenants. The other covenant that, is around G3. We're just trying to create more flexibility in terms of, complete timing of the completion of G3. So that's the 3rd area where we're trying to obtain some more flexibility. Thank you. The following question is from Joel Jackson of BMO Capital Markets. Please go ahead. Hi, good morning, John. Hey, Joel. Sean, I'm not going to ask you a question about whether or not you continue with G III, you are. But let's pretend that you have to decide that it didn't make sense because of demand in China or the global demand. And that's on this decade that it didn't make sense to build G Three So I guess the question would be, what penalties, what minimum spend would you have to still go out the door in in winding down that project? Yeah. It's too early to say to give you a a a number there, Joel. I mean, we're negotiating all the time with our our partners on the G Three project. It's our intention to complete it at some time. If it comes to a point where it's just not needed or the world is still in a really serious significant downturn, then, you know, we'll do what we have to do, to mitigate the costs around cancelling that project. It's not our current view on the project, but, you know, everything's on the table. I would say that, you know, we, we've been issued a number of, force majeures and delays on equipment, etcetera, because of the COVID-nineteen, which gives us some additional flexibility as we negotiate with our partners. So we want to have win win situations here and, and, you know, we will continue to negotiate and try to find a solution that makes sense for everybody. But I think, it's a bit premature to be thinking about cancelling. And I think it's when you make that decision where you are and what you've negotiated, which will drive how much additional capital you may have to spend, but, we're trying to minimize that as as we go forward. And my second question would be on cost care for methanol in China. Maybe an update where you think it is and what's driving marginal costs today change thermal and setting gas. We've obviously seen thermal coal prices get down to below and at the the ban, the government is set in see if intervention will come or not. There's a lot of stuff going on over there. Maybe talk about where you see the marginal cost from ethanol being right now. Yeah. 220 being set by coal producers. We've seen coal slightly decreased. It's around, you know, just over 500 and 5.10 rmb. Which is just at the lower end of the, the ban that the government had put in after the last, oil collapse in 2016. Something we're watching pretty closely. And, certainly, if it does go a lot lower, that will impact the cost curve, but Here we are. You know, China's been dealing with COVID since the end of January. So 3 months and the the ban seems to be alive, but that doesn't mean it's gonna changes, so something will watch pretty closely. Thank you. The following question is from Mike Leitin from Barclays. Please go ahead. Thanks, and good morning, John. I want to I want to return back to the conversation around your natural gas costs and obviously the variable cost dynamic where you tie your cost to methanol prices has been helpful throughout the cycle. But can you just maybe give us a little more help on how these contracts work now that we're at uniquely low part of the methanol price cycle? Is there any sort of variable cost floor, whereas nothing all goes further down that doesn't, equate to lower realized natural gas costs. Yeah. They're all a little different. So we don't obviously talk about each and every contract on an individual basis for commercial sensitivity reasons. What we have guided to and the guidance still is is valid today is that above 180 methanol realized price, we share about a third with a gas supplier on average through the contracts. So today, you know, we're we're over $200 a ton realized. So even if we saw a further reduction in realized methanol pricing, before once we get to 180 on a realized basis, you should consider that on average, the floor. For the basket of of gas contacts, although some would have a little higher floor and some would have a little lower, but that's the guidance we provided, and that's still valid today. Got it. That's really helpful. And I appreciate the outlook. It is very foggy today, but just given what you've talked about about the moves in price, the timing lag of inventory and costs flow through and just a presumed increased overhead absorption from the lower volumes would you still expect to be EBITDA positive in the second quarter? I think it's too early to say that, but I if you ask me today, we will be, but, things are moving pretty quickly here. We're only in early May. We've set May pricing. You know, I think unless you saw a complete collapse since June, which I guess is possible, we would be EBITDA positive in Q2. Thank you. The following question is from Hassan Ahmed of Alinda Global. Please go ahead. Good morning, John. Hey, how's it going? John, question around, it was very helpful, hearing your views on where you saw demand growth or demand declines rather. Sequentially, in Q1, obviously, 7% declines in Q1, And then, you know, you guys, obviously, I do some of your facilities, you know, just wanted to get a sense of, you know, where you saw the industry, sort of pan out in terms of supply, in Q1. I mean, did you see an equivalent sort of global supply decline in in in Q1 sort of matching the demand decline Was it higher? Was it lesser? You know, particularly keeping in mind, you know, the the shutdown mode China in particular was in Q1. And and where do you see that figure supply wise, as we sit here today? Yeah. Most of the shutdowns we saw from a supply side, we're we're in China. You're you're right to point that out. Our actions were later in the quarter. So it really flowed through into Q2. We haven't seen, too much. We've seen some other shutdowns, in, in, as I mentioned in my remarks in other parts of the world, but we need to see based on our current demand look, a lot more shutdowns. And there's, you know, a lot of a lot of, production today, which is above the realized price that we're seeing around the world, especially in China. So we would anticipate, as we've seen in previous downturns that supply supply will come off as the cash margins remain negative. It takes a while sometimes. It takes weeks and sometimes months. And I think it's more predicated on what their outlook is for, you know, the next 1 or 2 quarters. And I think that's really hard to anticipate in this environment. But when you turn off the global manufacturing, complex, demand does, get impacted. And we've seen this move around the world. We saw it in, you know, in July 1st January than in Asia in mid quarter 1st quarter and now in Europe, North America, South America, you know, the the production or, sorry, the manufacturing has been been turned off. So in order to balance things, we need to see other supply come off. And, the other issue is storage. There's, there's not enough storage to, that, you know, to manage all the the methanol that's being produced today, and there'll become a point where there's just nowhere to put it. And, that'll force, people to turn off no matter what their cost position is. So it'll be interesting to see how it develops over the next quarter or 2. Understood. Understood. Helpful. And as a follow-up, John, you know, obviously, all sorts of stress within, within the oil and gas markets and the question around, around your contracts. I mean, if I remember correctly, back in 2013, you announced a 10 year contract for gas supply, to Geismar, with Chesapeake Energy. You know, obviously that company, you know, leading the news recently seems to be, you know, in fairly sort of deep stress and enough sort of reports out there about bankruptcy filings and the like. So just wanted, you know, as best as you can, you know, you know, what sort of moves are you considering? What optionality do you have in case of a bankruptcy out there? I mean, is, you know, in terms of security of gas supply, upholding of the contracts and the like. Yeah. So I I think it's it's a short term and a medium term term issue. I mean, if we, were to have the supplier of Geismar 1 go bankrupt, be very positive for us because obviously the spot market today is much lower than what we're paying in Geismar. So when we signed these contracts in North America for Medicine Haton and Geismar, we, you know, we we had to view that if markets got really tough and people went bankrupt, we had natural hedge that meant the gas price was very low. I'm not worried about the supply of gas in North America for the foreseeable future. But I I think, you know, the medium term is a bit different. You know, if you have a very low oil price environment and gas environment, then you're gonna see production budgets being slashed and exploration and development budgets being slashed. So places like New Zealand, Chile, Trinidad, you know, I I get more concerned around how how do those, those assets become sustainable long term because you know in this business of oil and gas, if you're not investing, you have declines each and every year, which could lead to you know, not enough gas to go around at some point in the future. So I worry more about that than short term bankruptcies, in North America. Understood. Thank you so much, John. The following question is from Nelson Ng of RBC Capital Markets. Please go ahead. Great. Thanks. My first question it relates to the, debt covenants and flexibility. I presume you guys drew on your credit facilities because there is a potential at some point in the future that it may no longer be available. I was just wondering if you were to get relief on debt covenants whether you would look to use that cash and pay down the credit facilities so you don't have to pay the or incur the carrying cost of sitting on cash? We don't know. I mean, we're still in negotiations. So, everything's on the table. We're looking for relief on the covenants, to give us more flexibility. I mean, we we didn't do anything on on those lines of credits or credit facility that we weren't allowed to do. So, we thought it was prudent with all the uncertainty to get a bit more cash on the balance sheet, which is what we did. But, you know, we're negotiating many, many different things related to those, covenant relief. And when we have a deal, we'll certainly, let the market know what that deal looks like, including, down debt with cash. So it's too early to say anything about that, but once we have a deal, we'll still currently, let the market know what it looks like. Okay. And then the next question relates to, methanol demand. You mentioned that obviously that the manufacturing sector is very weak, but you saw some signs of recovery in China. Could you give a bit more color on what you're seeing in China. I'm just thinking about whether there's a potential lead to things to come, for the rest of the the world if, in terms of the the recovery profile you're looking at in China? Yeah. It's it's slow, I would say. You know, we are seeing recovery, but it's slow. Looking to me like a U shape, re recovery instead of a V shape, but that's early days. I think we'll see how Europe comes out of the pandemic and, you know, certainly United States is the middle of it right now. So they're starting to open up. So we'll see how that that pans out for cases, etcetera. But, you know, China is starting to unfaw and get back to more manufacturing activity, but it's still nowhere near what we saw in the fourth quarter of last year. You know, obviously, China is a very has a lot of exports and, they rely on the rest of the world's economy to be chugging along to, have somewhere to to to send their exports. And obviously, in the current environment, everything's basically stopped. Great. Thanks for that color. The following question is from Jonas Oxgaard of Bernstein. Please go ahead. Thank you. I'm gonna touch back a little bit on I'm a condiment earlier on, storage is basically full. But what physically happens when we run out of storage? Is it Chinese producers who historically have been quite bad at turning off production, even at negative cash quickly. And so if we're running in the scenario, whoever's still producing nothing on globally. There's no demand for it. Is there a chance we'd run into the WTI of negative pricing? Paying someone to turn into DME or what have you ever seen anything like it? I mean, that was a bunch of questions that are tied into 1, but How would you see anything like it? And what's your thinking of where we're heading next? Well, we obviously haven't seen anything like it. I I would disagree a little bit with what you said about production in China. In previous downturns in 0 916, we did see high cost production come off and we've seen that again this time. So they don't like to lose cash and they're probably quicker to move than some of our competitors in other parts of the world. As far as turning off production and we've seen them do that quite substantially over the last couple of months. But if there's no, when I talk about nowhere to put the product, I'm going to talk Chinese producers more on talking about imported product in the other in the different parts of the world. There's limited store capacity. This was all already an issue before COVID 19 as as, demand has gone up significantly in China for things like MTO. The amount of storage that was built was not anywhere close to what we saw, the increase in demand. So it was already an issue of supply chains and moving product in and out in a timely basis to meet demand with very little storage. So once tanks fill up, I guess the next thing that's similar to the oil companies is you can fill up ship And I think some of that is going on. We've seen spot, rates for ships go up quite significantly. We think that's because of storage. And but once that's full, then you have to turn off production or else, dump it somewhere else. So I think it makes sense to turn off production rather than have nowhere to put it. But, certainly, we haven't seen that in in the history of our market, but, you know, oil was not never been negative before for a long time either. So we're I think we're in on on it at times and trying to predict anything in the in this environment is is foolish. Fair enough. And is there if if we have to actually do something else with it, is there capacity to turn it into, say, DME or, I mean, there's negative margin today to to make DME so methanol But if you have to do something with it, could you set fire to it? Well, I guess you could set fire to it. I the easiest thing to do would be to blend it in gasoline, but I think that's a whole more complicated issue. But besides that, I think you either set fire to it or or dump it, but, I think, environmentally, I'm not sure that makes a lot of sense either. So to me, the rational thing to do is to turn off production. Fair enough. Thank you. Thank you. The following question is from Eric Tree of Citi. Please go ahead. What is your exposure to MTO compared to the industry and how does Methanol demand fare into MTO given NASA based ethylene economics turn more advantage. And are those customers advancing or extending turnaround times? Yeah. So our MTO exposure is less than and many of our competitors. We have, you know, a couple of customers who are selling MTO. I'd say the MTO rates have held up quite nicely, even in a very low environment for naphtha and a very low environment for olefins. I mean, ethylene, I think historical low prices. So that's today. That doesn't mean that's gonna be the case tomorrow, but we've seen MTO demand hold up, quite nicely. And, Again, we'll continue to monitor it, but we've seen some planned turnarounds and these turnarounds were planned in Q4 before the whole COVID-nineteen. Shocks. So, are they being extended because of economics? We don't have that kind of intel. But we're seeing the operating rates in in the 70% today in in in that market, which, you know, is quite healthy. So we'll see how these these current turnarounds pan out and, what the operating rates look like when they they return. But, again, making a forecast in this environment is foolish, and, we'll have to monitor things as they happen, not try to predict things that are unpredictable. Helpful. And as a follow-up, you noted that there were 2 projects that were expected to set up in 2020. Obviously visibility into that slow. But in past down cycles, like in 2008, 2009, typically, how how long did you see project delays? And I as a follow-up, you know, what kind of methanol price do you need to see to restart construction of G Three? Yeah. So there are 2 projects that are, you know, we thought would be completed in 2020. 1 was the Trinidad project and another one in the United States. We expect those to be delayed, in the current environment, how delayed it's a guess again. I'm not gonna guess today. So we we expect those to be completed at some time over the coming you know, a few quarters. As as far as us starting G III, I mean, again, it's it's way too early. We're in the midst here of significant downturn for methanol supply. We've we've negotiated a way to, you know, to restart it over the next 18 months if if things improve. And, you know, obviously, what we'll need to see is is a much better pricing outlook for methanol than we see today. And, that seems to me, a long way away from where we are today. So, you know, we're we're we continue to see pricing, you know, go down and bottom out below $200. And we've always said we think the long term price of methanol is $3.50, so we're a heck of a long way away from that price. Today, and I have no idea how long it's gonna take for demand to to to return and and and to get back to any semblance of levels that we saw in fourth quarter of last year, and I don't think anybody knows. So we'll see as economies start to open up the impact on on further cases of COVID and how governments react. So it's kind of out of our hands of what I would say. Thank you. Thank you. The following question is from Matthew Blair of Tudor Pickering Holt. Please go ahead. Hey. Good morning, everyone. Glad to hear you are safe and sound. I want to clarify on the shipping costs for methanol. Previously, there was some concern they had moved higher. Now have they moved lower due to cheaper fuel, or would you say they're still pretty elevated due to, storage demand. And if you have any numbers on this, that'd be much appreciated. Yeah. So we're using methanol and ultra low sulfur diesel. In our ships. So you know what's happened to those prices. So when we entered the quarter, we expected them to be trading at a price that was relative to the oil price at that time. So you can see that those prices have substantially lowered, which has led to lower logistics costs for us rather than higher, which is what we're predicting. I wish they were higher because that means we'd have a higher oil and methanol price, but they're lower and that's what we're dealing with. So I don't have the specific pricing in front of me, Matthew. We certainly can follow-up offline and get you that data. Great. Thanks. And then, I wanted to circle back to some previous comments. So, John, you mentioned your hope that the higher cost methanol producers would cut back He also noted that the Methanex has some take or pay contracts on gas supply. Are these take or pay contracts pretty standard? In in the industry and and something that could limit run cuts and and plant shutdowns going forward. Yeah. Hope hope is not a strategy, so I I didn't think I used the word hope. Hopefully, I didn't. You know, I think, a lot of companies do have somewhat of take or pay contracts. But I'll remind you, a lot of these, methanol producers, our competitors are, you know, state owned or or companies that are in, geographies where they're kind of buying gas from state owned state owned company or national company. So we're talking to our suppliers about our take or pay obligations and we have some flexibility. And I would say our our competitors also have some flexibility. So, I think that in this kind of environment, everything is up for for negotiation. If you can't sell it and you can't store it, then you can't produce it. So, I'm not in privy to our competitors' conversation but I I know we're talking to our suppliers about some flexibility and these unprecedented times. Very helpful. Thanks. The following question is from Lawrence Alexander of Jefferies. Please go ahead. Good morning. On the storage question, can you switch around and maybe give a thought or 2 on what this means for inventory levels in the chain relative to normal. That is if, even if demand picks up, he'll be in how long it might take to work down some FedEx tests that might be sort of stored in fits or in other unusual areas. And secondly, could you give a quick update on some of the non traditional applications, you know, the, the the M100 taxi trials, the industrial boilers, you know, how, how demand levels are are on that side? Yes. So, again, I can't predict the future. Demand will be the driver to how quickly we work through the overhanging inventories. We took very quick proactive measures to take production out of our system to allow us maximum flexibility in our inventory. And we're we're and I'm I'm glad we did that, although it was criticized at the time. Because it gives us a lot of flexibility. We have a lot of flexibility in our current supply chain to whether significant demand downside, and we're looking at creating more flexibility. So, again, if you can tell me what your outlook for demand for methanol is, tell you how long it will take to work through, excess inventory. And I don't think either of us knows that. So I'll move to your second question, which is around, the, kilns, boilers, and and M100. Well, obviously, M100, taxi trials continue, but if nobody's driving anywhere or going anywhere, then fuel is not being consumed. I know myself. I don't think I filled up my car here in the last 8 weeks. So if that's any indication of fuel consumption around the world, then, we're, you know, we're gonna continue to see things like MTBE and biodiesel and M100, be be under pressure from a demand perspective. Fortunately, kilns and barbers is different. Those are needed for, for, you know, for heating and, and, and, and, in, mainly heat, sorry, for, blocks of buildings in China. So we continue to see nice growth there. But, when you look at the demand destruction we've seen elsewhere, it's just a drop in the bucket compared to what we've seen on the demand destruction side. Just on the medium another way on think about the inventory questions, just is it significant as a build or is it once that if we had any kind of cover even to say to demand levels that we saw a month ago, would it just be sort of a blip? Yeah. Again, I don't know how much it's out there is being stored on ships. It's anecdotal. But we have seen the spot rates for ships chemical tankers go up quite significantly. We have heard anecdotally that people are storing methanol on ships. We know that storage and tanks And, you know, if you the average storage was, let's say, 800,000 tons on the coast in China, maybe it's a 1,000,000 plus today. So you know, it wouldn't take too long to to move through that in a in a in a better demand environment, but the the big question I don't know is how much is being stored on ships? Perfect. Thank you. Thank you. The following question is from Jason Kasha of Solaris Capital Management. Please go ahead. Hey, John. Just a couple of questions here. In terms of what you think needs in terms of supply coming out of the market to balance the market, I guess, on a percentage basis, I mean, how much supply do you think needs to come out to get the market balanced would be the first question? It depends on on where the demand ends up, Jason. So, you know, it's it's really early to tell is it gonna be 20%, 30%, 40%? I I don't know. And how long? I think that's the the other issue. So This market is all has always been balanced. It's just a minute at what price. And at the current spot prices in China, and there's probably 1,000,000 tons underwater on a cash basis out of a 80,000,000 ton market. So, you know, it it a lot need come out if you have a significant demand destruction, but I I I can't predict what that demand destruction could look like over the coming quarters. Got it. But it sounds like it's not 10 to 7. It sounds like 20. Sorry. So, I mean, I mean, full. Yeah. It's it's not 10. Yeah. It's not 10. Okay. Got it. Got it. And then I guess the other question is in terms of, when supply comes out and maybe just, you know, plant these idle. You know, what the plan is idled? How difficult is this a restart? I mean, are there big idling costs or are there costs a restart? Are they being fairly flexible? Yeah. Pretty flexible. We've kept all our people. You know, people cost for us is a it's not a very significant cost. You know, we only have fifteen hundred people in the whole organization. Very skilled and technical and we need them to restart these plans. When we take them down, we take them down in such a way that we preserve them very well. So if we made the call tomorrow that we're gonna start these plants up, you you're talking weeks, not months. So, our plan is to keep our teams in place and to, be ready to restart when the conditions are right. But, you know, I can't see that happening, in the in the immediate future. So we'll be ready. And I I hope I'm wrong, that things will improve a lot quicker than I'm anticipating, but I really don't know. But we will continue to keep those plants ready to restart and our people in place to be able to run those plants and when the time is right. Got it. So it sounds like it's like an idling restart to yourself rather than the industry. I mean, it's not so onerous in terms of basically costs and sort of ponderation that that people can't be flexible about bringing supply on the market bringing it back on in terms of if demand recovers? Yes, that's what I would suggest. That's how it's happened in the past. In 'nine'sixteen when we had similar conditions. Those times though, it lasted a quarter or 2. And you know, we didn't those were one with an oil price shock, which took a lot of demand out permanently. And the other one was the financial price which froze liquidity for a quarter or 2, but this seems to be quite different to me. This is not one of those events. This is a once in a 1 100 year event and we're learning as we go. And, I'll I'll I'll refuse to predict what's gonna happen next week. Never mind next month. So we're gonna manage the best we can. In a really difficult environment. Thank you. The last question is from Tom Roberts of UBS. Thanks. Glad you sound sound well. I'm sorry you have to deal with these challenges here. John, would you hazard a guess at which end market might come back the first? Do you think fuels applications because driving it looks like it's already starting to come back for something like formaldehyde in the construction market, might come back as that's usually stimulated during when interest rates drop and the government start doing things? Yes, again, you know, predicting the future is really hard in this environment, John, but I would expect, automobile driving to pick up pretty quickly. I'm not sure if people are going to be comfortable taking transit as an example. So are we going to see a whole bunch of new cars being being bought and driven? It could be. I think people have been at home now for quite some time, and maybe construction activity will pick up as people renovate. And I'm on the board of West Fraser, which is the largest lumber producer in North America. And, we've seen a lot of activity in rentals for homes market for for, even in the current environment, these people have stayed at home. So I think that's another industry that that could pick up pretty quickly, but to me, it's all around economic activity and economic activity is created by people doing stuff, by feeling free to move around and and and do do their normal day to day activities, you know, before COVID 19, I I personally think there's a lot of fear out there still. And even if things do open up, that'll be a very slow, pace of getting back to whatever the new normal is. So That's my personal opinion, but that's just a guess. But, you know, I think there's certain applications like you mentioned, which could bounce back quicker than others. And then in Trinidad, I assume you'll have no problem getting gas when you restart, but I think Chile has been a little bit more competitive on gas. If you're down for an extended period, do you think longer term that might hurt your ability to negotiate gas there with the country? No. I I I think I'm more concerned about further production exploration. You know, most of the gas we get for the second plant, all of the gas given the second line comes from Argentina. At gas, if we wanted to start up tomorrow, it's there. But, you know, what happens to Argentina, and it's it's situation in this environment and how does the E and P companies in this out there continue to develop gas reserves. So those are unknowns to me. But today, there's there's lots of gas in that cone, but 5 years from now, who knows? I mean, it depends on how all of this pans out and and where we go from here. So a bit of a guess, John. I, again, I don't know what's gonna happen next week. Never mind a few years from now. Okay. Thanks. Stay safe. Thanks, John. You too. Okay. Well, thank you. I wanted to reiterate that our top priority is keeping our team members safe and healthy. We will continue to operate our plants safely and reliably deliver secure and reliable supply to our customers and protect our balance sheet We have a strong financial position, and we believe that we are well positioned to weather the methanol demand destruction and other challenges resulting from COVID 19. Thanks for joining us today. Stay safe and look forward to connecting with you in July. Thank you for the interest in our company. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.