Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Q3 2018 earnings call. I would now like to turn the conference call over to Ms. Kim Campbell. Please go ahead, Ms. Campbell.
Good morning, everyone. Welcome to our third quarter 2018 results conference call. Our 2018 third 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 third quarter 2018 MD&A and to our 2017 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 on 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 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 the question and answer period.
Thanks, Kim. Good morning, everybody. We've had an outstanding first three quarters of the year, and we're extremely pleased with our financial performance as we recorded adjusted EBITDA of $874 million in the first nine months of 2018. This is the highest adjusted EBITDA recorded in the company's history and surpasses the record adjusted EBITDA of $838 million that we recorded in the full year of 2017. These results demonstrate the significantly improved earning powers of our business. Our third quarter 2018 results were very strong. Methanol prices have remained robust in the third quarter, and our average realized price increased to $413 per ton compared to our average realized price of $405 per ton in the second quarter. We recorded adjusted EBITDA of $293 million and an adjusted net income of $152 million, or $1.92 per share.
Our sales volume of 2.9 million tons was also strong and matched prior records. We believe that methanol prices have remained robust this year due to strong industry fundamentals. Methanol demand in the third quarter of 2018 was strong. Methanol to olefin, or MTO, operating rates rebounded in the third quarter as several facilities resumed production following planned maintenance activities in the second quarter and the first half of the third quarter. We continue to observe high operating rates for most MTO facilities. We continue to monitor the progress of new MTO units that are currently under construction and targeted to come online in the near to medium term. Methanol industry supply increased marginally in the third quarter as new supply from the Natgasoline plant in the U.S. was offset by various production outages globally, which sustained tight market conditions.
As we enter the fourth quarter, the Marjan plant in Iran has started producing methanol, although rate of production remains uncertain. We continue to monitor the enforcement of China's environmental regulations and the potential curtailment of methanol production in China as the winter season approaches. New supply from the U.S. and Iran and the startup of our own Chile IV plant will help to fulfill growing methanol demand. Turning to our operations. Our third-quarter production results were impacted by some gas restraints in New Zealand and some mechanical issues at our Trinidad and Egyptian plants. In New Zealand, we produced 478,000 tons during the third quarter, compared to 252,000 tons in Q2. Production was higher in the third quarter compared to the second quarter, as major turnaround activities were completed at the end of June.
Production was impacted in the third quarter as we experienced gas restraints resulting from natural gas suppliers completing planned and unplanned maintenance activities. We expect the gas constraints to be resolved in the fourth quarter. In Trinidad, we produced 353,000 equity tons in the third quarter of 2018, compared to 442,000 equity tons in Q2. Our production results were lower compared to the second quarter, primarily due to mechanical issues, power outages, and an earthquake. These mechanical issues have now been resolved. We continue to experience gas restrictions and expect to receive approximately 85% of our contracted gas supply for the foreseeable future. In Egypt, we produced 128,000 equity tons in the third quarter of 2018, compared to 165,000 equity tons in Q2.
Our production results were lower compared to the second quarter, primarily due to mechanical issues related to the supply of off-spec natural gas when the natural gas from the Zohr field was introduced to the grid. We continue to receive 100% of our contracted gas supply and reiterate our updated guidance that we expect to operate at close to full operating rates annually for the foreseeable future. In Chile, we produced 112,000 tons during the third quarter compared to 128,000 tons in Q2, reflecting lower gas deliveries during the Southern Hemisphere winter months. We are very pleased to announce earlier this month that we restarted and produced methanol from our Chile IV plant for the first time since 2007 and began to receive contracted natural gas from Argentina for the first time in 11 years. We expect the plant to ramp up to full production rates over the coming weeks.
Our team did an outstanding job of completing this project safely, on time, and on budget. We expect that our current gas agreements will allow for a two-plant operation in Chile during the Southern Hemisphere summer months and approximately 75% of a two-plant operation annually until mid-2020. Our production rate in Medicine Hat was impacted in the third quarter as a result of an interruption in the supply of CO2 from our supplier, which was restored late in Q3. Now turning to our financial results. We ended the quarter with $261 million in cash on the balance sheet. During the quarter, our Egypt entity distributed $80 million to its shareholders, of which $40 million is attributable to Methanex. Methanex share of cash, including our proportional share of Atlas and Egypt cash, was $249 million. Our balanced approach to capital allocation remains unchanged.
We believe we are well-positioned to meet our financial commitments, pursue our value-adding growth opportunities, and return excess cash to shareholders through dividends and share repurchases. Our planned maintenance capital from October 1, 2018, to the end of 2019 is estimated to be approximately $175 million. We continue to progress multiple advantaged opportunities to grow our production capacity and further improve our earnings power and cash generation capabilities over the coming years. We anticipate spending an additional $50 million to refurbish our Chile I plant over the coming years to ensure the long-term reliability of the plant. The timing of this investment will be dependent on our progress to secure sufficient gas without seasonal restrictions to underpin a continuous two-plant operation.
Our team is continuing to make progress on a potential project that would allow us to debottleneck our existing Geismar assets by approximately 10% for a few tens of millions of dollars of capital. The plan would be to carry out these debottlenecking projects during planned turnarounds over the next few years. We've begun the front-end engineering and design or FEED phase for the potential Geismar 3 production facility. We expect this process will continue over the next nine months and will enable us to consider a final investment decision by mid-2019. We expect to spend approximately $50 to $60 million on this project prior to reaching a final investment decision. Our preference remains to have a partner that can add significant strategic value to the project. We purchased 1.6 million shares for $113 million during the quarter under our share repurchase program.
Up to October 24th, we've repurchased 5.8 million shares or 88% of the 6.6 million shares approved under the current normal course issuer bid. In total, we returned $139 million to shareholders through our regular quarterly dividend and share repurchase program in the third quarter. Our outlook for the fourth quarter is positive. Methanol prices continue to be strong, and we expect our production levels to be higher in the fourth quarter of 2018 compared to the third quarter. As a result, we expect adjusted EBITDA to be slightly higher in the fourth quarter compared to the third quarter of 2018. I would now be happy to respond to any questions.
Thank you. Once again, please press star one at this time if you have a question. If you are using a speakerphone, please lift your handset before making your selection. Please limit your inquiry to one question plus a follow-up question. After that, if you have further questions, please rejoin the queue. The first question is from Mike Leithead of Barclays. Please go ahead.
Morning, John.
Good morning.
I guess if I could start by looking at your cash flow. You guys have been generating annual EBITDA north of $1 billion. Your dividend's about $100 million annually. You're guiding CapEx to about $230 million through the end of 2019. It seems like you should have a fair amount of excess cash available, particularly if you have about 1 million shares left on your buyback through March. Can you help frame how we should think about the deployment of that cash, and if we should expect a special dividend or some other method of distribution?
Yeah, really no change to our philosophy. Three pillars of that is to grow the company. We have some very interesting low-cost projects to do so, and we'll be pursuing those. Between the debottlenecks and the FEED on Geismar 3 and the Chile refurbishment over the next couple of years, you're talking $150 million, give or take, maybe a little less than that. Our second pillar is dividends. We have a dividend policy that's sustainable, growing, and meaningful. Yield target of one and a half to two and a half kind of range. We'd like to grow it each and every year, which we've done except for the financial crisis. As we buy back shares, we can grow the dividend without really a lot of additional cash outlay because we will be able to grow it without spending any more cash.
Our third pillar is share repurchase. We prefer the NCIB, normal course issuer bid, up to 10% of the shares per year. It gives us tremendous flexibility. We are in a commodity business. We see volatility as we've seen here in the stock markets here in the last few days. It gives us tremendous flexibility to increase or decrease depending on what's happening in the market. That's our preferred way to return money to shareholders through repurchases on the NCIB. Having said that, you're right to point out at current prices, we generate a heck of a lot of cash. What we've always said, and nothing's changed, is that if we need about $200 million to $250 million at these kind of prices to run the business. As the prices are higher, we need a bit more working capital.
If we're fortunate enough to have an excess $300 million above that and we can't do an NCIB, we've always said we consider a substantial issuer bid. Nothing's really changed. Those are the three pillars of what we do, and that's how you should expect us to move forward.
Great. On G3, you've undergone much of the initial work so far on your own. Is it fair to presume the hurdle would be higher for a partner to sign on today relative to maybe six months ago? Is there any sort of drop-dead date in your mind in terms of going solo versus in a partnership?
Well, we've always said we're looking for a strategic partner. We're not looking for cash. We've said that there's a significant amount of brownfield advantages to that project that, of course, we would want to be compensated for by any partner. That's part of the negotiations, is what we call a buy-in fee, which is not insignificant if you look at all of the advantages that project has with the existing plants and the brownfield investments we've already made. You're right to point out, as the months go by, the project becomes de-risked. That fee is a bit more firm, as I would say. We don't have a drop-dead date. We'd like to have a heads of agreement signed by the end of the year.
As long as we're making progress and we see a way to attract and have a strategic partner, that's our preference. Like I've said before, if we're not successful, we think the project is very attractive, and we'll look to do it ourselves.
Great. Thank you.
Thank you. The following question is from Jacob Bout of CIBC. Please go ahead.
Hey, John.
Hey, Jacob.
A number of production issues in the quarter. Maybe talk about what, if any, of these production issues extend into the fourth quarter.
We said we guide to two or three turnarounds per year. We've done one this year, so you should expect us to be doing a turnaround in the fourth quarter. I'm not going to say where or how long, but you should expect that. We've had these ongoing issues on the gas supply in New Zealand because of some technical concerns with the pipeline. We expect those to be resolved in the fourth quarter, but we would expect our operations to be impacted by the gas availability because of these issues in the fourth quarter. Other parts of the world, I don't anticipate any mechanical issues or further restrictions on gas other than what I've guided to in Trinidad.
Okay. Maybe in Argentina, can you talk about the gas supply there? What some of the terms are. Is it fixed or is there price participation? Are there any outstanding litigious issues stemming from what happened 10 years ago? I imagine some of those suppliers would be the same groups that you've been dealing with 10, 15 years ago.
The gas from Argentina is interruptible on our choice or their choice. There's a big want to be selling the excess gas in their summertime to us. We pay in US dollars, and certainly the country wants US dollars. The contracts are all a little different. They do have sharing mechanisms in them. As far as legal, we've managed to resolve most of those issues, and really you shouldn't be thinking any outstanding legal issues are going to impact our ability to buy gas from Argentina over the coming months.
Thank you.
Thank you. The following question is from Joel Jackson of BMO Capital Markets. Please go ahead.
Hi. Good morning, John.
Hey, Joel.
John, you've brought a lot of capacity on, have had some better operating rates at different plants, better gas availability. You're actually doing a lot of purchased methanol still, and it was a bit of a drag in this quarter. Can you talk about a little about maybe why you're doing so much purchased methanol? Did last quarter, did you think that you may have had some other production challenges, and so you're doing a little bit more for insurance? Maybe just give a little bit of dynamic. Thanks.
Yeah. I'd just point out that our sales continue to increase. As we've increased our production, our sales increase, and we're up towards the 11 million tons number now. As you do that, you need to increase your inventories. We have a very slight inventory compared to our sales. Traditionally 10 million tons, we've been keeping just around 1 million tons. We think we need to keep a little bit more inventory in our system to make sure that we can service our customers on time and reliably like we always have. A bit of the build would be related to inventory that we need to run the business. As well, we were not planning on some of these issues in the quarter. We had some indication in New Zealand about gas, but we certainly weren't expecting earthquake in Trinidad and off-spec gas in Egypt.
That did impact our production. Even though the levels were quite good, we were certainly forecasting for higher production levels than we obtained. It's a combination of those two things that made us have a little bit slightly higher purchase product in the quarter. Our guidance is still the same. We want to sell about 80% of our own equity molecules, and the other 20% will be a part of the offtakes that we have with our partners in Egypt and Trinidad, as well as some other offtakes that we have on a medium to longer term basis, and then some spot materials. Nothing's really changed, but you should expect, quarter-over-quarter, that sometimes it'll exceed and/or sometimes it'll be a little lower than that.
Right now, we're trying to get our inventories up to a state where we have a little bit more security of supply for our customers.
Okay. Thank you for that. Maybe just following up on a prior question, do you think, what you know now, that Q4 in New Zealand should have higher production than Q3, about the same, a little lower? What would you guess?
Well, I don't like to guess. Since I'm not in control of the gas supply situation, I'm not in control of the repairs that they need to make. We're pretty well at the mercy of what they're going to do in the quarter. I don't like to guess on those things.
Okay, thanks.
Thank you. The following question is from Daniel Jester of Citi. Please go ahead.
Yeah. Hi. Good morning, John.
Hey, Daniel.
The last couple winters in China, you've seen some pretty significant disruptions in their domestic methanol industry for environmental reasons, natural gas availability issues, et cetera. What's your latest take going into the winter this year about what could potentially transpire in China?
Well, here, I have to put my weather forecasting hat on, and I'm not very good at forecasting weather like most people around the world. I think last year we had a pretty cold winter there, and certainly they didn't have enough gas imported or domestic to supply all of the needs, forget the industrial complex. We're monitoring the situation pretty closely. We're here in mid to late October, but we really won't know until December, January when the cold weather kicks in. It'll depend on how cold it is. Certainly, I think they've taken steps this year to import more LNG. I think they're the largest importer of LNG ahead of Japan now. They are reacting to what happened last year.
There's certainly not enough gas to satisfy all of the needs of the country, they're going to have to burn more coal for power and heating. That's our expectation. How much more? It depends on the weather. We would expect natural gas to be restricted to make methanol in the winter, and depending on how much coal they need to burn for electricity and heating, could impact the coal-based industries like methanol. It's a bit of a guess, depending on how cold the winter is.
All right. Thank you. Then, you mentioned that there was an Iranian plant that started up in the quarter and is ramping up. Can you just give us your sense of how the moving pieces in Iran work, gas availability versus sanctions, and any sort of latest read on the ability of that to hit the market? Thank you.
Yeah. Just to remind everybody, we're precluded from going and doing business in Iran, a lot of our information we get is the public information. What we've seen in the last years is during their wintertime gas restrictions on the existing methanol production. We're not aware of them having significant infrastructure and gas deliverability improvements over the last 12 months. If the past is anything like the present, then we would expect gas restrictions to industry, including methanol, during their wintertime. Again, it's probably dependent on the weather and how cold it is. The sanctions are going to kick in here in early November. How is that going to impact their ability to move methanol? These are all questions that our teams follow on a daily basis, but until things actually happen, it's a little bit hard to forecast.
We would expect Iranian production of methanol and other products in the wintertime to be somewhat restricted because of gas availability during the wintertime.
Okay. Thanks, John.
Thank you. The following question is from Steve Hansen of Raymond James. Please go ahead.
Yeah. Good morning, guys.
Hey, Steve.
John, just on the idea of a potential partner for G3, you've given us a few details, but just can you give us a bit more sense for how many potential parties you might be speaking with at the moment as you look to sign somebody by year-end? Just as a second part of that, what other strategic value might you be looking for other than gas, which seems an obvious one? Is there marketing relationships, downstream customer demand, and what kind of commitments would you be looking for there if it was something other than gas in terms of firm offtake or something in there or both?
Well, as you get close to getting married, you don't want to have six or seven partners. You want to have a couple and then choose. I'd say we're down to the getting married stage, and we're close to signing the heads of agreement, which is like a marriage certificate on how things will be conducted over the next 25 years. Things we've said that what we're looking for is somebody that has strategic value. Gas, of course, would have a strategic value. Somebody that could possibly take methanol in an offtake, a derivative. Somebody that's producing a derivative somewhere around the world or may be interested in building on our site where we have significant amount of land that we could have derivatives built on the site.
Somebody that could maybe help us make sure we have access to markets and access to governments at the highest level. Those are the kinds of attributes we're looking for in a strategic partner. Somebody that understands the business, somebody that is looking to grow their business, and somebody that's really wanting to be a partner, but maybe not wanting to operate and understands our efficiencies around Geismar and having us operate could be the right choice for them. Those are some of them. Each partner has different attributes. We're getting pretty close here, so you shouldn't expect us to be dancing with about six people, maybe one or two.
Okay, that's helpful. Just a quick follow-up on the Geismar debottleneck. I think you said a 10% capacity increase is what you're shooting for. I just wanted to clarify. I think you said a few tens of millions of dollars, and there was a time frame that you attached to that as well. I just wanted to give it more clarity on exactly when we should expect that debottleneck to push through.
Yeah. A few tens of millions of dollars is our current estimate. There's a few things that have to be done. This would be like tying in what we did in Medicine Hat a CO2 stream into the plant. That could only really be done around turnaround time. Believe it or not, G1 and G2 are coming up for turnarounds over the next few years. It's already been that long. At the same time, we'd have to build a pipeline for CO2, that would take a bit of time as well. All that work is ongoing as we speak. As we do turn around, we would put the equipment in place, to be able to introduce CO2. As we complete the pipeline, we would introduce it to G1 and then G2 as we did that turnaround.
That's why we say the next few years. It's really dependent on the turnaround to tie in the equipment and getting that pipeline built.
Just to clarify, it sounds like it's a couple of years out still. It's more like a 2020 or 2021 event.
I wouldn't want to get that specific, depending on the pipeline. We're doing the work on that right now, and we know when we're going to do the G1 turnaround. We know what we have to do there's a bit of uncertainty on the timing around the pipeline. It'll be staged. G1 and then G2 is how you should think about it.
Understood. Okay. That's helpful. Thanks, guys.
Yeah.
Thank you. The following question is from John Roberts of UBS. Please go ahead.
Thank you. John, there's a lot of nervousness about the industrial markets recently. Are you seeing anything in the formaldehyde or other chemical derivative markets from methanol to give you a sense of where the industrial markets are today?
We're seeing strong growth. I've read the same stuff you have and heard the same stuff you had. I can only speak for methanol. We're seeing very strong growth. As we go into the fourth quarter, we're seeing solid growth, the GDP, IP growth on the traditional chemical derivatives and really strong growth on things like MTO. There are roughly 8 million tons of new MTO production, that's based on methanol demand, over the next 2 to 3 years. Those are facilities that are under construction. We continue to see robust growth on the traditional chemical derivatives and really strong growth on the energy kind of related, including MTO. We're not seeing the same things that some other companies are seeing. Doesn't mean I won't be talking next quarter and maybe things have changed.
We can only report what we're seeing, and we're very involved in China. We are the largest importer of methanol to China. We have a large team on the ground there. We watch China really closely, and we're not seeing anything today that gives us concern.
Maybe a follow-up on MTO in China. A lot of the MTO in China is for propylene, China also makes propylene from imported propane from the U.S. Do you think MTO, during the quarter, benefited when the U.S. propane exports stopped at the start of the quarter?
Yeah. I remind you, those methanol to propylene plants were shut down in 2016 never restarted. All the plants that are using MTO are both ethylene propylene sites, they're mainly integrated. Certainly, if there's less PDH, less propane, maybe a bit more demand for domestic. These are such integrated plants. You have to look at the derivatives they're producing to really understand the supply-demand balances. Unless you had a view, we don't have the view that those methanol to propylene on-purpose plants come back, you might see some impact, that's not our expectation at this time.
Okay. Thank you.
Thanks, John.
Thank you. The following question is from Hassan Ahmed of Alembic Global Advisors. Please go ahead.
Morning, John.
Hey, Hassan.
John, question around China. Seem to be sort of mixed messages coming out of China as it pertains to the whole environmental side of things. One side of the story is that the sort of supervision of these environmental sort of regulations and the like will move from the federal side of things to the provincial side of things, which essentially in theory would mean that they become a bit more lax. The flip side of that is, there's also news that 2+26 may move to another 11 cities, which in theory could mean more curtailment. What are you guys seeing on the ground over there?
We see the same thing that you mentioned moving to provincial. We said directionally, China's been very clear at the central level that they want to reduce emissions, especially particulate matter, mainly in the east part of China. That's what we're seeing. It doesn't mean they're gonna overnight reduce emissions to zero. They're very serious about cleaning up the air and cleaning up the water, and directionally, that's what we see. It doesn't mean they won't take certain decisions on a short-term basis, which may be driven by other factors. Directionally, we would expect over time, less and less coal-based industry on the East Coast. Certainly less and less methanol being made from natural gas as they use the natural gas for heating and electricity, which is much cleaner burning than coal.
Really no change in our thoughts about the direction, although there may be quarters or months where there are other issues that are driving other behaviors.
Understood. Now as a follow-up on the MTO side of things. In the ethylene market, we've obviously seen some choppiness. We had ethane prices skyrocketing in the U.S., then they've sort of come down a fair bit. Obviously, oil is up, naphtha is up. Then, last but not least, you have this whole sort of sanctions and trade tariffs and the like coming out of the U.S. and China. With all of this in mind, are you seeing more activity in China on the MTO side? Do you feel that now with all of these sort of cross currents, the Chinese may actually go out and start doubling down on the MTO side of things?
We've seen some of that for sure. Like I mentioned earlier, over the next two to three years, there's going to be eight million tons more methanol demand for MTO. That's up about five million from my last guidance. That second wave of 15 million, we haven't seen all of that come under construction yet. That doesn't mean in this environment they get a little bit more bullish about that. Naphtha is still fairly competitive even at $600, $700 a ton. I think everybody's in the same position. Well, what's oil going to do? Therefore, what's naphtha going to do? I have a huge investment in a naphtha cracker, and if oil goes back to over 100, then that investment's probably underwater.
Everybody's kind of in the same boat, and what's going to happen with oil, with Iran sanctions, and things in the Middle East, I don't know. Certainly, we've seen it increase here quite substantially in the last two years. I think it's tough to be making significant investments like naphtha crackers in the current environment. MTO is certainly one that requires a lot less capital, and then you just have to have a forecast on your methanol price versus other options. I think nothing's really changed, but it's a lot harder today, I think, to pull the trigger on a naphtha cracker than it was a few quarters ago.
Understood. Very helpful. Thanks so much, John.
Thank you. The following question is from Nelson Ng of RBC Capital Markets. Please go ahead.
Great. Thanks. John, I just wanted to follow up about the restrictions in China, I believe. I guess there's some talk about relaxing emissions restrictions this winter to help out the domestic economy. I guess first part of that question is, are you hearing the same? I guess if there are less restrictions, is it your view that production curtailments will mainly be based on whether it's a cold winter or a mild winter?
I haven't heard that about relaxing of restrictions, that's news to me. I haven't heard that. Depending on what it said and where and how much could impact the shutdowns of some of the coal-based industries. I'm not aware of that at all. I think I mentioned earlier that the more severe the cold winter is, the more restrictions we would expect.
Okay. Got it. Just one last cleanup question. Regarding the $50 million-$60 million spend on G3, will it be expensed or capitalized? I was just wondering whether we should be reducing it from our EBITDA next quarter.
No, it'll be capitalized. Assuming we go forward with the project, it'll be capitalized.
Okay, great. Thanks.
Thank you. The following question is from Jonas Oxgaard of Bernstein. Please go ahead.
Hi, good morning, guys.
Good morning.
Could we talk a little bit more about the Iranian sanctions? If I understood correctly, China has already announced that they plan on continuing importing methanol. How does that work with the shipping? Are there shippers willing to ship to China even with the sanctions in place? How should we think about how this evolves? I have a follow-up.
Yeah, I have not heard that China has said that they're going to continue to import methanol from Iran. What I did see this morning is the state-owned companies like PetroChina indicating they haven't booked any cargoes for oil in November. Our current view would be, if you have international operations that impact the U.S., you're probably not going to import much of anything from Iran. That doesn't mean nothing will get to China, because there's a lot of companies in China that don't have international operations, and probably would feel comfortable in importing methanol and other products into China. We won't know for sure until when the sanctions kick in next week. We'll certainly monitor it. The last time the sanctions were in place, they did have a hard time getting insurance. They had a hard time getting banking. They had a hard time getting shipping.
I think they found ways around all of those, and we did see product flow from Iran into India and China. That would be our expectation today. We wouldn't expect state-owned companies with international operations to be handling much Iranian methanol or oil or other products from Iran. It's our current view, but we're going to watch it like everybody else and see how it evolves.
It sounds like you'd expect some short-term disruption, but not necessarily long term.
That would be our expectation today, unless there's more pressure exerted or other things happen. We would expect India and China to be continuing to import methanol, but not the state-owned companies in China.
Okay. Is there any impact on the new projects that are still coming online?
The new projects in the U.S. or the new projects in Iran?
Oh, in Iran.
Yeah. We don't have a lot of additional information in Iran than anybody else has because we can't go there, and we don't go there. What we've heard is from catalyst suppliers and shipping companies, et cetera, that do business there, that they probably view it's going to be harder to get workers and equipment and spares and catalyst and like I said, shipping and insurance. It'll be harder, probably lead to some delays, we've seen over times when there's been previous sanctions that these projects do proceed. Like I said, maybe not in the timeline that they originally thought, eventually they do get completed, and that would be our current expectation as well.
Okay. Thank you.
Thank you.
Thank you. The following question is from Matthew Blair of Tudor, Pickering, Holt. Please go ahead.
Good morning, John.
Good morning.
You mentioned that methanol demand was strong in Q3. I was hoping that you could put a specific number on that. I think in the first half of the year, Methanex talked about 4% global demand growth. Was Q3 in that same range, or stronger or weaker?
In that same range. Year-over-year, 4% is what we saw. Yep.
Sounds good. Just circling back to the comment on inventories. Year-to-date, there's been an inventory draw within your system. Did I hear you correctly that you're looking to significantly build those inventories in Q4?
Well, significantly is not a word I would use. I'd say throughout the year, we've been trying to build inventories, but we've had really strong sales. Our production has been solid, but maybe a few hundred thousand tons less than we had forecasted for all the reasons that I've mentioned. This quarter and a few other quarters, we had significant complex outage in New Zealand, Q2, Q3. We've been trying to build throughout the year. I wouldn't use the word significantly. I'd use the word we'd like to have our inventories grow at the same percent as our sales. We've grown our sales by 1 million tons and probably 100,000 tons in inventory is what we'd like to see it grow by. We haven't been able to do that, as you pointed out.
We're going to continue to try, but I'll tell you, it's very tight out there. We're having a hard time finding product at any price. Whether we're successful or not depends on the supply-demand balances around the world. We're not comfortable with our current inventory level with 11 million tons of sales, and we're going to continue to be aggressive in trying to get it to that 1.1 and slightly higher. We're going to continue to try and do that, and we're hoping for a real solid production quarter from our assets. Like I said earlier, our really unknown is the gas supply in New Zealand. We'll see how that turns out.
Very helpful. Thank you.
Thank you. The following question is from Charles Neivert of Cowen. Please go ahead.
Morning, guys. Just had one quick one. Are you seeing the continuing increase in methanol use in the industrial boilers? Are they moving that direction? Do you think there's going to be a bit of an acceleration as you move into the winter as, again, they discourage the use of coal and things of that nature? Where would you put the current demand at the industrial boiler level now? Again, do we think it's going to go up during the course of the winter?
Yeah, it's not really seasonal, Charlie. Once they make the conversion, the conversion's done. It's not really a seasonal demand. It's like when you're choosing to get out of coal for boilers, you can use diesel, methanol, or natural gas, and all three are being chosen. It's around 2 million tons now, we are continuing to see growth in that market. We're doing a lot of work in China with the government on standards and specifications and delivery, and all that work has gone really well. That's been very positive for the industry as well as the methanol boiler manufacturers who used to make coal boilers as well. It's headed in the right direction, but I'll reinforce, it's not seasonal. Once somebody decides to switch, they're not going to switch back, and it's not really.
I didn't mean to imply the seasonality. It was just whether it's a continuing thing.
Yes.
Getting a push to get the coal out for environmental. That's continuing to be the case.
Yeah, that trend is continuing. We'd expect it to continue to accelerate. One of the new ones, and we had one of our Chinese team members here last week in Vancouver, and she brought me a piece of pottery made in a methanol kiln, which was pretty cool. We haven't talked about kilns yet, but that's another very large potential demand for methanol. They are starting to convert kilns from coal to methanol, and I've got one on my desk. It was kind of a nice little milestone that we haven't talked about yet, but stay tuned.
Okay. One other question on-- I know that there's been, over time, some increase in use of methanol as a cooking fuel. Is that something that's also continuing, and where would you sort of put that at current levels?
Not really a big demand driver. About a million tons. We don't see huge growth there, but it's been pretty stable.
Okay. Thanks very much.
Thanks, Charlie.
Thank you. The last question is from Chris Shaw of Monness, Crespi, Hardt & Co. Please go ahead.
Hey, good morning, everyone. How you doing?
Hey, Chris.
You mentioned the potential demand for the next two years from new MTO plants, I think around 8 million tons. Can you contrast that with what you see for the supply coming online for the next two years? You must have some insight as to what's there. Is most of that coming out of Iran?
That's a good point. There is some additional supply expected out of Iran, a couple more million tons beyond what's under production right now. Towards the end of the decade into the next decade, probably the Trinidad Mitsubishi plant will start up. That's about 1 million tons. We have the Yuhuang plant in the U.S. They've just signed some sort of partnership deal with Koch. We don't have the details of that, but that's probably 2021, 2022-ish kind of timeframe, and that's about 1.8 million. Some small more production coming out of China. We do expect, as I mentioned earlier, some rationalization in China as well.
You're right to point out there's quite a bit more demand coming on than supply, we can't build it all ourselves, and we do need to see some additional supply to keep the world balanced. It'll be really interesting in the next couple of years, we'll see how these projects that are under construction get completed and run. We're going to need quite a bit of new methanol supply to meet this demand.
Just to clarify, did you say you guys expected production to be up sequentially in the fourth quarter?
I said it will be up from the third quarter, yes.
That's taking into consideration the turnaround that you suggested would be happening in 4Q?
That's right.
Okay, great. Thanks a lot.
Thank you.
Thank you. We do actually have a question from Cherilyn Radbourne of TD Securities. Please go ahead.
Thanks very much for squeezing me in.
No problem
had a couple of quick ones on South America. First off on Chile, just want to make sure that I understand the plan there. Is your intention to run both Chile I and Chile IV together for some period of time before taking Chile I down for refurbishment, or what's the plan there?
Yes, our plan is to ramp up both plants to full rates as soon as we can. That's the plan. The gas is available and we're ramping up Chile IV, as I mentioned earlier. I'll remind you, Chile I hasn't run at full rates for quite a long time. Current plan would be to ramp up Chile IV, stabilize it, and then to slowly ramp up Chile I. Whether we get to full rates or not, we think we can, but maybe it's 90%. We don't know because we haven't run it at full rates for some time. Assuming we secure additional gas, our plan would be to take Chile I down during their southern hemisphere wintertime to do about half of the $50 million refurbishment. Assuming we can secure additional gas, we would do the second half of that refurbishment in mid-2020.
During the non-winter months down there, our plan is to run both plants at full rates, and there's enough gas today to do that. Again, we're not going to spend the money in Chile I until we secure additional contracted gas to underpin that plant for some more years.
As it relates to Argentina, obviously there's been some political turmoil in that country recently. Are you continuing to see investment in the Vaca Muerta shale?
Absolutely. I think part of their solution is to become self-sufficient in energy, and that's their focus, so they don't import LNG and gas from Bolivia, et cetera, which they have to pay for in US dollars. It's strategic for the country to get sufficient and then to start exporting again. I think that's their goal. There's lots of reserves there. There's been lots of work done, and they're pretty close back to the production levels they were pre-2007. They've been very clear during their summer months when they have excess gas, they will be looking to export that gas to us and to others. I think over time, as they become more self-sufficient, we would expect them to build infrastructure to allow them to export the gas in the form of LNG. That's somewhere down the road. Certainly, there's a lot of gas in that formation.
The International Energy Agency says 800 TCF. They're applying the same technology to that basin that we've seen applied in Chile and of course, in North America. Lots of activity and going quite quickly, and we're quite optimistic they'll become self-sufficient and even one day in their wintertime we'll start to get gas. I think that's a number of years down the road.
Great. Thank you for the time.
Thank you.
Thank you. There are no further questions registered at this time. I'll turn the meeting back over to Ms. Campbell.
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