Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Q3 2021 Earnings Call. I would now like to turn the conference call over to Ms. Kim Campbell. Please go ahead, Ms. Campbell.
Thank you. Good morning, everyone. Welcome to our third quarter 2021 results conference call. Our 2021 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 2021 MD&A and to our 2020 annual report for more information.
I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's date. It is our policy not to comment on or update this guidance between quarters. For clarification, any references to revenue, EBITDA, adjusted EBITDA, cash flow, or income made in today's remarks reflect our 63.1% economic interest in the Atlas facility and our 50% economic interest in the Egypt facility. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and the impact of certain items associated with specific identified events. These items are non-GAAP measures that do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies.
We report these non-GAAP measures in this way to make them a better measure of underlying operating performance, and we encourage analysts covering the company to report their estimates in this manner. I would now like to turn the call over to Methanex's President and CEO, Mr. John Floren, for his comments and a question-and-answer period.
Thanks, Kim, and good morning, everyone. This morning, a few members of our executive leadership team are joining me, including Ian Cameron, our SVP, Finance and CFO, Vanessa James, who previously led our marketing and logistics organization and now leads our corporate development function, including the execution of our Geismar 3 project as well as our sustainability function, and Rich Sumner, who was recently appointed to lead our marketing and logistics organization after working for many years with the company in various finance and marketing roles around the world. Mike Herz, who led our corporate development function and our Geismar 3 project, recently retired from the company after 26 years of exceptional and dedicated service.
Today, we will review our strong third quarter 2021 financial results, discuss our latest views on the methanol market, talk about our operational results, and share our robust outlook as we enter the fourth quarter. We will open up the call for your questions. Turning to our financial results. We recorded adjusted EBITDA results of $264 million in the third quarter and adjusted net income of $99 million or $1.29 per share. Our adjusted EBITDA results reflect a continuing strong methanol price environment, partially offset by lower sales of Methanex-produced methanol. In the third quarter, we increased our average realized price to $390 per ton, a $14 increase compared to the second quarter. Our results illustrate the significant leverage that our earnings have to methanol prices.
In addition, amid a rapidly rising energy price environment, our results highlight our low cost structure and the value of our natural gas arrangements as approximately 65% of our near-term North American feedstock requirements are managed through fixed price contracts, and the majority of our natural gas agreements across the rest of the world are linked to methanol prices. Now turning to the methanol market. In the third quarter, methanol market conditions remained tight with ongoing industry supply challenges. Traditional methanol demand was flat as various factors, including supply chain disruptions, extreme weather events, and global energy shortages impacted industrial production levels and constrained demand growth. Demand for methanol to olefins or MTO producers was lower in the third quarter due to planned maintenance activities and China's government-mandated industrial operating rate restrictions intended to limit energy consumption and energy intensity.
Demand from other energy-related applications was steady. Methanol industry supply continues to be impacted by various factors. In North America, Hurricane Ida and technical issues affected methanol industry production. In Europe, sharply rising natural gas prices and planned and unplanned outages constrained methanol industry production. In China, limited coal supply and government-mandated industrial operating rates restrictions, as noted earlier, to manage total energy consumption and energy intensity curtailed methanol production. Over recent weeks, global energy shortages and increasing coal, oil, and natural gas prices are impacting methanol supply and methanol demand, leading to a sharp increase in methanol prices and a significant steepening of the industry cost curve. We estimate a sharp rise in the industry cost curve with an average range over the past several weeks of approximately $450-$500 per ton.
We have seen significant volatility in coal markets, and more recently we've seen downward pressure in the coal futures market as a result of announced government intervention in the coal market in China, giving historically high pricing levels. We recently posted our November prices, which increased by $83 to $692 per ton in North America, and increased by $90 to $600 per ton for Asia Pacific. We set our European contract price quarterly, and our fourth quarter posted price is EUR 490, or approximately $575 per ton. Starting in January 2022, we are introducing a new posted price for the China market. We will continue to post the Asia Pacific price for customers in the region, excluding China.
We are making this change to better reflect the different market fundamentals in China compared with other countries in the region. Our outlook for the methanol industry is positive, and we believe that new industry supply will be needed to meet growing methanol demand over the next five years. Now turning to our operational results. Our third quarter 2021 production of 1.5 million tons was slightly lower than the second quarter. Our production in New Zealand was lower in the third quarter compared to the second quarter, primarily due to the short-term commercial arrangement to make natural gas available to support a tight New Zealand electricity market from early June to late August. Since then, we have operated both of our Motunui plants. We estimate production in New Zealand for 2021 of 1.3 million tons.
The upstream gas sector is completing several field development projects that could improve gas availability over the coming years. In Geismar, during the third quarter, we shut down our Geismar 1 and 2 plants as a precautionary measure to ensure that the safety of our team members during Hurricane Ida. Fortunately, the hurricane only caused very minor damage, and we restarted production after approximately two weeks. The production impact of this outage was approximately 100,000 tons, which offset higher production resulting from the completion of our Geismar 2 debottlenecking project earlier this year. In Chile, our production in the third quarter was similar to the second quarter. We typically experience lower gas deliveries in the Southern Hemisphere winter months, impacting our second and third quarters.
We recently restarted production at our Chile four plant, which was idle for the last 18 months, and expect to operate both plants during the Southern Hemisphere summer months to the end of April 2022. We estimate production in Chile for 2021 of 800,000 tons. Our Atlas plant in Trinidad, as well as our Egypt and Medicine Hat plants, operated well during the quarter. Now turning to our balance sheet. We ended the third quarter in a strong financial position with over $900 million in cash and $900 million of undrawn backup liquidity. We previously announced a strategic shipping partnership with Mitsui O.S.K. Lines, Ltd. or MOL with the proceeds of $145 million.
We recently finalized definitive agreements for this partnership and closing is expected in the coming months subject to regulatory approval and after all the customary conditions are met. Turning to our capital allocation priorities, we generate meaningful cash flow across a wide range of methanol prices. Our capital allocation priorities remain the same. We use the cash we generate to maintain our business, pursue value accretive growth opportunities, and continue our strong track record of returning excess cash to shareholders. We recently restarted construction of our Geismar 3 project, a unique project with significant capital and operating cost advantages that will strengthen our asset portfolio and substantially improve our future cash generation capability. Our capital cost estimate for the project is $1.25 billion-$1.35 billion.
We have committed approximately $455 million to the project as at the end of Q3, 2021, and we expect approximately $800 million-$900 million of remaining capital costs to be capitalized before capitalized interest, or approximately $100 million per quarter from October 2021 onward. We are confident in our ability to complete this project on time and on budget, and we have substantially reduced the project execution risk profile. Our remaining budget includes allowances and contingencies for both cost escalation and the remaining risks of the project. We are targeting commercial operations at the end of 2023 or early 2024. With our strong liquidity position and cash flow generation, we are well-positioned to fund the Geismar 3 project from cash and build on our long-term track record of returning excess cash to shareholders.
We recently announced that we reset our quarterly dividend to $0.125 per share and commenced the 5% share repurchase program. At this time, Geismar 3 is the only significant growth capital in our plans over the next few years. We expect that G3 will substantially increase our cash generation capability and support a significant increase in our future shareholder distribution potential. Now turning to our outlook for the fourth quarter. Global energy shortages, and escalating coal, oil, and natural gas prices are leading to a sharp increase in methanol prices. We expect realized methanol prices in the fourth quarter of 2021 will be significantly higher than the third quarter based on our current posted prices. We forecast that our fourth quarter production will be higher than the third quarter as we restarted our Chile four plant in early October.
We restarted our Motunui plant, New Zealand, in late August, and we expect to run our Geismar plants at full rates without an unplanned two-week shutdown due to Hurricane Ida, as well as realizing the benefits of the completion of the debottlenecking project. As a result, we anticipate our adjusted EBITDA results in the fourth quarter to be considerably higher than the third quarter. We would now be happy to answer any questions.
Thank you. Please press star one at this time if you have a question. The first question is from Joel Jackson from BMO Capital Markets. Please go ahead.
Hi, good morning, John. I have a couple of questions I'll ask one by one, if that's okay. You know, I think we're in a very, well, complex part of the methanol cycle right now, maybe you would agree. When you look at some of the academic or theoretical numbers out there, like it would seem like maybe methanol is pushing up against its theoretical maximum price, right?
So it seems like the equivalent energy value is similar right now for methanol and say, gasoline in China, which I think some could argue is potentially the maximum unless oil and gasoline prices rise further. I know you don't predict the future, but, you know, all the things going on, gas, coal, cost curves rising, methanol going up, gasoline prices catching up. I mean, how do you look at that right now in terms of the methanol price environment? Where do we go from here?
Yeah, well, it's supply driven, the current issues and the price rise as we've seen, and a number of productions, as I mentioned in my remarks, have come off around the world, which is leading to less supply and more demand. You're right to point out when that happens, prices will rise. The marginal demand is impacted to get the world back in balance. What is that price today? It's probably changing every day based on all the factors you mentioned, coal, natural gas, et cetera. Again, you know, we're a bit surprised on how quickly prices have risen here in the second half, but nobody was planning on the tight energy environment and high prices that we're seeing there.
Again, you're right to say that the future is hard to predict, but, you know, I think we're enjoying you know, the benefits of a higher energy environment and some supply challenges that we don't expect to solve themselves in the near term.
That's really helpful. Then I wanna ask for the buyback. Are you able to comment on how much stock you're able to buy back so far in October, based on September public data? It looks like you're doing about 17 shares a day, which would put your 5% buyback kind of down in about a year, a little less than a year. Is that the idea to try to hit that buyback evenly? Maybe if you don't wanna comment on that, can you at least comment on how much you bought back in October so far?
Yeah. I really can't comment on that, Joel. Just in general, what we've said is we wanna have the cash on the balance sheet to complete Q3, which we do now, and another $200 million-$300 million. Then everything above that will be distributed to shareholders. You know, Q4 is looking really solid, and we're gonna generate, you know, quite a bit of cash. I think by the end of the quarter, we'll reach those targets and, you know, we can then look to accelerate the buyback or other options. Right now, we have around 5% out there, and we think another 3%-4% possible in the 12-month calendar period. That's our primary focus now is to complete Q3 and then return all excess cash above, you know, $1.1-$1.2 to shareholders.
Thank you.
Thank you. The next question is from Nelson Ng from RBC Capital Markets. Please go ahead.
Great. Thanks. John, I want to follow up on your comment regarding the supply crunch and your view that it's not gonna get resolved anytime soon. Like, in China, are you seeing any easing given I think they had some energy consumption restrictions in China, but have you seen them easing? And I guess there's the recent steps they're taking to improve or increase coal supply. So does that help the supply side at all from your perspective?
Well, I guess it depends on your timeframe, Nelson. Right now, we're still seeing the dual controls, as they're called in China, which is impacting supply quite significantly and demand. We're coming into their winter months, and natural gas still is a fairly large raw material for production of methanol in China. And we all know what the LNG prices have been like.
And yeah, the government has stepped in and made some policy decisions around coal, but we have no idea how long it's gonna take for the coal to rebalance in China. And we're coming into their winter where they consume more coal. So we don't expect it to be, you know, a light switch and things to return to the way they were before the crisis on coal and other energy. Directionally, you know, it'll probably always get back to balance at some point, but it's probably gonna take some time in our estimation.
Okay, thanks. My next question relates to logistics. I know this is a different shipping market, but obviously the container shipping side has seen a lot of issues, and part of that is due to tight labor markets. Have you seen any, I guess, delays from a logistics perspective on your end?
No, this is one of our key competitive advantages that we all, you know, we speak about quite frequently. You know, we have our own ships that we, you know, can move around the world to wherever we want. You know, we have terminal relationships, we have our own terminals. Nothing's really changed in the last quarter. I think I mentioned on the last call that we were seeing some slight delays because of the shortage of pilots in China, but that's adding like a week to two weeks for discharge, longer time, and, you know, really doesn't impact our ability to service our customers. Fortunately, we're not experiencing the same supply chain issues that most of our customers are and even customers of our customers are.
Okay. Just one last question on G3. I know you flagged that you've factored in a number of contingencies. But out of the remaining like $800 million-$900 million of CapEx remaining, do you have a rough breakdown in terms of in terms of how it breaks down into like materials, labor, and equipment? I'm just wondering like how large the labor component is.
Yeah. I think I've guided to that on projects before and, you know, really there's three big components of the project, and labor is the biggest one. Like I said before, most of the equipment is purchased. We still have some, you know, non-strategic equipment to get on site, but it's really labor. The two big components are labor rates, which we've guided to are about the same as when we did G2, and that's still the case today, and then productivity. You know, we'll know more about what we expect in productivity as we ramp up the site. I think we have about 500-600 workers on the site today, and I think at peak will be over 1,000.
We have a large owners team, much larger than we had for G1 and G2, and really trying to manage the scheduling and the productivity issue, working with our you know KBR, who's the engineering contractor on the job.
Okay, thanks. That's good color. I'll leave it there.
Thank you. We ask that you please limit yourself to one question and one follow-up. The next question is from Jacob Bout from CIBC. Please go ahead.
Good morning.
Morning.
First question is on methanol demand destruction. I know you said in the MD&A that there was a 1% decline in global methanol demand in the third quarter. You know, are you seeing signs of demand destruction now? You know, I know there's some industry reports talking about MTO being at historic low rates. And how are things shaping up in the fourth quarter versus third quarter?
Yeah. We are seeing demand impacted by the controls I've mentioned in China. You know, so where there's limits on how in certain provinces how industry can operate, so that is impacting demand for methanol. We also knew there was quite a bit of planned maintenance in MTO in the third quarter, which has happened. Pricing is pretty volatile in that sector. You know, when we're up at the 550-ish range, you know, that certainly would have been economically challenged for some of the MTO players, not all. The rest of the world, like I've mentioned, we've seen these high energy prices in Europe, for example. Some customers are cutting back production because the energy costs are so high.
We had some, you know, disruptions in the Gulf because of the hurricane. I don't expect gas prices to ease in Europe in the winter, but we're not counting on another hurricane in the Gulf, so we should see demand improvement there. You know, we do worry about inflation as well. You know, if you have a high inflationary environment, maybe consumer demand wanes, probably not this quarter, but, you know, that's another thing we're watching. You know, we're not anticipating a demand drop in Q4, but we're watching it closely.
Okay. My second question is just on gas costs. You touched a bit on this at the beginning of the call, but can you remind us how much of your gas right now is tied to spot versus linked methanol price and how much of your gas is hedged?
In North America, you know, in North America, we have 65% of our gas hedged or fixed price. The rest of the world is really linked to methanol. As methanol prices move, our gas costs move. About 35% of our gas in North America is related to spot pricing.
How far forward are you hedged?
Different lengths. We've layered in hedges, you know, for quite some years. You know, there's a number of different hedges and, you know, in Medicine Hat, we have fixed price for, you know, another 10 years. It's different lengths of time depending on which hedge or which fixed price deal it is.
Leave it there. Thank you, John.
Thanks.
Thank you. The next question is from Edlain Rodriguez from Jefferies. Please go ahead.
Thank you. Good morning, guys. John, quick question. I mean, with methanol prices up significantly, I mean, are you seeing or do you believe you might see that the supply response could change in terms of, you know, guys pulling forward the supply coming in?
We would have expected anybody that could run last quarter should have run hard. You know, we certainly didn't see a lot of new supply or idle supply come on. We're not anticipating any other supply coming on in the quarter. The cost curve, as I mentioned, is still in that $450-$500 range today for the last weeks or so. You know, I think there's still a really high cost curve that's underpinning methanol pricing. We don't expect additional supply to come on in the next few quarters.
Okay. Also related to methanol prices being up so much, like, any concerns that the rate of adoption for new applications, you know, like in industrial or marine, like that could be slowed down because of prices, getting up so high?
Well, you know, when we're looking at new adoption is really being driven by environmental issues, by clean burning fuels. There we're competing with other potential clean burning fuels, and those prices have also gone up quite substantially. We don't believe there'll be any impact on adoption of methanol as a clean burning fuel as a result of current prices.
Okay. Thank you, guys.
Thank you.
Thank you. The next question is from Mike Leithead from Barclays. Please go ahead.
Great. Thanks. Good morning, guys, and congrats on the quarter.
Thank you.
First question related to demand. I think excluding MTO, you talked about energy-related demand being flattish in the quarter. I guess given the material move higher we've seen in oil and carbon prices globally, do you expect to see a pickup in some of these energy markets in the next few quarters? Or is there just something about the relative pricing of methanol that's limiting some uptake right now?
No, I think those applications are really mainly for driving, you know, like biodiesel, MTBE, methanol M100. You know, the world's not back to normal yet. People aren't driving the way they used to. So that has impacted, you know, some of the other energy demand. As things normalize and the world gets back to normal, and people get back to their normal driving habits, we would expect those applications to increase in demand.
Got it. That makes sense. Secondly, just on the buyback, I want to make sure I heard you right in your answer to an earlier question. It sounds like given where the cash flow generation currently sits, you'll sort of get where you want to be by year-end in terms of pre-funding G3, and then maybe you can get a bit more aggressive on the buyback. It sounds like you'd like to hit that 5% authorization. And then if I heard you correctly, maybe a few more percent within the next 12 months. Is that how you're thinking about it?
Yeah. I'll be very clear. We wanna have around the cash on the balance sheet to complete G3, so that's $800 million-$900 million left, about $100 million a quarter. We wanna have $200 million-$300 million cash on the balance sheet to run the company. Everything above that will return to shareholders, and right now it's through share buyback. That hasn't changed. The more cash we generate, the more we're gonna return to shareholders and the quicker we can do it.
Makes sense. Thank you, John.
Thank you.
Thank you. The next question is from Hassan Ahmed from Alembic Global Advisors. Please go ahead.
Morning, John.
Morning.
I got a question on inventories. You know, obviously it's been a very strange year, you know, with Winter Storm Uri, then obviously Hurricane Ida. I mean, historically, you know, in a rising pricing environment, you know, typically you see restocking. But, you know, with all of these events that have transpired, I would imagine, you know, inventories which were lean only got leaner. So, you know, what are you guys seeing in terms of global inventories? You know, how low are they? And how long do you think a restocking exercise would take? When would we get to normal inventory levels? And how would you see that factoring into demand growth as you look into 2022?
Yeah. I'll ask Rich Sumner, our head of marketing, to take a crack at that.
Thanks, John. Yeah, we definitely see low inventories across the supply chain. When we look to China, we also know that over time, China's the growth in market demand in China has put constraints on storage capacity especially on the coastal markets. We see low inventories in China coastal markets. A lot of the supply-demand balances that John talked about that we don't think is gonna be cured in the short term is gonna add huge further strength to pricing, and it will take some time before we can rebuild inventories in the industry. You know, that factor is definitely supporting current pricing dynamics.
Yeah. I mentioned earlier, Hassan, as well, you know, in Europe with high gas prices, you know, some of our customers have curtailed production as well, and that'll have to be rebuilt. It really comes back to demand, you know. We believe there's pent-up demand out there still. As we get back to normal, you know, the supply chains will at some point correct themselves and people will be able to get what they want when they want it. How long that takes is a bit of a guess, but we do believe there's pent-up demand for sure.
Very helpful, John. As a follow-up, a question around sort of medium to long-term supply growth. You know, it's very interesting, last week on Celanese's earnings call, you know, as I'm sure you know, Celanese has a pretty sizable position in China. So one of the risks that the CEO sort of flagged was around their raw materials and raw material sourcing and supply. Particularly, Lori, the CEO, mentioned methanol and how supply growth in methanol will not be as robust as it was, you know, in the next decade, as it was in the previous decade. You know, rather interestingly, she talked about how commissioning is a major issue in China now, how historically the capital cost advantage that they used to enjoy isn't really there anymore, and a variety of other issues.
Point really being that she sounded quite negative, I guess, on supply growth prospects for methanol in particular, in China. I mean, obviously, you guys have announced G3, the timing of which in light of these comments seems quite interesting. What are you guys seeing in terms of, call it global supply growth, but particularly with a focus on China?
Yeah, we've been saying the same things for some time. I'm glad somebody's listening. You know, I think we've said in China that they're directionally not gonna grow their methanol production, and where they'll grow it is in inner Mongolia, not on the coast where a lot of the consumption is. They're gonna need imports and more imports. Energy is an issue. You can see how quickly that's turned to an issue in China, and directionally they're gonna use their energy for, you know, heating and electricity. They're moving up the value chain as well in all industries, not just in methanol, cement, steel, et cetera. I mean, they're moving away from those industries and more up the value chain. Those trends have been going on for some time. Then outside China, where can you build a methanol plant today?
You know, and you have to have a price of $400 for 20 years in mind to get a double-digit return at $3-$4 gas. I think everybody's faced the same issues, and that looks hard to do today. How do you get it financed in that kind of environment? You know, I think that hasn't changed. We, you know, had a period here recently of $250 pricing for some time, and banks and lenders remember that. I think unless you have a strong balance sheet like we do and cash generation capability, financing these $1.3 billion-$1.5 billion projects is really difficult.
As far as us, I mean, we're G3 is gonna be perfect as far as timing, as far as cost structure, as far as emissions and CO2 emissions, et cetera. It's gonna be, you know, the best in the world. We're quite happy about it. For our other growth, our focus is on getting our second plant in Trinidad restarted and our third plant in New Zealand restarted. That's the cheapest way we can grow our production, and that's what we're gonna focus on.
Very helpful, John. Thank you so much.
Thank you. The next question is from Eric Petrie from Citi. Please go ahead.
Hi. Good morning, John.
Morning.
Do you expect methanol demand to return to more historical rates of 3%-4% next year, excluding China dual control and hurricane weather events?
Yeah, it depends on your forecast for GDP. Assuming, you know, MTO operates at around, you know, 70%-80% and we get, you know, 3% GDP growth, yes, we would expect that kinda growth. In a high inflationary market, it's hard to know if GDP will probably be compressed. To me, those are the two things we watch is GDP and MTO rates.
Okay. Will your production, methanol produced tons grow in lockstep with that, or do you think you'll do better with the recent G1, G2 expansions? Or how should we think about growth in production with your turnaround next year versus this year?
Yeah. It depends on gas availability in Chile. That'll be what drives our production. Right now we're running, you know, at high rates in Chile, and we'll see how it looks there next winter or next summer. Assuming it's similar to this year, you know, I think we don't telegraph turnarounds. I always say two to three per year, and that's still the guidance. But, you know, our debottlenecking is done in Geismar, and, provided no hurricane events, we will do better there this next year than this year. Hopefully in New Zealand, we won't have to sell on our gas electricity market next year, but who knows?
you know, obviously, we don't want the country not to have heating and electricity, so assuming that doesn't happen, we'll be better in New Zealand as well. I anticipate I'd be very surprised if our production next year is not higher than this year.
Okay. Thank you.
Thank you. The next question is from Matthew Blair from Tudor, Pickering, Holt & Co. Please go ahead.
Hey. Good morning, John. Given where methanol prices are there any prospects for a short-term, term opportunistic restart at Titan in Trinidad?
Yeah, short term is not possible. We don't have the people. If you recall, we have to spend some capital. We don't have the opportunity to start it up in an opportunistic way. You know, even if we did, it probably doesn't make sense, the amount of money you spend to start it up and not knowing how long high prices are gonna last. We're still focused with the government on, you know, a five-year contract that allows us to be profitable through the cycle, and that's still where we're focused.
Got it. Then I think under your original modeling assumptions, you had all the incremental production from G3 going to Asia. Is that still a good assumption? I just ask given the pace of the demand recovery and also because, you know, it seems like given the size of G3, it'd probably be lower on the cost curve than some of your North American peers. Just wanted to check on that.
Yeah, we're still modeling it that way, but obviously we're gonna try to sell as many of those molecules closer to home because the economics are better. I think from a modeling perspective, when we're talking about returns, et cetera, it was intellectually the right thing to do to say the worst case scenario, we have to bring 1.8 million tons to Asia or China and Asia. We're still modeling it that way. As things evolve here, you know, if we can sell more in the Atlantic Basin, obviously the economics improve.
Great. Thank you.
Thank you. The next question is from Adam Starr from Gulfside Asset Management. Please go ahead.
You mentioned that you're going to a separate price sheet for China at the beginning of the year. Based on past history, how will the Chinese price compare with the rest of Asia Pacific? How does your volume break down between those markets?
Yeah, we're selling about a quarter into China and about 20% into Asia-Pacific in any given year. You know, in the recent history, I'd say China has been setting the cost curve. The pricing in China has been lower by the freight differentials to the other markets like Japan, Korea, Southeast Asia. That's about $20-$25 today. I think on the last call, I was grilled quite hard about the discount. I don't know. It hasn't come up today, but you know, part of the challenge there is we were trying to maximize our overall profitability by setting an Asia-Pacific price that you know, made sense for all the markets. With China being on average $20-$25 lower, it was impacting our discount. Having the two separate prices hopefully will, you know, help with that issue, and that's why we decided to go that way.
It's really not gonna affect what you make. It's just gonna be a little more transparent to us.
That's correct. That's right.
Thank you very much. Also, are higher gas prices making the Trinidadians more willing to discuss a longer term contract?
Well, at least the offers that we got, I mean, even at these prices, we'd be making very little EBITDA based on the price-sharing mechanism that we saw. I don't know what our competitors are paying, but that's what we were offered.
Okay, 'cause they're missing a pretty good boat right now, but in Chile, is there still potential for higher gas supplies down the road? Is there drilling going on? Is there new gas being developed?
There is. There's new gas. Yeah, there's new gas on both sides of the border, Chile and Argentina. I think I've mentioned before, we need to do some maintenance work on our Chilean plant in the next few years as well to get to higher rates. The gas availability is improving in the Southern Basin.
Okay. Thank you very much, and I appreciate the outlook.
Thank you.
Thank you. The next question is from Ben Isaacson from Scotiabank. Please go ahead.
Thank you very much, and good morning. Two back to basics questions for you, John. First one is on the cost curves. You mentioned marginal cost is somewhere in the $450-$500 range. Over the last few weeks, prices have been higher than that, which suggests we're in a demand-driven market right now, where pricing is based off of affordability and not on the cost curves. My question is, now that we're seeing pressure by the Chinese government to push coal prices lower, and at some point, we will see European gas prices coming off in the spring. Will that not push methanol prices lower, or are we truly demand-driven, and affordability is trumping all else right now?
Yeah, I'd call it supply kind of interruptions are driving. There's not enough supply to meet demand. We're probably saying the same thing there, Ben. In Europe, you know, you have to see gas prices fall quite substantially to even at today's prices, to allow restarts of the idle capacity there. And in China, you know, we'll see how the coal market de-develops, and there's many things that go into what methanol producers pay for coal in China. It's not just the index that you may read on Bloomberg or wherever. There's a lot of different factors. So you're right. I'd say we've been about above whatever the cost curve has been most of this year. And until supply catches up to demand, that's probably gonna be the case.
Thank you for that. My second question is, the relationship between oil and methanol is quite complex. There's direct relationships, there's indirect relationships, there's perceived ones, et cetera. And I'm just trying to understand, we're at $80 oil now. A $10 change in the price of oil, can you just remind us what does that mean for methanol and for Methanex? Whether you think about demand or pricing or cost curves or affordability, whatever it may be.
Yeah, there's not really a link between oil and methanol. There's no real substitutable products in the demand where, you know, a higher oil price or lower oil price will lead to less demand for methanol. Generally, I'd mention a higher energy complex is good for methanol pricing because the cost curve moves up because some supply has to come out and, you know, and demand for methanol into energy applications, which are really being driven by environmental issues, would continue to grow. I think, you know, there's really no link in our minds between the price of oil and the price of methanol on any given day.
Thank you.
Thank you.
Thank you.
The next question is from Roland Rausch from Crown Extra Investments. Please go ahead.
Hey, John, it's Roland. How are you?
Good. How are you, Roland?
Good. Hey, sorry, I might be the third person here going after that share buyback disclosure, but can I just run a couple of probably common understanding points? Number one, the roughly $150 million cash in, I assume, you still expect in Q4. If I pro forma that, you are roughly at the $1.1 billion you mentioned before. Is that correct?
Yeah. Plus, we're gonna get some, hopefully, the money from the MOL sale as well, Roland.
Okay, understood. I know you guys did a great job in, I guess it was July 2016, where you laid out kind of, I think it was $865 million, actually. I'm talking about G3 CapEx. Has any of that changed? I think it was $100 million in Q4, and then I think the large part, $410 million in 2022, and then around $300-$350 million in 2023. I don't wanna pinpoint you 'cause I know that it's a moving target, but is that roughly still, you know, what you guys expect as CapEx layout for G3?
Our guidance hasn't changed on the CapEx for G3. We have a large contingency, as I've mentioned in those budget numbers. As well, I mentioned in my opening remarks, about $100 million a quarter is how you should model the spend on G3 until completion.
Okay. Basically, again, I know you answered it in five different ways already, but if that sale proceeds come in, are you there to redeploy any free cash flow, you know, back to share buybacks? Or is that too aggressive to model?
No, we are buying back shares every day today. I think.
Right.
You know, as we get closer to our targets, can accelerate that buyback and think about a second one, you know, first, you know.
Okay.
In the next 12 months.
Just one more on this. I assume there are certain blackout periods on when you can buy back share, right?
No, there are blackout periods when we can change the rate of buybacks, but we can, you know.
Okay.
At a certain month, like, getting close to quarter end, we can't change the rate, but we can give an order to buy X amount of dollars per day throughout a blackout period.
Okay. All right. That's all I had. Thanks and,
Thanks, Roland.
Yeah, best of luck for the next quarters. Yeah.
Thank you.
Thank you. The next question is from John Roberts from UBS. Please go ahead.
Good morning.
Morning, John.
Yep. How far out do you think the first sequestration project is for a world-scale methanol plant? Would that be more than five years out, do you think?
You know, capital, we're looking at it ourselves, especially in North America for Medicine Hat and for Geismar, and the capital cost is quite substantial. I think without some sort of government help, subsidy or involvement, it's probably longer than that, is what I would say, John. But governments are pretty, you know, bullish on reducing carbon, and this is one way to do it. I know the Alberta government and the Louisiana government are both very interested in carbon capture and storage. We have a team working on it. You know, if and when you know, you get the FID on it's probably a couple of years, you know, to build it into the plant. Five years? I would guess I'd be hopeful that within five years we'd have one in place.
Okay. There was some MTO in China that was being back integrated into coal. Has the coal situation in China set back those projects, or are they still proceeding on plan, do you think?
Yeah. Two have been completed and they're running. We haven't seen any impact. You know, how we manage that is we include those in our supply additions where some of the publications include them as demand losses. It's a little bit of apples to oranges. Sorry. Those have happened and, you know, we are expecting another MTO plant consuming 1.8 million tons of methanol to come on in the next six months. You know, that'll have an impact on demand as well, but we haven't seen any change in the backward integration recently based on the coal prices.
Okay. Thank you.
Thanks, John.
Thank you. As a reminder, you may press star one if you have a question. The last question is from Joel Jackson from BMO Capital Markets. Please go ahead.
All right. Thanks for squeezing one more in for me. John, if I remember how some of your gas contracts work with your methanol price sharing mechanisms, that has to counter the limit, like when methanol prices are very, very low, the bad part of the cycle, or methanol prices are very, very high, like I guess now, high end cycle, that some of the price sharing is different. It may not be as linear. Can you just comment on that? You know, at methanol prices now versus say $100 lower, you know, do the contracts, the price mechanism formulas work a little bit differently?
You're right. They're all a little different. The guidance we give is on average. You know, in general, I've used this for years. At $200 methanol, we're paying about $2 for gas. At $300, about $3, and at $400, about $4. You know, that's the guidance we give. It's not exact, obviously, because each contract is different, and as we renegotiate, they're all changing, depending on the price markers, et cetera, et cetera. Just in general, the higher we go for methanol, the more we're gonna pay for gas.
Thanks.
Okay. Well, thanks very much for all the questions. We're very pleased to share our excellent financial results with you today. We generate meaningful cash flow across a wide range of methanol prices. Our capital allocation priorities remain the same. We use the cash we generate to maintain our business, pursue value accretive growth opportunities, and continue our strong track record of returning excess cash to shareholders. Thank you for joining us today. We'll speak with you again early in 2022, and thank you for the interest in our company.
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