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Methanex Corporation (NASDAQ:MEOH)

Q1 2014 Earnings Conference Call

April 30, 2014 12:00 PM ET

Executives

Sandra Daycock - Director, IR

John Floren - President and CEO

Analysts

Ben Isaacson - Scotiabank

Hassan Ahmed - Alembic Global Advisors

Joel Jackson - BMO Capital Markets

Jacob Bout - CIBC World Markets

Laurence Alexander - Jefferies & Company

Robert Kwan - RBC Capital Markets

Charles Neivert - Cowen & Company

Chris McDougall - Westlake Securities

Steve Hansen - Raymond James & Associates

Chris Shaw - Monness Crespi

Operator

Ladies and gentlemen, thank you for standing-by. Welcome to the Methanex Corporation’s First Quarter 2014 Results Conference Call.

I would now like to turn the conference over to Ms. Sandra Daycock, Director of Investor Relations. Please go ahead Ms. Daycock.

Sandra Daycock

Thanks you. Good morning, ladies and gentlemen. Welcome to our first quarter of 2014 results conference call. Our 2014 first quarter report along with presentation slides summarizing the Q1 results can be accessed at our Web site at www.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 forecast or projections, which are included in the forward-looking information. Please refer to our latest MD&A and to our 2013 Annual Report for more information.

For clarification, any references to EBITDA, cash flow or income made in today's remarks reflect our 63.1% economic interest in the Atlas facility and our proportionate economic interest in the Egypt facility. On December 9, 2013, we completed the sale of a 10% equity interest in the Egypt facility. Our proportionate interest in the facility was 60% prior to that date and 50% thereafter.

In addition, we reported our adjusted EBITDA and our adjusted net income to exclude the mark-to-market impact on share-based compensation and other non-operating items. We report our results 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.

John Floren

Thanks Sandra. Well we had an excellent first quarter of 2014. We achieved adjusted EBITDA of 225 million and adjusted net income of $160 million or a $1.65 per share on a diluted basis. We also sold 2.178 million metric tonnes of methanol which is a all-time record for the Company in the quarter. We’re pleased to announce a 25% increase in our dividend from $0.20 to $0.25 a share. We strive for a meaningful, sustainable and growing dividend. This is the 10th time we have increased our dividend since its inception in 2002. Our increase in operating capacity of approximately a 1 million tonnes in 2013 supports a higher dividend that can be sustained at lower methanol pricing.

We’re also excited to announce a 5% normal course issuer bid to purchase up to a 4.8 million shares. This announcement reflects our balanced approach to the utilization of cash and builds on our long track-record of returning excess cash to shareholders. Since 2000 we have repurchased approximately 45% of the Company’s shares.

Late in Q1 we saw a sharp drop in pricing particularly in Asia. The decline came as several idle plants resumed operations that eased Asian supply constrains. While a prize decline was essentially supply driven, demand was also slightly lower in Q1 due to seasonal Chinese New Year slowdown coupled with lower DME demand and MTO maintenance. Traditional demand outside of China grew during the quarter. Pricing has moderated to levels seemed prior to Q4 a major supply disruptions. The Atlantic Pacific price differential continues at approximately $100 a tonne. We’ve just announced our May contract pricing which moves slightly lower in the U.S to 545 a tonne and a decrease of $20 a tonne in Asia to 460 a tonne. We believe spot prices in China have stabilized at current levels.

In the quarter we made solid progress on our Geismar relocation projects. We’re targeting to start up Geismar 1 at the end of the year, the bulk of the dismantling of Geismar 2 is complete and the first shipment is on its way to Louisiana. We expect all modules of Geismar 2 to be on-site later this year. Achieving the budget for the two relocations remains challenging as we’re seeing pressure on both project scope and wages.

During the first quarter of 2014 capital expenditures related to the Geismar projects were $130 million. The remaining budgeted capital expenditures related to Geismar are 505 million. In the first quarter we produced 1.226 million metric tonnes of methanol compared with 1.194 metric tonnes during the fourth quarter of 2013. We ran our Egypt plant at 87% operating rate in Q1 based on gas availability. I am still comfortable with a 75% to 80% operating rate guidance for 204, as we might see lower operating rates than 87% as the year progresses, as a result of less gas availability in the summer period when electricity demand increases.

In Trinidad we experienced gas restrictions in Q1 2014 at a rate which was about the same as Q4 2013. We estimate that we'll incur about a $10 million negative impact on margins related to inventory on-hand at the end of Q1 based on our current view of pricing in Q2. Our average discount in Q1 was 14.5%, this significant increase from Q4 2013 discount was as a result of rapid decline in the spot market especially in Asia where we chose to adjust pricing and discounts on a temporary basis. We expect our discount to improve in Q2 based on our current expectation for Q2 prices.

Our current operating Chile plant is expected to be idle early in May and we’re targeting to start the plant up later this year.

I’ll now stop and take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) 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 Ben Isaacson of Scotiabank. Please go ahead.

Ben Isaacson - Scotiabank

Thank you very much. Hi John, just on China can you talk a little bit about the import export dynamic in Q1 and how you see that playing out over the next 12-18 months?

John Floren

Yes hi Ben. I think in Q1 there wasn’t a lot of product to import as quite a few of the plants in Southeast Asia and Iran were having production issues. So we did see higher rates in China with locally produced product. And we did see quite a bit of exports and then it wasn’t really Chinese product but it was more likely product that had been imported from the Middle East or other locations going to Southeast Asia and Korea to really fill in the gap that was present because of the outages in the region. And so going forward we would expect imports to go back to more normal levels, 4 million to 5 million tonnes per year, so a 1 million tonnes a quarter, give or take.

Ben Isaacson - Scotiabank

Perfect. And then my second question is on Geismar 2, where are you in terms of negotiations for a gas contract? And looking at the forward curve, are you still comfortable there being spot?

John Floren

Yes, we’re comfortable with where we see the forward curve and we’re comfortable based on the amount of gas, the reserves that we’ve been reported increasing all the time. Our current view on gas for the next five to 10 years in the U.S. is between $4 and $6 and we’re very comfortable at that range. We certainly see that many people that are drilling today have got their cost structures down to the 4 to 4.50 range and get a return at those numbers, so we’re comfortable that the gas price will allow us to produce at very high rates for a long time.

Having said that we’d certainly like to underpin that million tonnes by a long-term gas contract our team is working hard I think we had a couple of things go against us in the quarter. We had gas prices themselves go up to 4.50 and we saw even spot prices on a day basis hit $20-$30 because of the extremely cold winter we experienced in North America and now with methanol prices falling people looking at a forward curve versus a methanol let’s say related formula it’s not as attractive today as it would have been a few months ago.

Ben Isaacson - Scotiabank

Great, thank you very much.

Operator

Thank you. The following question is from Hassan Ahmed of Alembic Global. Please go ahead.

Hassan Ahmed - Alembic Global

Good Morning John.

John Floren

Good morning.

Hassan Ahmed - Alembic Global Advisors

I was taking a look at the sequential swing between Q4 and Q1 in EBITDA, and it seems that there was a $25 million hit on higher cost on the produced methanol side of things. So I was just trying to get a sense of how much of that 25 million was from the margin sharing side of things versus actual production cost going up?

John Floren

Yes our cost structure really hasn’t changed Hassan I mean we can get into the details with you offline. But you will remember in our gas contracts there is a lag as the price goes up there is a bit of a lag on the gas we share on average globally a third of any increase in methanol with the gas suppliers and I mentioned there is a lag. Prices came off in the quarter pretty quickly in Asia late in the quarter, so you would have seen some pricing that was or sales pricing would have been lower. But our cost structure really hasn’t changed at all we’ve seen this before as you have prices go up rapidly or prices go down rapidly that it’s really inventory flows that are affected.

Hassan Ahmed - Alembic Global Advisors

But I mean obviously you are only exposed to sort of non-longer term contract prices on the Chilean and the Medicine Hat side of things so it wasn’t -- obviously Chilean production came down so it’s not that cost would have gone up there so it’s not that cost skyrocketed in Medicine Hat?

John Floren

Well, we did have some increases in Medicine Hat because some of our contracted gas was not -- we weren’t 100% contracted and we did see spot prices in the gas market and Medicine Hat go up in the quarter quite substantially. So, really nothing has changed in our cost structure and it’s really inventory flows that we have seen in the past.

Hassan Ahmed - Alembic Global Advisors

Sure. And as a follow-up obviously yesterday Westlake Chemical announced that they were dropping some assets into an MLP and there is clearly some debate in terms of some delays associated with the approval process and the like. So where do you stand with regards to your thought process, with regards to an MLP? And just some color on potential timing if you were to go through with it?

John Floren

Sure. Well, we have a team looking at MLP for our Geismar 1 and 2 assets. We don’t have to make a decision on that till later this year, early next year we’d like to be operating for a period of time I don’t know a quarter, six months before we’d have cash flows that we could show the market to drop into an MLP we’re studying the pros and cons certainly Westlake got a nice bump yesterday because of their MLP announcement. We have time to look at this issue and there is a lot of things to consider not just the distributions of the cash, it is how does it impact your operations of your whole Company your ability to growth the Company et cetera. So we have the pleasure and luxury of some time to look at it.

I have said before and I’ll say again if we think it is accretive value to shareholders then we will seriously look at, at doing it, but it is early days for us to make that decision. I think as well you’d have to look at that the market looked like at the time you were thinking of dropping your assets into an MLP, what’s the methanol price, what’s the forecast that would have a big impact on the valuation.

Hassan Ahmed - Alembic Global Advisors

Sure thing. And from a regulatory perspective, you don't expect any sort of pushback or delays or whatever, if you decide to sort of go through with it?

John Floren

Well again those are things we’re working through. We saw the letters have been kind of suspended for now but one of our competitors dropped their asset into an MLP with no issues, so assuming the rules don’t change we wouldn’t expect that to be an impediment.

Hassan Ahmed - Alembic Global Advisors

Very good, thank you so much John.

Operator

Thank you. As a reminder, please limit yourself to one question and one follow-up question. After that if you have further questions, please rejoin the queue. The following question is from Joel Jackson of BMO Capital Markets. Please go ahead.

Joel Jackson - BMO Capital Markets

Thank you very much. Good morning. John, maybe you could elaborate on what was going on with New Zealand on the maintenance, on the gas platform in the quarter, how you see that playing out across Q2 in the second half of the year, please?

John Floren

Yes that was a one-time maintenance on the big Maui field that Shell operates there in New Zealand, so it was a fairly major maintenance and we don’t expect that to continue throughout the year.

Joel Jackson - BMO Capital Markets

Okay. And you talked about how Chinese prices seemed to have hit bottoms here, East China prices. Maybe you could talk about where you see Atlantic Basin, some North American, and European prices coming to -- where will the floors be with sort of what premiums to China? Thanks.

John Floren

Yes it’s tough to predict the future on pricing. I think we have said in the last call and we’ll say it again. We probably as soon as you have supply and demand getting more imbalanced which they seem to be today. We’ll return to pricing levels we saw in Q4 and that seems to be where we’re today, we do expect that $100 differential to continue for this foreseeable future.

Joel Jackson - BMO Capital Markets

Thank you.

Operator

Thank you. (Operator Instructions) Please limit your inquiry to one question plus a follow-up question. After that if you have further questions, please rejoin the queue. The following question is from Jacob Bout of CIBC. Please go ahead.

Jacob Bout - CIBC World Markets

Hi. Good afternoon. Wanted to get your opinion on buying existing methanol assets, so say for example if the MTHL assets were to come up for sale, how would you look at that?

John Floren

I think we like to grow our Company Jacob and one of the ways to grow it is to buy existing assets, first of all it had to be up for sale, that’s the first and there is not a lot of people that are looking to sell their assets today. Second of all, wherever we look to buy assets, we’d have to think a concentration risk. So if you think of MHTL, we already are pretty exposed in Trinidad so we have to take that into consideration. But if found assets for sale that met our criteria of returns and we could get comfortable with the associated country risk then yes we would be buyers.

Jacob Bout - CIBC World Markets

Okay. Maybe just my follow-up here, just on the MLP structure. So we saw the announcement out of Westlake yesterday, but also we've seen others, like CF and Potash that have walked away from this type of structure and logically in your mind, what are the machinations that you're going through as you think about either one plant or two plants?

John Floren

Well I think we, well we’re looking at one plant first because that’s what’s in front of us. And there is a lot of things to consider it. It’s simplified sometime in some of the writings that you read but we’re learning, we’re going through to understand all the implications on our business, and see are the returns that we’re seeing are they sustainable, could the rules change, if the rules change, how does that impact maybe the structure we set up. If we set up an MLP structure, what other things are we -- not able to do, so it’s quite complicated set of analysis that we have to do, because we’re a single product commodity chemical company running a global supply chain that’s integrated so you’d have to roll off that piece of your business you wouldn’t have the EBITDA from that piece to grow if you chose to grow, you wouldn’t have the EBITDA from the MLPPs to sustain a trough in the methanol pricing. So there is a lot of things that we need to examine and take not only our management team through, but our Board through as we look to make the decision. And I guess the beauty is we do have time because we won’t be in a position to drop Geismar 1 and 2 an MLP until sometime next year.

Jacob Bout - CIBC World Markets

Alright, I appreciate the candor.

John Floren

Thanks Jacob.

Operator

Thank you. The following question is from Laurence Alexander of Jefferies. Please go ahead.

Laurence Alexander - Jefferies & Company

Hello. I guess two quick questions. First, can you give an update on your thinking around other potential projects, either a second plant in Medicine Hat or another project or the projects in Chile? What's your thinking about in terms of doing it either on your own or bringing in other partners and the timeline for a decision there? And then secondly, can you walk through a little bit how to think about the average discounts? They were up quite a bit quarter-over-quarter. Is this sort of a good run rate for the balance of the year or how do you see it going to evolve going forward?

John Floren

As far as new projects beyond Geismar 1 and 2?

Laurence Alexander - Jefferies & Company

Yes correct yes. So they’re moving a third plant from Chile to the U.S you are doing a new projects in Medicine Hat?

John Floren

Yes we continue to have two teams working on those projects, so there is a team working on a potential third relocation from Chile and there is a team working on a Medicine Hat 2 expansion. I would say on the Medicine Hat 2 expansion the capital cost looked quite challenging and the execution risk is quite high due to the inability to get a time and materials type of arrangement with an EPC contractor. Decision making process there we’re completing a pre-feed we’re doing some other work to look at how do we get the product to Asia and what the capital cost might be for a conventional steam reforming 1.3 million tonne plant. We’ll probably be in a decision FID by the next 12 months is the current view, so quite a bit of work to do but it looks quite challenging based on gas at 4.50 the current capital cost we’re seeing and the long-term methanol price.

As far as a third relocation well obviously using our assets in Chile is the first prize for the Company so we’re still watching what’s happening in Chile itself with the unconventional drilling, Argentina is busily developing their shale gas assets and we have a team like I said looking at a possible third relocation to Geismar. Things that have to happen probably before we pull the trigger on that getting Geismar 1 running, having gas contract or some sort of gas certainty for a 1 million tonnes in Geismar 2 and we probably need to acquire a little bit of land in the area. So again a team working on as I said the decision on that is probably in the next nine to 12 months as well.

And then the second question was on the discounts. I’ve guided before that we expect our discounts to improve overtime as markets remain tight with not a lot of new supply coming on and demand continuing to increase that guidance hasn’t really changed. In the quarter, we saw discounts go up because we chose to temporarily adjust some pricing based on a real large drop off in pricing that I think what happened was all of the plants that were out all came back at the same time, a couple of the plants whether it be Iran or in Malaysia didn’t have all of their molecules contracted so we saw quite a bit of material come on to the spot market in a very short period of time which led to lower -- quite significantly lower spot prices in a matter of weeks.

Laurence Alexander - Jefferies & Company

Thank you.

Operator

Thank you. The following question is from Robert Kwan of RBC Capital Markets. Please go ahead.

Robert Kwan - RBC Capital Markets

Good morning. If I can just get some color and your thoughts on capital allocation and John you made some comments around new Greenfield flat ground field growth around Medicine Hat showing relocation, and acquisitions. Just wondering when you were looking at sizing the amount of the dividend increase and the decision on NCIB, were those completely separate decisions or did you see all that with the challenging environment out there for Medicine Hat that it made more sense to basically invest in your own capacity on the share buyback side and maybe give a little bit more on the dividend?

John Floren

The things we’ve done with our cash is no different than we’ve done in the past we take a balanced approach and there is three pillars to that balanced approach, grow the Company, have a meaningful growing sustainable dividend at the bottom-end of the cycle and then return any excess cash to shareholders through share buybacks, that hasn’t changed. So we’re preserving the ability to grow the Company even though we’ve increased the dividend and the share buyback. I’ve said before that if we don’t have opportunities that makes sense to growth the Company, as we get the 8 million tonnes of our own capacity at a $400 realized this is significantly lower than we’re seeing today we’ll be generating over a $1 billion in EBITDA of which 700 million will be free cash. So if that was the situation we’d be having a lot more consideration with dividend and share buybacks than we announced yesterday.

Robert Kwan - RBC Capital Markets

Okay. And then I am sorry, go ahead.

John Floren

I am just saying we preserve the ability to grow the Company despite having increased the dividend by 25% in putting out a normal course of 5%.

Robert Kwan - RBC Capital Markets

So the decision to proceed with an NCIB because that hasn’t been an every year thing isn’t -- should not be construed as concerns or change in your thoughts on potential Greenfield flat ground field growth?

John Floren

I think it should be construed that we’re very positive about the ability of this Company to generate significant cash despite spending 130 million a quarter on growing the Company by 2 million tonnes.

Robert Kwan - RBC Capital Markets

Got it. And just the last kind of question here on the MLPs, your referenced the private letter rulings just wondering if you do decide to go ahead will you be seeking definitely seeking private letter ruling or are you happy relying that there is similar assets in MLPs?

John Floren

No we’d seek a private letter ruling.

Robert Kwan - RBC Capital Markets

Okay, great. Thank you.

Operator

Thank you. The following question is from Charles Neivert of Cowen. Please go ahead.

Charles Neivert - Cowen & Company

Good morning guys. Quick on the outages that were out not yours but the global outages, you had the big ones in Indonesia you had the Iranians there was issues in Oman, issues in Saudi Arabia. Has everything now back and running effectively I mean now that there are other turnarounds that are going on now or will be shortly that should be sort of adjusted for or dealt with?

John Floren

Plants that were down are back and running the Brunei’s, the Malaysian’s, the Iranian’s that were restricted on gas and sanctions they’re back and running, there is a couple down right now that are normal maintenance and you should expect to see normal maintenance in this industry every quarter. So, I’d say the industry right now is running at a pretty good cliff.

Charles Neivert - Cowen & Company

So what we are seeing is basically everything that was unscheduled and sort of -- and that was offline is now back again and pricing is now stabilizing around that level?

John Floren

That’s right.

Charles Neivert - Cowen & Company

Around whatever the level we’re seeing with basically everyone out there running. Do you have any ideas going forward on what I think you’d said that gas curtailments in Trinidad are going to sort of replicate what they have until the last couple of quarters, is that right?

John Floren

Yes, we’re seeing gas restrictions in Trinidad similar this quarter as last quarter.

Charles Neivert - Cowen & Company

Okay. Last question is China have they shutdown any of the gas base production yet in any significant way or is that something that might still come where do we stand with that, what showed in?

John Floren

Well, it’s pretty interesting but when you see their prices decline as quickly as they do you don’t get an immediate response but we are seeing response now where high cost gas-based plants and some coal-based plants have reduced or turned off. We do believe there is some of the industry below the cash cost and again it’s not an immediate response they probably love to see how long they expect the pricing to continue before they turn off but some have turned off we would expect others to turn off. We’ve seen pricing rebound a little bit in China in the order of $10 a tonne I think we’re at 370 to 375 today so I don’t anticipate that future is going to be any different than the past when the Chinese producers have been losing cash they’ve shutdown and that would be my expectation going forward until I see something different.

Charles Neivert - Cowen & Company

Okay, great. Thanks very much.

Operator

Thank you. (Operator Instructions) Please limit your inquiry to one question plus a follow-up question. After that if you have further questions, please rejoin the queue. The following question is from Chris McDougall of Westlake Securities. Please go ahead.

Chris McDougall - Westlake Securities

Hello John, thanks for taking the question. I wanted to understand with the dividend the substantial increase in the dividend what sort of stress you go through when evaluating the right level for that and if you could give a specific kind of floor methanol price or any color around that? And then I also want to understand the expected pace of the share buyback.

John Floren

Yes so, on the dividend we have three things that we look at when we’re thinking about the dividend, so we want it to be growing, so we’ve grown it every single year since 2002 except for the time of the financial crisis and when we had our assets in Chile become stranded to some extent. We also like it to be sustainable like you mentioned so the last time we saw a real troughed in the methanol industry was just after the financial crisis we saw our prices of $200 a tonne every one of our plants at that price were still cash positive and we maintained the dividend. So we do stress tested as we increased it that we wanted to be able to maintain it at what we believe is the troughed in the cycle, and then meaningful. So what is meaningful mean probably somewhere in the 1.5% to 2% range for a single product commodity company is a meaningful dividend. We don’t look at specifically at any given point of the share price we just look at it usually once a year and make a call and that’s what we’ve done this year and I think the yield is probably 1.7 or something depending what the stock is doing. And then on the share buyback our philosophy on share buybacks is to be in the market on a daily basis not to try and time the market to have a standard amount of shares each day that we’re looking to buy to complete the normal course issuer bid in usually a 12 month period.

Chris McDougall - Westlake Securities

Okay, great. Thanks for that color. And then shifting gears on the new demand side so we’ve talked before about the Ferry application with Stena and then some other kind of energy demand sources. Do you have any updates generally about kind of the progress of getting new demand to the industry?

John Floren

Yes one of the challenges when we saw the fly up in pricing the energy applications we were looking to make significant investments in became less attractive in some cases. So Stena is continuing to pursue conversion of their first Ferry later this year so that’s ongoing. We’re building our seven ships that will be able to run on methanol, I think the economics for MTO and DME are much better today than they were 60 days ago. Volvo and their truck fleet in the U.S. have a trial going on with Safeway to use DME to run those trucks to replace diesel. So these things again don’t happen overnight but the trends are there that energy applications continue to grow and continue to drive the growth of the industry.

Chris McDougall - Westlake Securities

Okay, great. Thanks a lot.

Operator

Thank you. The following question is from Steve Hansen of Raymond James. Please go ahead.

Steve Hansen - Raymond James & Associates

Yes. Good morning guys. Just a quick question here, I was hoping you could clarify or help us better understand the impact of the drag on the quarter associated with the purchased tonne volumes? And then would just re-clarify what you thought the inventory drag would be going into Q2 I missed the number I apologize.

John Floren

Yes, so we estimate that we’ll incur about a $10 million negative impact on margins related to inventory on-hand at the end of Q1 based on our current view of Q2 price. I’d rather not get into the color specifically around what happened in Q1 with purchased products. What I said overtime is on average you should think of a flat margin on what we purchase and what we sell. We have done much better than that over the last 12 months but on average that’s our guidance.

Steve Hansen - Raymond James & Associates

Okay. Understood, and then just maybe one other question as it related to the spread and bifurcation between the markets, as I understand it, that one of the key issues driving the North American spot market in recent weeks has been some arbitrage or imported tonnes. I am just trying to understand, do you have a sense for market intelligence standpoint how much of that volume is still left, given the discount happened there a little bit? Is that largely finished and should we expect to see that $100 that you suggested hold pretty firm here?

John Floren

Yes we expect the $100 differential between the bases to continue for the foreseeable future. There has been product from the Southeast Asia moving into Europe and North America, we understand most of its sold in place, so we don’t think that’s going to have a significant impact on the current spot markets in those regions. Having said that I think it is surprising North America and Europe is a little less than $100 a tonne differential, you should continue to see cargos move from Southeast Asia to Europe that’s. That’s what we saw in Q4 last year and that’s what we expect going forward this year.

Steve Hansen - Raymond James & Associates

Okay, great. That’s helpful, makes sense.

Operator

Thank you. (Operator Instructions) Please limit your inquiry to one question plus a follow-up question. After that if you have further questions, please rejoin the queue. The following question is from Chris Shaw of Monness Crespi. Please go ahead.

Chris Shaw - Monness Crespi

Yes, just a follow-up on the purchase volumes. Just curious, is that sort of more a normal level, do you think, or was that elevated during the quarter? I know you're marketing the lined volumes as well now, but I was just trying to figure out, sore of model for the rest of the year if that seems like a more normal level?

John Floren

I think as you see us bring on our own production tonnage the percent of purchased product that we’ll be selling will decrease. When we do have our own production issues we have to go out and buy a little bit more than we’re planning to cover our own shortfalls. So I think the answer to the question is really predicated on how well we produce it is how much we’re going to purchase.

Chris Shaw - Monness Crespi

Okay. And that to that end of it, you mentioned Chile, the plant was going to be shut down for a while, until May or so. Just tell me exactly what's going on down there, I mean is that just depending on how much gas Argentina is giving you?

John Floren

No I think what we have said is in the winter months down there the gas balances look quite difficult for us to continue to run because the city itself and Chile pulls more gas for heating in their winter and Argentina is not as receptive to exporting quantities of gas in their winter time. So those two, the combination of those two factors makes it difficult for us to run in the winter time. So our current plan is we will probably go down in the next week to 10 days and we expect to be operating again later this year, that’s our current view.

Chris Shaw - Monness Crespi

Okay, thank you.

Operator

Thank you. The following question is Hassan Ahmed of Alembic Global. Please go ahead.

Hassan Ahmed - Alembic Global Advisors

Hi, again, John. I had a follow-up. You obviously talked about the supply disruption side of things for methanol. But obviously, there were a certain degree of demand disruptions as well. You touched on MTO disruptions, covering the asset used chain. There were obviously some VAM and acetic disruptions as well. So just wanted to get your sense of, what that amounted to roughly in Q1? And are those behind us now, and would that in turn mean demand support as well going forward?

John Floren

Yes we did see decrease globally in Q1 versus Q4 last year by about 150,000 tonnes. So we didn’t see growth we saw a decrease. That has also contributed to the rapid drop in pricing. We didn’t see the rebound after Chinese New Year that we would have expected in the traditional demand. In think pricing like I mentioned earlier was pretty high and put pressure our DME and even MTO took maintenance probably for reasons that the economics were not that great as they were paying $500 a tonne for methanol give or take. So I think post things have corrected that the affordability for DME and MTO is a lot better today than it was 45 days ago. And we have started to see demand on the traditional drivers in China rebound. So our expectation is Q2, we’ll see growth again at more levels that we would have saw last year. So I think we said last year the industry grew at 8% on average, so 2% to 3% growth is what we’re forecasting globally in Q2.

Hassan Ahmed - Alembic Global Advisors

Perfect, thanks so much.

Operator

Thank you. (Operator Instructions) Please limit your inquiry to one question plus a follow-up question. After that if you have further questions, please rejoin the queue. The last question is from Laurence Alexander of Jefferies. Please go ahead.

Laurence Alexander - Jefferies & Company

Just want to follow-up on the domain question. Do you see the surge of 2% to 3% demand CAGR sort of being sustainable for the next several quarters? And if so, would that be suffice to get to staff up the new capacity coming on and get to a tight balance in the middle of next year? Or do you think it's going to take a little bit longer than that?

John Floren

Again the future is hard to predict but we’ve seen 7%-8% growth in methanol the last few years and that would be our expectation going forward being driven by the energy applications. And I think under those conditions you’re going to see snug in markets, you’re going to see certain times like we saw in the last 30 days where supply is a little bit more than demand but I think the trends have not changed. When you look at that compounded annual growth rate of 7% to 8% per year, that’s 3 million to 4 million tonnes of new capacity that’s needed every year to keep the market balanced and there is not 3 million to 4 million tones of new capacity coming on and as I have mentioned many times it takes three to four to five years to build a project from the start of the project to turning off the taps we have fairly good visibility over the next four or five years and we still believe that you’re going to have a combination of higher cost capacity having to run to keep the market balanced as well as some substitution impacts based on the affordability for energy applications in methanol. So our view has not changed at all.

I think it’s a little interesting I have mentioned on the last call that this is a commodity chemical business like any other. It has a cost curve and if you don’t stay above the cost curve for any extended period of time in this case we stayed above it for months not for days. And as a result we were able to generate excellent EBITDA in the quarter, this quarter and last quarter. So we’ll take it, we didn’t ever thought it was sustainable but I think the fundamentals that we look at is at $400 a tonne realized as we execute Geismar 1 and 2 we’re generating over a $1 billion in EBITDA and that’s what gets me excited. We’re going to have ups and downs in the pricing it is a commodity product depending on supply demand but the trends are still there and very solid.

Laurence Alexander - Jefferies & Company

Thank you.

Operator

Thank you. I would now like to turn the meeting back over to Mr. Floren.

John Floren

Well, thanks very much for the questions and interest in the Company. Due the ongoing production issues in April and the anticipated may shutdown Chile operation and the ongoing gas restrictions, our current view is, production levels in Q2 will be similar to Q1. In addition the price of methanol as mentioned has moderated to levels we experienced prior to the significant global production outages in Q4. And as a result, we expect earnings and EBITDA to be reduced in Q2 versus Q1 of 2014. Thanks very much for your time.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.

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