Methanex's (MEOH) CEO John Floren on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: Methanex Corporation (MEOH)

Methanex Corporation (NASDAQ:MEOH)

Q2 2014 Earnings Conference Call

July 31, 2014 12:00 PM ET

Executives

John Floren - President and CEO

Analysts

Ben Isaacson - Scotiabank

Jacob Bout - CIBC

Cherilyn Radbourne - TD Securities

Hassan Ahmed - Alembic Global

Robert Kwan - RBC Capital Markets

Charles Neivert - Cowen and Company

Steve Hansen - Raymond James

Chris Shaw - Monness Crespi

Chris McDougall - Westlake Securities

Ryan McCarter - UBS

Bernard Horn - Polaris Capital

Operator

Ladies and gentlemen, thank you for standing-by. Welcome to the Methanex Corporation’s Second Quarter 2014 Results Conference Call. I will now like to turn the conference over to Ms. Sandra Daycock, Director of Investor Relations. Please go ahead Ms. Daycock.

Sandra Daycock

Thank you. Good morning, ladies and gentlemen. Welcome to our second quarter 2014 results conference call. Our 2014 second quarter report along with presentation slides summarizing the Q2 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 than 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 50% 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 the underlying operating performance of the Company and we encourage analysts covering the Company to report their estimates in this manner.

I would now like to turn over the call to Methanex’s President and CEO, Mr. John Floren, for his comments and a question-and-answer period.

John Floren

Thank you, Sandra. Q2 was another solid quarter for the Company we generated 160 million in adjusted EBITDA and recorded earnings per share of $1.24. Prices in the quarter moderated back to similar levels as Q2 2013 which should enhance the demand and attractiveness for methanol as a source for energy. As a result of the lower prices in the May, June period China imported over 400,000 tonnes a month or about 5 million tonnes annualized. We expect our Chile 1 plant to start up during Q3 and met at higher rates then when we shut it down on May 19th due to the lack of natural gas.

Our New Zealand plants ran at very high rates during Q2. We started receiving high CO2 gas in May and we’re currently looking to secure additional high CO2 gas to allow the operation to run at full capacity of 2.4 million tonnes per year. We received $42 million related to a settlement with total Total Austral to terminate all remaining obligations under their gas supply agreement.

In the quarter we returned $106 million in cash to shareholders. We returned $24 million through dividends and on May 6th, we started to buy back shares, we repurchased approximately 1.4 million common shares in the quarter representing $82 million of cash for an average buyback price of $59.99 per share under the normal course issuer bid. The share we purchased in the quarter represents 28% of the total shares approved to be repurchased over a 12 month period.

We had a produced inventory build of 69,000 metric tonnes if we did not have this production inventory build in the quarter we could have generated an additional $12 million in EBITDA or approximately $0.08 a share in earnings. Loss on purchased product in the quarter was $10 million no purchase product loss is expected in Q3. Discounts improved somewhat and we expect the discount to continue to improve in a more stable pricing environment. We continue to experience gas restrictions in Trinidad which was slightly higher than in Q1 2014. We also had some ongoing production interruptions due to the mechanical problems with the average air separation unit which is operated by air products.

The Egypt operating rate was 63% in Q2 and 76% for the first half of 2014. As a result of the recent extended shutdown, the 2014 operating rate guidance of 75% to 80% is no longer valid. We are actively engaged in discussions with the Egyptian Government to restore gas supply to our operation and have been notified that we should start receiving gas in the coming days and expect to be operating in August.

It is difficult at this time to predict the expected operating rate for the balance of 2014 and we believe we will be running at higher rates in the winter months when there is less demand for gas to make electricity for cooling. We continue to make excellent progress on our Geismar project. In July we started to commission Geismar 1, our target remains to start up the plant by the end of the year.

However, we may experience some delay into early Q1 2015. We have experienced some scope and productivity has been approximately 20% less than initially planned when we started the project. We expect to have a fairly accurate estimate of how much capital we expect to spend to complete the project in the September, October period. With that point we’ll be close to finishing Geismar 1 and have a good idea of the number of man hours to complete the first plant. We also plan to have all the equipment on site Geismar 2 which we believe will significantly reduce the execution risk for the second plant.

Based on the estimated man-hours required to complete Geismar 1, we will forecast the man-hours to complete Geismar 2. We will also make an estimate of any labor, hourly rate and per diem increases we might experience in the 2015-2016 period as a result of the increase in construction activity in the U.S. Gulf Coast and finalize an estimated dollar amount to complete the project. We plan to communicate any revised capital dollars spend to the market on our Q3 quarterly conference call.

During the quarter we continue to look at the potential benefit of an MLP structure for our Geismar assets. We have been assessing this structure as a possible means to create long-term value for shareholders. At this juncture we see the long-term value generation from an MLP extending from the flow through tax savings to a certain class of investors. We are weighing that potential value against cost and risk of the structure. We do not need to make an immediate decision on this issue, would advice investors that it is premature to anticipate the outcome of our decision.

I will now stop there and welcome any questions.

Question-and-Answer Session

Operator

Thank you, Mr. Floren. (Operator Instructions) Please limit your enquiry to one question, plus a follow-up question. After that if you have further questions please rejoin the queue. (Operator Instructions) Your first question is from Ben Isaacson from Scotiabank. Please go ahead, your line is open.

Ben Isaacson - Scotiabank

Hi John, thank you for taking my question. Just with respect to the MLP, can you just run through some of the strategic and operational risks or considerations that you are thinking about with respect to not dropping assets down into an MLP?

John Floren

Sure. It’s still early days we are still reviewing the pros and cons. I think some of the risks -- we operate a global integrated business. If we were to drop some of our assets in the U.S. into an MLP, certainly we have to ring fence those and you know there would be some operational inefficiencies, there would be some additional SG&A to have a separate structure, we would have to have a separate Board of Directors, certainly the cash flows generated from what we think are going to be some of our best assets in the company would be restricted, for shareholders of the MLP, would have rights to that cash. So there is a number of things that are would be quite different than our normal course -- the way we operate our business. So we are weighing the positives that we have identified versus the negatives, and then our decision will be based on what’s best on long-term value creation for our shareholders.

Ben Isaacson - Scotiabank

And then just my second question. We’ve seen China coal prices down another kind of 5% to 10% over the past months depending on the region. Can you talk about how that market shapes your outlook, if at all? And then especially given kind of Chinese or China’s goal to reduce thermal power based coal demand? Thanks.

John Floren

Yes, sure. We watch the coal market in China closely as well. The cost curve in China today is set by natural gas, not by coal. There is about 5 million tonnes of production still by natural gas. The Chinese government has been raising natural gas prices annually. The last one was in July of last year. they have stated in their five-year plan the interest to get their energy prices more to more global levels and natural gas is probably imported LNG which is probably $10 to $12 of MMBtu today. So coal price every $10 lowering of the coal price, it’s close to about $20 on the cost curve for coal producers in China. So if you had a view that overtime all the natural gas would go away at 5 million tonnes of natural gas-based production and would be replaced by coal overtime, and then coal price stays where it is, it would have an impact on the cost curve. But I think that’s years away before that eventuates.

Operator

The next question is from Jacob Bout from CIBC. Please go ahead, your line is open.

Jacob Bout - CIBC

A question on the cost, you are talking about on the call, that 25% was that just for Geismar 1 and maybe talk a little bit about what’s been driving that and what could make that number move up and down?

John Floren

I’m not sure what you’re referring to Jacob, by 25%. I think I mentioned that we are seeing productivity in the Geismar side, about 20% lower than planned when we started the project. I’ll remind you that about one-third of man-hours are in Chile, and about two-thirds of the man-hours are in Geismar, so that the Chile side is basically completed for both Geismar 1 and 2. The lower productivity is really being caused by what we see as lower skills in the area, younger workforce. I think there hasn’t been much construction to any significant extent in the U.S. for a number of years. And if you were to look at our side or other side, you’d see good part of the work-force between 45 and 60, and a good part between 20 and 25, 29 and nothing in the middle. So I think that’s contributing to lower than planned productivity. And the productivity numbers we use for our project were based on averages for the last 10 years in the similar market environment in the U.S.

Jacob Bout - CIBC

And then how do you think about the ramp in production? How long do you have build inventory for and when to be start to see some of this production hit the income statement?

John Floren

Yes, so the ramp-up in production will grow quite quickly. When we have had challenges in commissioning plants before it is when we have had to commission on our own utility. The nice thing about Geismar is we are buying most of the stuff the steam et cetera across the fence. So our guys are indicating the start up should be weeks not months. So time will tell, but that’s our current anticipation.

Jacob Bout - CIBC

Alright, thank you.

John Floren

Thanks Jacob.

Operator

Thank you. (Operator Instructions) Now next question is from Joel Jackson from BMO Capital Markets. Please go ahead, your line is open.

Joel Jackson - BMO Capital Markets

Hi, thanks, good morning. Are you able to give your best guess for the operating rates at Atlas and timing in Q3 and maybe your best guess in operating rate range for your Methanex in Q3 as well?

John Floren

I’m not good at guessing or predicting the future I think we anticipate further restrictions on gas in Trinidad and we don’t have any scheduled outages in Trinidad or anywhere else in the Methanex world but that doesn’t mean we’re not going to have some.

Joel Jackson - BMO Capital Markets

Could you maybe also give your view on the gas situation in Egypt I mean we have seen a lot of things going on where well the nitrogen producers have gas outages through September, you’ve got Egypt talking about why don’t you bring on a floating barge or floating terminal off the coast for LNG the government has talked about raising minimum gas price to industrial customer as well, can you maybe talk with some of those things please?

John Floren

Sure I think long-term gas in Egypt there is a lot of reserves there 50 to 80 Tcf depending on whose numbers you use, certainly the short-term issues were caused by the resolution some years ago and the investments in the upstream dried up basically because the upstreamer owned a lot of money from the government. And as you mentioned energy is subsidized in Egypt. So I think the current government is focused on getting demand under control as well as incentivizing more of the reserves to be developed and that means paying the upstream.

At the same time they have announced they’re going to eliminate subsidies overtime on energy which when you pay world prices you would expect more economic value of the product to be used in the country and not wasted. So I think longer term we’re pretty comfortable with the gasify situation in Egypt short-term as we have mentioned before there is going to be some bumps along the road. We’re in constant contact with the government and what I would say is what they’ve told us they’ve lived up to at this time and we have no reason to believe that they won’t live up to the commitments they’ve made to us in the future.

Joel Jackson - BMO Capital Markets

Okay. Thank you.

Operator

Thank you. Our next question is from Cherilyn Radbourne from TD Securities. Please go ahead, your line is open.

Cherilyn Radbourne - TD Securities

Thanks very much good afternoon or good morning, depending on where you are. As you’re probably aware one of the industry consultants has been highlighting the successful start up of a number of MTO and MTP plants and that would be merchant demand. In China it will be critical to maintaining the industry’s supply demand balance through the end of the year. So I just wondered whether you agree and whether you could just address that issue?

John Floren

Well again the future is really hard to predict, currently we have some of the regular participants down, Malaysians are having trouble again and the one of the big Saudi plants is down uncertain when it might come up. In Q2 of this we have the operating rate of the industry really high versus Q1 so I think it’s really difficult to predict. Demand certainly drives part of the equation and supplies the other side of course and demand in Q2 was okay, Q1 was not great and the energy applications for methanol were not seller at a $500 methanol price in Q1.

Going forward in the second half where we expect demand to continue improve including MTO, our current view on MTO is there is about another 900,000 tonnes of demand for MTO by the end of the year and next year you’re talking 5 million tonnes of potential demand through the year. So MTO demand will certainly have a large impact on the demand side of the equation but I think it’s really hard to predict what’s going to happen on the supply side, if you go back to more normal operating rates we could see the market tighten up quite significantly again but it’s really hard to predict the future.

Cherilyn Radbourne - TD Securities

Okay. Thanks for that color. That’s all from me.

John Floren

Thank you.

Operator

Thank you. Our next question is from Hassan Ahmed from Alembic Global. Please go ahead, your line is open.

Hassan Ahmed - Alembic Global

Hi there John. John just wanted some more color on the demand side of things I was obviously going through the press release and was a bit surprise seeing there was a mention of demand sort of running at an annualized rate of 57 million tonnes which would essentially equate to being flat with last year’s level. So where exactly, where are these pockets of sort of no growth or negative growth?

John Floren

So South America hasn’t been great and that’s really Brazil, North America and Europe are growing at GDP rate somewhere about 2% to 3%. China has been disappointing and the first half with a high methanol price environment the energy applications were impacted with DME and MTO. So MTO was great at 550 methanol pricing so we saw operating rate reduce and some maintenance taken, at current prices we’re seeing demand in Q2 higher than Q1 and our expectation for the second half would be higher demand again. But it’s really difficult to predict how this might eventuate but certainly the global economy seem to be doing quite well and 60% of the demand from ethanol is still chemical and the energy applications continue to grow. We see higher operating rates in the MTO and fuel blending areas. And like I said we expect another almost 1 million tonnes of demand come on in MTO later this year, and quite a significant amount next year.

Hassan Ahmed - Alembic Global

And again, in line with this, where do you see inventory levels right now?

John Floren

Our own inventory levels are probably similar to where they were last quarter, around the 800,000 tonne mark. Certainly as prices were coming down, and the anticipation of prices coming down, our belief is that customers would have ran their inventories as low as possible trying to avoid paying higher prices in a falling market. So it is very difficult to know exactly at any given point in time where the inventories are with our customers’ side. Our demand pull continues to be quite good at this point. We have watched the Chinese inventory creep up to about 25 days of supply on the coast. And that’s the number we tend to watch pretty closely. Recent days, the CFR market, the import market for China has gone up, and the Southeast Asian price has gone up quite a lot because of the outages that we have seen in Malaysia and Saudi. So it doesn’t take very much on the margin to flip the market one way or the other.

Hassan Ahmed - Alembic Global

Fair enough and a final one if I may, on the supply side of things. You talked about maybe some slight delay in ramping up Geismar 1, what about the other industry participants as you think about sort of longer term, are you sort of beginning to see sort of very clear signs of capacity additions being pushed out? So that’s one side of it. And on the other side, off late we have been sort of hearing about a fair bit of activity, Chinese consortium sort of coming in and announcing mega-mega-methanol projects on the Gulf Coast. How valuable do you think those announcements are?

John Floren

Well the only other project besides ours outside China that is under construction is the Celanese project. So I think you’d have to ask them how they are doing on progressing that project. I think they’d been verbal in announcing mid to Q3…

Hassan Ahmed - Alembic Global

Yes now they are saying Q4 of ’15.

John Floren

Okay, so you know better than I do, Hassan, so that’s the one that’s under construction. All of the other announcements have not reached FID. To my knowledge, have not secured gas, have not secured ETC, in some cases land, permits, a lot of things that you’d want to check the box before you do FID and financing is a big one as well, to have these first projects banked, so none of those have concluded so to me if that is the case. There must be issues in securing some of those key components of a project. Some of the set you’ve have seen from the Chinese, whether it be in the Pacific Northwest or recently in the Gulf coast, we believe it is to underpin exports to China for MTO production and more production in the future. When we talk to MTO producers and potential producers in China, their biggest concern is methanol supply. And probably the amount of projects that are on the merchant methanol slate for MTO will not go forward and unless they do secure some sort of methanol supply.

So I think it’s a bit of a chicken in the egg. The MTO, some of it won’t go forward without methanol supply and some of that methanol supply will go forward without having a customer to the MTO. So we will continue to watch this space. Having said that, we are seeing a number of the Olefin crackers starting construction now which is tightening up labor markets, and I think execution risk in the Gulf Coast in the next 3 to 4 years is going to be quite severe. I’m really happy that we’re not going to be building a Greenfield or Brownfield site in that timeframe because I think both productivity and cost from a per diem and labor rates in that 2016-2017 period could be under quite some pressure. And execution risk, I think, increases quite significantly. We have seen that story before in the oil sands in Canada, and in the LNG projects in Australia.

Operator

Thank you. (Operator Instructions) Please limit your enquiry to one question, plus a follow-up question. After that if you have further questions please rejoin the queue. And our next question is from Robert Kwan from RBC Capital Markets. Please go ahead, your line is open.

Robert Kwan - RBC Capital Markets

John, I guess you were just talking about it here in terms of cost pressures in the Gulf Coast and if I have heard you said the same thing about Alberta. And just wondering if you look at the potential for expansion, whether that’s full Greenfield or if you decide to relocate a second unit, are there other areas that you think might be interesting, whether that’s relocation or a Greenfield to expand capacity or based on just kind of what you’re seeing in your outlook? You like the idea of just returning capital back to shareholders?

John Floren

So we will have added 3 million tonnes of capacity over a three year period when Geismar 2 is up and running in early 2016, or about 60% of our capacity, our next best growth opportunity post that is Chile. And we still will have about 1.5 million tonnes oil capacity in Chile. We’re working really hard to get that running, and that won’t cost us very much capital. And there has been some good activity and results on the Chilean side of the border in the unconventional, early days. And Argentina continues to spend a lot of money in the Neuquen on unconventional and EIA says there is 500 Tcf of reserves there and overtime if they become self efficient again you might expect them to look to export gas again but I think that sometime away. So our focus is really to get our Chile plans running at higher rates and we’re optimistic we’ll be able to do that this year and in the coming years.

Beyond that we’ve been pretty public about a potential relocation of another Chile plant but we’d like to see how things eventuate down in Chile before making that call. So we’ll make that call in the next nine to 12 months. We have team working on a third relocation from Chile. We also have a team working on potential Brownfield in Medicine Hat. Having set that the labor situation in Alberta is not much better than it is in the Gulf Coast but if you had to view that the LNG projects in DC don’t go forward and the oil sands don’t add any more new capacity because they don’t have the ability to get the product out because of the lack of pipeline. There could be some engineering and construction resource available that could fit quite nicely to something that we may want to do there and at that timing we’ll make a decision on the next nine to 12 months as well.

We are starting to see the early signs of some downsizing and engineering firms in the Alberta markets and we’re watching that pretty closely I think that project is more of a timing issue than anything else, so we’ll continue to work on that project as well. Beyond that we have people looking around the world for gas to make methanol but under the current environment when you’re competing with LNG they can afford to pay a lot more for gas than we can and you’re looking at a Greenfield side nine, 10 year payback period and the associated risk on capital and execution it’s really difficult to execute a project today based on the current forecast with long-term price for methanol. I think the best use or one of the better uses of our cash as what we did last quarter we bought back at an average of $60 a share which I think is going to be great capital allocation over the next three to four years when we look back at it. So our biggest concern is capital allocation we will be disciplined as we have in the past and if we can’t plan projects that meet our hurdle rates as well as our economic value add that we’re looking for then we’ll look to buyback our own capacity and continue to do that as we have done in the past.

Robert Kwan - RBC Capital Markets

That’s great color. Just the last question to make sure I guess I was hearing your color right so with the temporary increase in tax rates and removal of stuff these kind of macro things going in Egypt, you’re obviously in a good position because of your partners but just to be clear has the government approached you about trying to re-price the gas agreement?

John Floren

No, our focus is getting the plant running. The government has not approached us at this point about changing the gas contract, it doesn’t mean they won’t in the future I mean Egypt we’ve seen a number of changes since that project, but if you look at the economics on that project even though we’ve been only running a few years it’s been outstanding. We’ve got our equity back and I think it’s been an outstanding project. So I think we have to be open to what the future might bring but I think that still going to be an outstanding project for us going forward.

Robert Kwan - RBC Capital Markets

Okay, but no purchase yet?

John Floren

That’s correct.

Robert Kwan - RBC Capital Markets

Okay. Thank you.

Operator

Thank you. Our next question is from Charles Neivert from Cowen. Please go ahead, your line is open.

Charles Neivert - Cowen and Company

Good morning guys. In terms of the operations going on in Geismar, are we beginning to start seeing a slower spend on the CapEx side I mean if as you’re getting into construction of the plant itself and there is commissioning your spend rate is that a little bit lower than it was when we was bringing it up and sort of doing the major part of the construction. So is that something we would anticipate more of going forward as you obviously you are going to wind it down? And the other is when I look at Geismar 1, how long did it take or it does it look like it’s going to take from the time basically everything landed or began to land till the time it’s completing assuming it finishes by year’s end, how long that have been, basically the construction work?

John Floren

Yes, Charlie so we’re looking at it as one project so to split it out Geismar 1 and 2 is really difficult because there is lot of activity on the site and how do you allocate who is working on what for utilities to which project so I would say as Geismar 1 ramps down, Geismar 2 is going to ramp-up. So the spend that you should see in the next two quarters should be similar to what you have seen this year. So I mean certainly as Geismar 1 is running or getting close to running the spend will come down the spend on Geismar 2 won’t go after the same extent. So I’d say for the balance of the year the run rate should be pretty similar.

To answer your second question the big reformer which was a last piece of equipment for Geismar 1 landed on site at the end of last year so around December 28, 2013. Our current view is we have three of the six shipments onsite the force is on the way and all of the pieces will be onsite in our current expectation by September. We are planning to start up late in Q1 2016 so that will give us a further six months of date on the construction side versus the first Geismar 1 project.

Charles Neivert - Cowen and Company

And then one other follow-up on the share repurchase is the -- looking forward is it more going to be an opportunistic thing if we said well we’re about three months in and you did about a quarter of it, you have a year to do it, should we expect a sort of regular purchase in time or is it going to be a little lumpy or it will just depend on opportunity.

John Floren

I really liked buying back shares below $60.

Charles Neivert - Cowen and Company

I wish that all, but it doesn’t get there.

John Floren

Yes, that’s why you would have seen us accelerate at that point. So again I don’t want to predict the future, at $60 and less, it’s very attractive for us.

Operator

Our next question is from Robert Walker from Jefferies. Please go ahead, your line is open.

Robert Walker - Jefferies

Just to clarify this last comment on the buyback. Is the plan to complete it within 12 months, is that the requirement?

John Floren

It’s a number of shares, right Robert, so I think it was 4.8 million shares was the requirement. I think the Canadian one is within the 12 month calendar period. But this as you know is through the U.S., so it was a number of shares.

Robert Walker - Jefferies

In a 12 month period?

John Floren

There was no timing associated with the 4.8 million shares.

Robert Walker - Jefferies

On the ASU issue in Trinidad, how much volume was lost? And what’s the path to resolve the issues?

John Floren

I think it was around 77,000 tonnes of production lost due to the ASU. We don’t operate that ASU. We are kind of trying to understand that ourselves. It was not our expertise, ASUs. And we believe they have told us that the issue has been resolved, and with the same issue twice, so that’s a little concerning. We believe it is resolved, but again, we don’t operate that plant. And then the issue would be they have no plant outages in the second half of this year, and unplanned we are not planning on so.

Robert Walker - Jefferies

Okay, thanks and then maybe last thing if I could, just as you bring up Geismar 1, do you have any indication for, how you’re going to redirect your product flow from say Trinidad, that’s currently serving the U.S. market?

John Floren

I think we have been pretty clear of that, probably what we’re going to do Robert is lower our amount of product repurchasing. We have about, give or take 2.5 to 3 million tonnes of sales in North America, with Geismar running and Medicine Hat we will have 1.5 million tonnes of production. So we will still be importing products from Trinidad. That’s our current expectation.

Operator

Our next question is from Steve Hansen from Raymond James. Please go ahead, your line is open.

Steve Hansen - Raymond James

John, I think you referred to the Chinese gas-based producers sitting at the high-end of the curve today, in China. I’m just curious of what you guys are seeing, or where do you think that marginal cost lies today and sort of what activity are you seeing by those gas producers, given the lower price environment we’re seeing here? Are you seeing definitive capacity to shutdown to this juncture, or just where do you think they’re at even just at an operating rate basis, that 5 million tonnes you referred to?

John Floren

Yes, as always, some of this is anecdotal. So I will say that upfront, we don’t have perfect information on what’s going on with the gas situation in China. We have seen some producers turndown rates. For sure, we see some that seemed to be operating at a loss. We hear anecdotally, maybe they are concerned that if they do shut down, they may never get gas again. So we are seeing some of the higher cost producers to continue to run, which was what our expectation, was not our expectation so, I think, like I said there is still about 5 million tonnes of production at that high-end of the cost curve which is continuing to run at this time.

Steve Hansen - Raymond James

And do you have a sense for where just that rough, even at the mid-range of that 5 million tonnes would fit, is it in the 350 range or 375 range?

John Floren

Yes, probably that range, it’s difficult. I mean we have heard maybe some temporary allowances on gas as well from some of the local governments. So it’s really hard to get really factual information on what’s going on, but that’s probably a pretty good range, Steve.

Steve Hansen - Raymond James

Okay, fair enough. And then just quickly on turning gears to sort of some of the future demand applications, particularly shipping, we see you have got some regulations coming around the corner here early next year, the KKN and just trying to get your sense or an update for any blending activities at the maritime level that you think might come to fruition over the next couple of years?

John Floren

Yes, so nothing in our forecast, nothing in the industry expert forecasts related to methanol on-board ships. I think it’s a bit of wait-and-see attitude happening. Certainly there are two producers of engines, both MAN and Wartsila that are ready to go. As you know the ships that we are currently building which will be in the 2016 period will be able to run on methanol. And also the MAN engines and, sorry Stena is converting to Germanica later this year, early next year to run on methanol. So I think the initial decisions or solutions will be to run on low sulfur diesel, or what they call MGO. It has a technology that is improved up for methanol, as a viable alternative for bunker fuel or blended with MGO at low levels. Then you’ll see more of that overtime.

Steve Hansen - Raymond James

Okay, great. And just one last one if I may, you referred to Chile going back or coming back online in Q3, and I think you referred to high rates. What kind of visibility do you have on the gas, what duration do you have the kind of visibility do you have for the next couple of quarters to run that at high rates?

John Floren

Our anticipation is we will be running the Chile plant at higher rates than we shutdown in May 19, and we plan to run it today through their summer period, our winter period. And I think there is opportunity maybe to run even during their winter period next year, but that’s quite a bit away and some things have to happen for that to occur. So I think again it’s difficult to predict but more optimistic about Chile gas than we would have been six months ago.

Steve Hansen - Raymond James

And we did we ever get official or any sort of quantitative data out of the ENAP effort on the fracing front down there is that -- have you got any data to share there?

John Floren

We have data I’m not sure we’re willing to share that’s probably for ENAP to share since we’re not actively involved in the upstream.

Steve Hansen - Raymond James

Is it encouraging?

John Floren

It is encouraging, and as they get better at fracing it is more encouraging and we’re seeing the same things down there that we saw in the U.S. in the early days of the fracing industry. So it’s bit of trial and error each deposit is a little different in the fluid and the sand and all the equipments, there is two fracing crews down there now which is positive. So I think they’re getting better.

Steve Hansen - Raymond James

Very good, thank you I appreciate.

Operator

Thank you. (Operator Instructions) And the next question is from Chris Shaw from Monness Crespi. Please go ahead, your line is open.

Chris Shaw - Monness Crespi

Hi good morning everyone, how are you doing?

John Floren

Good morning.

Chris Shaw - Monness Crespi

John earlier when you’re talking about being thankful about not having any I guess new plants going up and in that 16 to 17 timeframe I thought for a second you’re saying Geismar 3 was -- had been to follow that within sort of canned for now, and timing of that if you were to make a decision 9 to 12 months from now, when would that be under construction, how quickly after that decision was made, how do you think quickly would you start actually building it?

John Floren

Yes, that’s the $94 question or whatever you want to, how want to use the metaphor I think we’re analyzing the activity of construction labor in that market in that period and it may make sense to wait to the back-end of what we’re seeing eventualize not everything that’s been announced is going forward. So there could be a quite a few more projects starting under construction which will tighten up labor supply I mean we’ve had some people that we’ve commissioned studies dollar shows they could be up to a 30% labor shortage for while there is a pipefitter et cetera in that period and I don’t want to be doing anything significant in that kind of environment. So it may make sense to go forward, it may make sense to wait we’re just watching how many of these projects actually start going forward we’ve seen in the last three or four months, three crackers start under construction and anecdotally heard again the labor force on some of those sites is quit young and productivity is going to be quite a challenge.

Chris Shaw - Monness Crespi

Alternatively I mean with some of these announced Chinese plant I mean there is pretty good volume if the cost are going away we think it would be very high, I mean it might make more sense for them to buy assets, and in that regard would you be willing to sell pieces of plant specifically if the bid is high enough to I mean whomever want that capacity?

John Floren

I think it’s unlikely you will see us selling up pieces of our production capacity we spend a lot of money time and sweat equity building these things and nobody wants to buy the company we’re for sale everyday so there is always an option so.

Chris Shaw - Monness Crespi

Great. Thanks for that.

Operator

Thank you. Our next question is from Chris McDougall from Westlake Securities. Please go ahead, your line is open.

Chris McDougall - Westlake Securities

Great. Thanks a lot for the update. Shifting back to is the potential of expanding the Medicine Hat facility couple of longer term timeframe, I just want to get sense of how big the local market is for that gas and what options you would have for giving that out to the international market, how soon that would be a real option?

John Floren

Yes, all the economics that we’re doing around a Brownfield Medicine Hat would be export to Asia. So there is not enough local market to absorb anymore than what we’re already producing today in Medicine Hat now if you had a view on field blending or other energy applications longer term that could change but currently we’re modeling any Brownfield site there as if all the product is going to Asia. I’ll remind you we used to have three plants in Medicine Hat with rail the product to Vancouver here and ship it out to China. So that’s how we’re modeling this project so we’re not anticipating the logistics to be local I think that wouldn’t be a good way to model it. And to rail it down to the Gulf Coast doesn’t make sense either.

As far as the gasifier I mean there is lots of gas in Western Canada and the pipeline is don’t get built to the coast the LNG projects go forward. There is a lot of stranded gas there and certainly we do anticipate that the eco price to be lower than Henry Hub price and when we’re modeling every dollar in MMBtu lower in Alberta than Henry Hub equates to about $40 of tonne on the project on the cost side of the project. So you can pay a little bit of freight with that.

Chris McDougall - Westlake Securities

That makes sense. And then shifting back to Egypt, so with the economics of that project haven’t been so great to be continue to expectation there, how much of that has been driven by the gas versus the lower freight with that supply being closer to some of the end markets?

John Floren

I think the methanol price has been higher than anticipated that’s been a big contributor to the economics, the higher the methanol price the higher the gas price for the government and higher the methanol price the more dividends the more earnings so it’s just been a win for everybody there, it is really being driven by the methanol price.

Chris McDougall - Westlake Securities

Okay, great. Thanks a lot. That’s it from me.

Operator

Thank you. Our next question is from Ryan McCarter from UBS. Please go ahead, your line is open.

Ryan McCarter - UBS

Just a couple of things John, just to clarify, on the Chile restart, that’s all assuming it’s all Chilean gas, assuming you are getting this from Argentina, we need to talk about…

John Floren

We anticipate to get gas again from IDFs yes, that’s our anticipation.

Ryan McCarter - UBS

And just back to the full relocation, obviously U.S. there is a little more uncertainty about cost going forward, on the other hand it sounds like Chile getting better. This trade-off of moving the third plant, is it becoming tougher more because you’re really concerned about the cost situation in the U.S., or is that you are actually at the same time getting that much more bullish at Chile, that actually might be able to sell two plants down there? You wouldn’t want to give the odds which is pushing you more at the moment?

John Floren

Depends on the day, today 50-50.

Ryan McCarter - UBS

Great that’s helpful, but thinking a lot.

John Floren

I have smarter guys with me working on this. So when they give me an answer, then I will let you know.

Operator

The next question is from Bernard Horn form Polaris Capital. Please go ahead, your line is open.

Bernard Horn - Polaris Capital

Yes, I guess had a similar clarification question on Chile plant 3, so just to be sure, you say that while you are hopeful that they’re going to be more gas supplies both from Argentina and Chile, for that Chile 3 plant, you’re also initiating a study to move that plant back up and I just didn’t know if you were anticipating or studying a -- moving that to Geismar or is it someplace else?

John Floren

So the plant that we’re looking at is actually the Chile 4 plant or the third Chilean relocation, so the numbers sometimes get confusing. So I apologize for that. So this plant if you recall, the fourth plant was integrated into the site taking some of the excess CO2 off of the other plants and using oxygen to make methanol. So if we were to move the Chile 4 plant, it would have to be the west side where there is existing ethanol production. So that would be Geismar or Egypt or New Zealand as some examples. So we do have a team looking at that, and we have a team studying the benefits of moving it to different places, and that’s really around gas supply. So it’s a couple of things that we’re looking to check the box before we would make a decision. Obviously we have already talked about capital and the risk there. But we would like to have a gas contract for Chile, for the second Geismar plant. Currently we are exposed to the market on that. So I think that something we would like to check off. And then we need a bit of land which we think is not unattainable. There is a couple of options for land. So we think we can solve that issue. So I think, getting a gas contract and then getting comfortable around the capital environment and execution risk would be the next big things to check off before we make that decision.

Bernard Horn - Polaris Capital

Right, and then due to the nature of the integrated -- the integrated nature of 3 and 4 in Chile, what implications does that have, so you can lump off 3, and 4 can still be produce in Chile, is that correct?

John Floren

Yes, so number 1 and 4 are left. 4 would be the one we’re looking to relocate. We could certainly run 1 on its own no problem. And we could run both, 1 and 4 together if we had enough gas in Chile.

Bernard Horn - Polaris Capital

Okay fine and then on the production of your merchant supplies, as Geismar comes up, where are you typically buying your merchant gas now, and where would it make sense to, I am assuming that would -- would it make sense to reduce what you are currently buying, or something else, I am just kind of trying to understand where you’re sourcing that and what the production costs of those merchant suppliers looks like and how that would change the supply demand dynamics going forward?

John Floren

You’re talking about methanol we’re purchasing on the market, Bernard?

Bernard Horn - Polaris Capital

Yes, I thought that’s what I -- you said earlier in the call?

John Floren

Right, so we buy in the cheapest market. We have an integrated supply chain. So we can move our home production around the world based on logistics cost and where the low-price market is. Today the low price market is in China. So that’s where we have been focused our activity. So we’re flexible on where we move. I think what we are seeing though right now the Atlantic basin is short on product, so product moves from the Atlantic basin into Pacific basin. If all of these or a lot of these projects that have been announced go forward at some point, you might see the shift where the Atlantic basin becomes a little longer. So that could shift the basin balances, but I think is some years away, Bernard.

Bernard Horn - Polaris Capital

Is the low cost, you said that you’re sourcing low cost gas in China. My sense is that they were at the high-end of the curve. Is there some cheaper gas, or cheaper product that you are able to source in China, or is it Asia in general?

John Floren

Yes, there are at the high-end of the cost curve, but they also set the price. So if you add back of logistics, they are obviously the cheapest place to buy product. To move products from China to the Atlantic basin is about $100 a tonne. So you had have to have the logistics cost, so if you are using products and selling products in China, then it’s best to buy it in China today.

Bernard Horn - Polaris Capital

And lastly, the China demand picture, we know that it is both user fuel but I am curious if the construction use there is what is kind of creating some of the soft demand that you saw in first half of this year, any more color on what the end demand is that is weaker?

John Floren

Yes from al the highs it is still a big market in China about 6 million tonnes of demand we saw that pretty weak in Q2 and seeded gas which is also another large demand in China, there was quite a few of the plants there under maintenance in Q2. So I think those two things did contribute to the lower demand that we have see in that quarter.

Bernard Horn - Polaris Capital

Thanks. That’s all I had.

John Floren

Thank you.

Operator

Thank you. We have a follow-up question from Charles Neivert from Cowen. Please go ahead, your line is open.

Charles Neivert - Cowen and Company

Great. Two things you mentioned some other countries that are now beginning to blend methanol into the gasoline and can you just go into who they are and sort of where they stand in terms of, is it experiment, is it now part of policy, how does that look like it may advance. And then on the follow-up, the U.S. has got a fair number I think it’s 3 or 4, methanol to gasoline operations that are sort of in planning stages, do you have any idea about where those stand or how far advance they maybe I know they’re not into obviously construction or even the engineering early, late engineering stages, but as far as you understand are they continuing to advance at any sort of pace?

John Floren

Yes so where else besides China is methanol being blended into fuel it’s happening Europe. The European standard today allows for 3% methanol fuel blending in the standard. So all the European countries have the opportunity to blend and a number of them are. As far as other countries we see in the Middle-East we understand Iran is using methanol, we believe India and couple of other, France are using ethanol, Australia has fuel blown trials for what they call GEM fuels which are gasoline, ethanol, methanol blends that they’re looking to launch later this year. Israel they’ve found quite a bit of gas off of Israel they’re looking to reduce their imported oil dependence so they’ve done trials in Israel and using European technical institute to run the tests on 15% blends and 85% blend. So we are starting to see a number of other countries using methanol and I think overtime you would expect because of the economic attributes and the clean burning attributes of methanol that more and more countries will adopt the use of methanol as a fuel and I think it will be somewhat limited again by methanol supply. So it will be, I think orderly growth will be needed in order to keep those things balance.

I’ll remind you Charles that we were the first guys to make gasoline from ethanol in New Zealand many, many years ago and when we look at the use of methanol as a fuel to replace gasoline is much more cost effective than taking that methanol and going to gasoline. We had a view that methanol would never find its way into the fuel and another option it go that extra step to make gasoline and then you have a market that’s already there. So you’re right to say there is a number of projects announced, if they go forward capital costs are quite high even higher than a methanol plant so I think the jury is out so we have no more information and what we’ve seen in the public domain.

Charles Neivert - Cowen and Company

Okay. Thanks very much.

Operator

Thank you. Our next question is also a follow-up question from Chris McDougall from Westlake Securities. Please go ahead, your line is open.

Chris McDougall - Westlake Securities

Yes, thanks for the follow-up. So the replacement cost number that we talked about is typically a $1,000 a tonne and given the run up in costs that you’re talked about as far as the labor I want to see if you’re still comfortable with that and then on the down side it seems like the Brownfield projects that we’re seeing reported numbers on since the Celanese project are about $600 a tonne, so is that a pretty good range still to work with from about $1,000 a tonne for a Greenfield site and $600 for Brownfield?

John Floren

Yes again I only know on Celanese but I’ve seen in the public domain. What I have seen is one partner paid 500 million and the other partner paid 300 million for fifty-fifty share. So the partner that paid 300 tells me there is about 200 million in Brownfield benefits there. To my knowledge that’s not a lump sum turnkey EPC contract so there is risk on execution. The labor rate is one side I think the bigger issue is productivity I have mentioned earlier in the call that we’ve seen 20% less productivity than this historical 10 year period in the U.S. and that’s with no activity in that region or little activity in that region as activity winds up and there is not enough scale workers to go around our expectation that productivity number probably go down.

I think that’s the big risk than labor escalation is execution enough welders, pipefitters, construction people to actually build the thing and as we’ve seen in places like Canada and Australia when you have core productivity and not enough labor the schedule gets extended, you’re not making ethanol to generate EBITDA in the same time period that you thought that has a big impact on the project economics. So I think time will tell, we still use that $1,000 of tonne number but there is huge risk around executing at that price and I think it’s really difficult to get a lump sum turnkey and if were successfully you would be paying a very significant premium because our experience is the engineering firms aren’t willing to take that risk today.

Chris McDougall - Westlake Securities

Okay, fair enough. And then back on the Europe blending question. You mentioned the 3% of availability on a blend fueling how much do you think are going in now, there are a lot of unmet opportunity there or are you thinking a few percent although I get them into the European gas pool?

John Floren

Yes. It is country-by-country, so there are a few countries using it, I don’t know, that is Holland, England, Iceland, maybe Denmark. So there is a lot of potential there. But today I think it is 100,000 tonnes. It’s not significant. I think there’s a lot of potential to use more methanol in the fuel pool in Europe.

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Floren.

John Floren

Well, thanks very much for all the interest and all the questions. As demand is expected to be stronger in the second half of 2014 as well we believe, as I mentioned about 900,000 metric tonnes of additional merchant methanol demand for Olefins production will materialize later in 2014. And that should have a positive impact on the growth of methanol. And due to the current gas restrictions in both Egypt and Trinidad, we would expect our production numbers to be similar in Q3 versus Q2. And as a result of the current supply and demand balance, we would expect realized prices to be lower in Q3 than Q2 which would lead to lower EBITDA and earnings per share in Q3 versus Q2. So thanks very much for the interest. Look forward to speaking to you again in about 90 days.

Operator

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

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