Methanex Corp (MEOH) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this call is being recorded on Wednesday, July 25th, 2007. I would now like to turn the conference call over to Mr. Jason Chesko, Director Investor Relations. Please go ahead, sir.

Jason Chesko. Good morning, ladies and gentlemen. I would like to remind our listeners that our comments and answers to your questions 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 the bottom of our latest news release and to our 2006 Annual Report for more information.

I would now like to turn the call over to Methanex's President and CEO, Mr. Bruce Aitken; for his comments.

Thank you Jason, and good morning everyone; and welcome to the Methanex second-quarter investor conference call. I've got a number of colleagues with me in the room and they will be available to answer questions a little later.

Firstly a few comments on our results for the second quarter; our adjusted EBITDA was $76.5 million, while net income was $35.7 million or $0.35 per share.

As I mentioned in our last call, our results for this quarter include approximately $35 million in transition costs, which resulted from selling higher-cost opening inventory. As well, we experienced higher than normal per-ton production costs at our Chile plant as a result of the low operating rate at that site during the quarter.

So, on a normalized basis, earnings in the future at the methanol prices that prevail in the second quarter, could be expected to be significantly higher.

On the last conference call, I discussed how the methanol markets returned to a more balanced environment during the first quarter of the year, as the industry recovered from a shortage in global inventories and returned to more normal levels. A relatively balanced market environment persisted throughout the second quarter and contract methanol pricing was relatively stable to reflect this.

In the second quarter, our average realized methanol price was $286 per ton. I will discuss our outlook on pricing in a bit more detail in a few moments.

Production from our large low-cost plants in Trinidad was once again excellent; producing a total of 459,000 tons during the quarter. We successfully completed a planned maintenance program at our Atlas plant in mid-April, and the plant has run well above designed capacity since that time.

In the third quarter, there is some work being done in completing gas delivery infrastructure in Trinidad to tie in new gas fields. However, we expect little, if any, disruption to our gas supply while this work is being completing.

However, production from our site in Chile was disappointing. During the second quarter, we produced 569,000 metric tons, which was well below production capacity for the site of 960,000 tons.

As I discussed in our last call, we made the decision in early May to shut one of our four plants as a result of technical issues and our expectation of reducing gas deliveries during the Argentine winter. A major compressor failure that occurred in mid June impacted gas infrastructure in the Argentinean province of Tierra del Fuego, and disrupted all of the gas supply from that province.

This technical failure, combined with the uncertainty caused by very cold winter conditions prevailing in Argentina, led us to a decision to operate only one of our plants in Chile until the repair was completed. This week, we continue operating only one plant. We expect natural gas balances in Argentina to improve in the next couple of weeks, which should allow us to restart two of our plants.

With repair work to an undersea pipeline being carried out, while one of our four gas suppliers expected to be completed at the end of Q3; we expect to be back operating all four plants in the fourth quarter of this year. I'll comment more on our outlook for natural gas through our plants in Chile in just a few moments.

Our plant in New Zealand operated at full-production rates during the second quarter, producing 120,000 tons of methanol. We have secured natural gas in New Zealand, which allows us to operate the plant until early in 2008. And we continue to pursue additional natural gas purchase opportunities to allow us to operate the plant through 2008 and beyond.

In the methanol price environment we are operating in, this plant provides potential cash flow to our shareholders, and helps to offset some of the lost earnings resulting from our challenges that we are facing in Chile.

Switching topics now to the industry and pricing outlook; as I mentioned earlier, global methanol markets rebalanced over the first quarter of this year and remained relatively balanced over the second quarter. Global industry's supply operated below normal rates in the second quarter, caused in part by our own plants in Chile and the low operating rate of a new plant in the Middle East.

In addition, China reverted back to being a net importer of methanol during the quarter. Previously, as a result of very high industry pricing in Q4 '06 and Q1 '07, a significant arbitrage opportunity existed between domestic prices in China and the export market, causing China to become a net exporter of more than 200,000 metric tons in the first quarter of this year. And this contributed to the rebalancing of global inventories outside of China.

However, in the pricing environment in the second quarter, this arbitrage opportunity disappeared and the incentive for producers in China to export has been reduced, while some high-cost capacity in China has [shut down] or has been converted to ammonia.

In the second quarter, China was a net importer of approximately 100,000 tons; and we would expect this amount to increase in the future. Exports in China are also becoming less competitive as they are faced with upward pressure on coal prices and appreciating currency and the reduction in VAT rebate from the Chinese government; which in the current industry environment has increased the cost of Chinese exports by approximately $20 per ton.

Outside of China, near the beginning of the quarter we saw the announced shutdown of over 1 million tons of methanol supply, as these producers were no longer profitable. We expect this trend to continue as some other high-cost producers are challenged to remain profitable in the current methanol and market environment.

Overall, industry demand is strong; including the outlook for emerging energy applications. Our own joint venture DME project with China, which I will discuss in a moment, is on track for start up before the end of the year.

There are some minor pockets of demand weakness; for example, in US formaldehyde due to slower housing starts; and in European biodiesel which is currently faced with high vegetable oil prices. There have also been some recent outages in some derivative plants which produce acetic acid and MTBE. However, these are the result of short-term technical issues; and not structural issues impacting long-term demand.

Contract pricing in all regions in July is similar and in the range of $300 per ton. Looking out over the next couple of quarters; assuming normal industry operating conditions, we expect markets to remain balanced and contract pricing to remain relatively stable. And the current price levels, which are marginally lower than the second quarter, and notional discount rate reduces slightly, we would expect our realized price in the quarter to be in the range of $260 to $270 per metric ton.

Looking out more long term, it was interesting to observe the updated methanol price forecast by Chemical Industry Consultants, CMAI; published last month. CMAI increased its long-term methanol price forecast in June by almost $50 per ton to a low of $225 per ton in 2011. In making the change, they cited many factors positively impacting pricing in the methanol industry; including a higher energy price outlook, higher demand expectations including more use in energy applications, higher capital costs for new plants, and higher natural gas costs impacting this cost structure for low-cost producers.

I'll switch topics now and talk about some of the opportunities and challenges that we face; firstly, natural gas to our plants in Chile. The lack of availability in Argentinean gas over the last few weeks has been very disappointing. The primary cause has been equipment failure in two of our gas suppliers which affected deliveries of gas not only to ourselves, but also to the Argentinean domestic market.

It is unfortunate that these events coincided with a period of particularly cold weather in Argentina. However, as I mentioned a few moments ago, we are expecting improvements in deliveries in the coming weeks. When gas supply resumes, the situation with our Argentinean gas suppliers remains unchanged. We continue to have short-term arrangements with all of our suppliers in which we have agreed to share part of the export duty imposed by the Argentinean government.

The principle underlying these agreements is that for so long as we can afford to do so, we are prepared to share the cost of the duty. In exchange, we have gained considerable flexibility to take gas, depending on prevailing methanol market conditions. In the current pricing environment, it is still good business for us to secure our contractual entitlements from Argentina.

As we have discussed in previous calls, our long-term solution to both gas supply security issues and the minimization of any tax impact on either us or our suppliers, is to secure more natural gas from Chile. And while it is not our intention to transform ourselves into an oil and gas company, it makes very good sense for us to invest some capital to accelerate gas development in Southern Chile to improve our gas supply and profitability in our plants in that country.

In this regard, we are currently evaluating various initiatives and expect to commit capital to these projects over the next couple of years. On Monday, we announced an agreement with Wintershall and Geopark to participate in the international bidding round, which was launched by the government of Chile last month. The bidding round consists of ten blocks covering a total area of 32,000 square kilometers, dedicated for oil and gas development; and all of the blocks are situated in Southern Chile, in the Magallanes basin close to our plant.

The bidding round has attracted international attention, as it offers the unique opportunity of an under-explored area in a country which is politically and economically stable.

Just last week, Chile's Minister of Mining was in Calgary, presenting the opportunity to an audience of approximately 40 interested companies. The process is progressing well, with blocks to be awarded to successful bidders by the end of the year.

Secondly, I'd like to provide an update on our agreement with Geopark which we announced last March. Our outlook for new gas supply from Chile from this agreement continues to look promising. Geopark has already supplied us with a small amount of gas from the block close to our plant. And we expect this block alone could supply us up to 10% of our Chile gas needs by next year.

In addition, Geopark has an extensive drilling program underway in this block; and they have expectations that they could become a much more significant supplier of our total gas needs in Chile over the next few years.

[ENAP], our primary gas supplier, is also continuing its extensive capital expenditure program in the Magallanes basin in two prospects near our plants. In May, they announced the commercial discovery of gas in one of those prospects. We understand that the development program is being planned.

In short, we are pleased with the overall gas development activity that is occurring in Southern Chile. And we believe that allocating some capital and being actively involved with initiatives to accelerate development makes very good business sense.

And while I'm optimistic that many of these initiatives will improve our gas supply situation in the short-to-medium term, there is no doubt that it will take a few years before this issue is totally behind us.

The next opportunity that I wanted to provide you an update on is our project in Egypt, which is progressing very well. We reached financial close and commenced site work in May. We have ordered long-lead items for the project. Currently there are more than 250 people on the site, performing the preliminary civil works.

This project is a first-class growth opportunity for Methanex and will be among the lowest-cost plants in the global methanol industry. The project is on track to be completed in late 2009 and supply methanol to customers in early 2010.

The last opportunity I wanted to touch on is our investment in DME in China. We're in the final stages of government approvals for our joint venture with the Chinese energy company XinAo. We're at an investment of approximately $5 million. We were allowed a 20% interest in a 200,000 ton DME plant. And we will supply 100% of the approximately 300,000 tons of methanol supply required for the plant.

The plant, which is near Shanghai, is currently under construction and on schedule for start up during the fourth quarter of this year. Our joint venture also has approval to increase DME capacity on the current site to 1 million tons, and XinAo has a number of other potential sites around China that are suitable for DME development.

We continue to be very excited about that methanol demand growth potential for the DME industry. In addition to the 1 million-ton project we are involved in, there are many other similarly-scaled DME projects expected to come online over the next few years in China.

Outside of China, we are also seeing momentum build for DME development. Japan has supported DME development in its energy plan and there is an 80,000-ton plant on target for start up there next year. In addition, we see opportunities for DME development in various other countries, including Egypt, where we have signed on MRU to develop a DME project.

I'll change topics now and make a few comments about liquidity. Our cash flow from operating activities during the quarter was $124 million after the changes in working capital. During the quarter, we returned a total of $93 million to shareholders via dividends and share repurchases. As of a couple of days ago, we have repurchased 1.8 million shares under our normal course issuer bid.

We have a number of uses for cash; it is part of our consideration in managing our balance sheet. Thusly, we were in a strong position to meet our commitments on the Egypt project. As I mentioned earlier, we expect to invest, to accelerate development in gas in Southern Chile and improve the security of natural gas supply to our Chilean plants, and to expand the demand for methanol in the DME market.

In the strong cash flow environment that we are operating in, we are well-positioned to meet all of these objectives, while continuing to return excess cash to our shareholders.

Before stopping for questions, I'll make a few comments regarding our expectations for the third quarter. I mentioned earlier that the second quarter was negatively impacted by approximately $35 million as a result of the transitional pricing environment that existed where higher-cost first-quarter inventory was sold in the second quarter.

With a stable price environment prevailing, we would not be impacted by this in the third quarter. However, given the lower operating rate at our Chile operations during recent weeks, we would expect that sales from our Chile plants will be lower during the third quarter. This factor, combined with the slightly lower price environment, would substantially offset this $35 million improvement.

So at this point, I'm happy to stop and take any questions that you might have.

Thank you. (Operator Instructions). Our first question today is Mr. Sam Kanes with Scotia Capital. Please go ahead, sir.

Bruce, I'm trying to get a little more color I guess on what contracts you've signed recently that have a cost-plus arrangement to it. I know the DME in China does. I speculate some MTBE does and/or acetic acid in Europe that you inherited. Have those changed at all or is the mix correct in what I'm asking?

Yes, good morning, Sam. No, no change at all really; the cost-plus contracts that we have are all inherited as a part of our investments in Trinidad. And we have added nothing to that mix. So that guidance that we've offered historically is that about 20% of our contracts are on a cost-plus basis or some sort of cost-recovery basis.

Okay. And then one follow up Bruce; there is some new gasifier project in Louisiana that is going to produce some ethanol in the US and there is also some form of option that Terra has sold at Huntsman to use that moth-balled methanol plant in the US Gulf, that may or may not be come a gasifier; I don't know. I'm just wondering if you have interest or involvement in those particular -- I guess indirect methanol developments.

No, we don't and I probably know as much as you do, Sam; just from reading what's in the media. I guess our view is that energy prices in North America are going to be high longer term. Our business model has always been to identify lower-cost energy sources to make our product. And we continue to think that's an appropriate strategy.

Thanks, Bruce.

And our next question, Patrick Yung, Raymond James; please go ahead, sir.

Good morning. I have a couple of questions here. First of all, do you have any estimates in terms of your expected capital commitment in exploring gas in Chile?

What we've said in our investor presentations that we've put aside $50 to $100 million. So that's probably as precise as I'd want to be. There are opportunities, but we are very focused on acceleration. There are other companies who are willing and interested in exploring for natural gas in that area because it's a very prospective basin. So our only interest is -- is there some way that can participate to make it go faster? So that's the focus of our (inaudible) focus there (inaudible) dollars.

That makes sense. And second question is -- what are your thoughts on the recent Chinese export tax rebate cut? What would you expect the net impact would be for your Company?

Well, the expectation is pretty much as I mentioned in my comments, that we've seen exports from China that were at a level of 200,000 tons in the first quarter of this year, disappear in the second quarter. And it's becoming much less attractive for Chinese to export methanol as a result of this cut in VAT. And I think the big picture development there is that the Chinese government does not want to see energy-intensive commodities exported from their country. They want to ensure that -- it's a country that's short of energy -- they want to ensure that energy is used to create higher-value exports. And I think that makes a lot of strategic sense for China.

So we think directionally longer-term the Chinese government does not want to see exports of Chinese methanol.

That makes sense. And the final question is -- given your Chilean curtailments right now and current spot markets, do you guys see yourself more active in the spot markets in the next couple of quarters and would you likely be net buyers to fulfill your contracts?

Well, we have been supplementing our supply from other suppliers. And one of the advantages of being a global supplier is we have lots relationships all around the world. So we're typically trying to find the best way to keep our supply chain full. Those of you that have looked at our financial statements will notice that our inventories are down quite substantially from Q1 to Q2. I would say we feel as though we're in a very comfortable position. But we continue to be buyers of methanol.

Alright. That's all I had, Bruce. Thanks a lot.

Okay.

Thank you. And our next question, Jacob Bout, CIBC World Markets; please go ahead, sir.

Good morning.

Hi, Jacob.

Maybe you can just quantify for us, on the gas supply issues that you've had for your Chilean operations; the breakdown between how much is coming from Argentinean supply and Chilean supply and then how much is coming from weather, labor and mechanical issues.

It's a bit tricky over the quarter because we started the quarter with four plants operating and then went to three and then went to one. So I would find it hard to do that off the top of my head. I guess our broad guidance in the past, which is probably not very helpful for you Jacob, is that 60% of our gas comes from Argentina and 40% comes from Chile. That's the contractual position.

I think I can try and add a bit of flavor to what occurred this quarter. We received no curtailments of gas from the Argentine government until these technical failures in infrastructures began to occur in Argentina. And the problem with that is that it doesn't only impact us; it impacts the whole delivery of gas into the Argentinean economy. So when that impact occurs in Argentina, then the Argentineans look at exports as being a way to redeem some of the gas that's been lost.

So maybe we can, after this call we can answer your question in more detail, Jacob. But it's not a question I can answer off the top of my head.

Okay. Maybe then just on Chilean supply of natural gas for your operations; what your thoughts are as far as how much will be supplied from Chile kind of end of '07, end of '08 and then end of 2010?

I'm quite optimistic that we're going to get more gas this year, both from Geopark and from ENAP. So we will be able to increase our production before the end of 2007; and again another step up in 2008.

Would that be up a couple of percentage points each or--?

Well, in terms of Geopark the number I mentioned in my comments was 10% of our gas before the end of next year. I would say that feels like a conservative estimate too; that certainly that their company has a more aggressive forecast than that. The gas discovery that ENAP made that they're currently evaluating a development plan for, they told us that gas could be flowing out of that in early 2008. So again, that supplements what we've currently got. So I would expect that we're certainly able to have 40 to 50% of our gas from Chile in 2008.

Let's say this is a bit dependent. So you're asking me to forecast or speculate here a wee bit, so I'm going to put it in that context, that it will be what my feeling is around what we might expect to receive.

Beyond in terms of the bidding round, I think it's very realistic to say that there is a period of time where companies have to go through and win a block. They then have to decide what they're going to do with it. Some of these blocks have already got 2D seismic, some have got 3D seismic. I would guess that most bidders will want to expand their 3D seismic work. They will then want to drill some exploratory wells before they decide the development plan.

So I think it's very realistic to think that that's going be three to four years before we see gas out of some of those prospects. So the target for me is around 2010-2011 that we're back to full production based only on Chilean gas. But again, I want to emphasize that this is based on what we know around the prospect (inaudible) and the gas in that area; but it's dependent on people doing real work to confirm the availability of that gas.

And it would just essentially be one large step up from say 50% up to close to 100%?

No, I don't think so; because the nature of these fields -- they tend to be -- well, there is a lot of shallow gas, so that tends to suggest multiple relatively low-cost wells that are drilled over a period of time. And there is some deep gas, and there's some substantial potential for large reserves of deep gas that I'm sure as most listeners would know, it's more expensive to go after, it takes longer, there's a longer term [arrival]. So I don't have any particular intelligence at the moment on what gas we might expect out of some of the shallow (inaudible) wells, or how long it would take to develop some of the deeper prospects.

Okay, great. Thank you.

Thank you. And our next question, Winfried Fruehauf from W. Fruehauf Consulting; please go ahead, sir.

Thank you. What is the status of the price dispute between your gas supplies in Argentina and yourself, notably with Apache Corporation?

No, we don't have a price dispute. Win, we have an agreement with them. It's a short-term agreement whereby we share duties. Now you could speculate and say, well at the end of that short-term agreement are we going to be in dispute? Well, I don't know. We've certainly managed to resolve any differences to date. So we continue to operate under those agreements. They continue to supply us gas and we carry on paying them. So that doesn't feel like a dispute to me.

How much has your gas price increased because of the sharing of the export tax?

Well, there's quite a lot of guidance in our MD&A and what we've said there is that when prices go below $250 a ton, we provide all the gas supplies at base price, which more or less means that we are paying all the duty. For that, we have a lot of flexibility. So we don't have to take their gas and we don't have to make methanol if we don't want to.

So at above $250 a ton, there is a sharing mechanism; so we pay some of the duties and others pay some of the duty. But I think in this regard, I think we've been very pragmatic. We want to continue to be able to make methanol from Argentinean natural gas. And in order to do that, we recognize that we need to provide an economic incentive for our gas suppliers to supply us. And I think that has worked very well for us, other than the fact that some of the suppliers have been less than reliable.

I apologize for not having this part of the MD&A in front of me because I didn't receive your earnings release at all. So I don't really know what's in there. My next question, if I may, is that to the extent that Chile-- that you're going to be successful with the [incremental] gas from Chile; given that initially you would be purchasing or receiving shallow gas. Would this not mean that you would have an ongoing commitment toward development wells and maybe exploration wells as the deliverability of gas from these shallow wells decreases?

Well, my expectation is that we're going to be buying gas from third parties, mostly. I talked about our desire to invest in acceleration and that can take many forms, from financing to development of infrastructure. So I don't see us really participating a lot in what you would describe as pure E&P, which is the sort of business that you're describing.

But you mentioned sort of a $50 million to $100 million potential commitment. What I'm trying to get at is that this is your initial commitment; but because of the poor deliverability of shallow gas wells, that would be an ongoing commitment from those wells whose drilling you participated in.

Well, let me just offer you a little example. If for example, we were to provide financing to an explorer to develop gas reserves; that's a financing proposal. It's not an oil and gas development, so you would expect that once their gas supply has progressed the development into reserve, that he will be self-sufficient in funding. So it's those sorts of things that we're looking at. Now I don't want to give any guidance on what we're planning to do, but I offer that as an example.

We're not out there drilling wells, per se. We're focusing on how can we help people get gas to us more quickly.

I understand, and I appreciate that you're electing to go into details; but no matter whether you have your own wells or interests in existing wells or new interests; somebody will have to continue to spend money to maintain deliverability.

Well, that's right; but that's someone else's business, isn't it? It's now our business. They're -- like our existing gas suppliers that do that today. So anyone who is in that business of supplying gas to methanol plants has to continue to spend money to develop their gas fields.

Yes, but if those suppliers are saying I'm sorry but the nature of the wells requires us to do more exploration to maintain gas supply to Methanex; wouldn't you still be on the hook?

Well, that would be part of a dialogue and a discussion around the pricing and terms and conditions of the gas that we purchase. But I don't really see that anything is different in the future than it has been in the past; that we have long-term gas contracts and our gas suppliers commit to supply us over a long period of time at a pricing arrangement.

So there are clearly negotiations that need to take place. But I think you're mixing the concept of us buying gas; which is what we do, with the exploration programs which is someone else's business.

Well, fair enough. If I may come back my earlier question; what is the term of your interim agreement with Apache Corporation and potentially other Argentine suppliers?

What we've described is that these are all short term. Some of them expire at the end of this year, some of them at the end of next year. And there's a variety; I think we have seven suppliers in total. So they're all a bit different. But the terms around how we share are more or less the same. So as I described a little earlier -- and there certainly is a detailed description in the MD&A on the sharing mechanisms.

Alright, I'll read that. And thank you very much.

Okay. Thank you.

Thank you. And our next question, Bob Hastings, Canaccord Capital Corporation; go ahead, please.

Hi, thank you. Just, I hate to go on about Argentina; but just sort of a clarification question first of all. You have 60-something percent currently of your gas coming from Argentina under contractual arrangements -- that goes up to -- is it 80% by 2009?

That's correct, yes.

So when we talk about 10% or something from Geopark; does that get us by 2009 down to 70% or if more it gets us back down to 50%?

That's correct, yes.

Okay. And one of the things I noticed in your disclaimer, if you will, was the potential-- well you couldn't say what the tax was going to do from Argentina; whether it could actually be increased. Was their economy growing so fast and then putting in even new gas-powered power generation that could use up more than what one of your units are taking today; do you see that there's a real possibility that they could start to increase that tax to pass along their import cost to exporters, which has been sort of the game plan all along?

Well, it seems like a couple of parts here, Bob. To the extent that they build power stations; they're going to build them in the north where the people are. Remember our gas reserves are in the Deep South. The only way to take more gas from the South to the North is to build new pipelines. And in that regard, there is nothing much happening. So we are not aware of any pipeline expansion that's currently going on. Now people have talked about it. But nothing much is happening terms of building capacity to take gas to the North. That would be point number one.

The second point is that that's very typical MD&A language that we've added into our disclosure there. And we don't know what the Argentinean government might do in the future. So I think you always get your lawyers helping you to write these documents and that would be-- as you understand the context that that comment has come in under.

Okay. No, but one of the strategies, as I understood it, was that the government of Argentina was basically trying to pass along-- like they obviously have a horrible policy of charging 50 cents for gas to the consumers, which is encouraging usage and making things even worse. And it's obviously not the state of a longer term; but in the mean time, their tact has being passed along higher import costs from Bolivia to the people who they are exporting gas to.

Again, I guess the only comment there Bob, is that their exports are becoming less and less. So that's an unsustainable policy as well. There is no way that as they choose to reduce exports, they're also choosing to pass along less of that tax from Bolivia. Because -- Chile is working very hard to free itself from the necessity of importing gas from Argentina, so this is not a long-term tactic. It's a short-term policy.

(Inaudible) I agree it's unsustainable and they'll have to do something different. I'm just worried about sort of the mean time. And if they're going to encourage more gas or Chile is going to find (inaudible) more gas, would it be fair to say that higher sustained methanol prices we all would expect going forward relative to the past, might be partially eaten up by higher has costs?

Well, I think the beauty of our current gas contracts is that we pay higher gas costs when the price of methanol is higher. So even under existing contracts, we're rewarding gas suppliers with returns that are still quite attractive today. So I think we -- well, I think it's probably unrealistic to say that we can expect to have $1 gas. And if the price of methanol is $100 a ton in the future, then that's a problem for us. But I guess the expectation for certainly our industry is that the days of $100 a ton methanol are behind us and we're unlikely to see them again.

Yes, I agree with that. Okay, thank you-- well, one last question on the DME, And China has been taking a little bit longer than sort of originally hoped for, as new projects often do. But with the advent of DME in China and other projects being looked at, my understanding was that longer runs are actually trying to build their own methanol capacity for those projects. And obviously they can't do that in the near term. Do you have sort of a projection of what you're seeing as what they might be or were you negotiating with them to import over the longer-term to meet those DME demands?

They are -- they have built lots of capacity in China. And a lot of that capacity is been fine for DME so there is no doubt that they will be self sufficient to a large extent for methanol into DME. The key point here is I think the differentiation between the coastal markets in China and the inland markets. So the inland markets I have no doubt will be supplied by domestically-produced methanol and that methanol will go into both DME and gasoline. The focus for our attention as far as imports are concerned, are the coastal markets. We have a lot of international customers who are building capacity or have built or are building capacity in East China and South China. We have Chinese customers who today demand natural-gas-based methanol. So we think there is a growth opportunity in those Eastern provinces where coal costs are very high and the cost of (inaudible) is very high. That's where the increasing opportunity for methanol imports exists.

Okay and do you have any idea as to sort of in terms of your contractual relationships -- do you see those increasing?

John Floren is on; John if you have any comments to add to my comments there?

Yes. We're seeing the DME growth today being in around the Shanghai area and in the South of China that not only our partner is growing there but there are two other Chinese companies that are building DME plants in those two areas. The demand for the DME in that area for methanol is going to be served by imported methanol from ourselves and other international suppliers. There are talks going on.

We wouldn't expect in the short term that those plants, to be serviced from the inner-Mongolia or the coal-based areas. Maybe over the long term, five to ten years as the infrastructure in China becomes more robust, that might be a possibility. But we certainly don't see that in the foreseeable future.

Okay. Thank you very much, John.

Okay.

Thank you. And our next question, Fai Lee, RBC Capital Markets; go ahead, please.

Great, thanks. Sorry Bruce; I joined the call late and I was just wondering, did you comment on your realized price outlook for the third quarter?

Yes, what we said is around $260 to $270 per ton, Fai.

And what about the sales volumes?

I didn't comment on them. And I guess we are impacted a little by the expectations around lower operating rates in Chile. So the guidance I'd offer is perhaps a little less than Q2, but not by a huge amount.

Okay. And in Q2 it looks like you drew down inventories I guess because production was less than your actual sales.

That's right.

Is there any opportunity to draw down more inventory or are your inventories pretty comfortable right now?

Well, I'd say we're comfortable. And I commented a little earlier that we had been sourcing methanol from other suppliers around the world. And we've certainly been quite successful in buying methanol forward into this quarter. So I think we feel quite comfortable with where we're placed today.

Okay, great. And the last question I have is -- Trinidad I guess had gas curtailments, did you comment on how you were impacted or could be impacted?

We haven't been impacted and we don't expect to be impacted.

Okay, thank you.

Perhaps I've been a bit too direct there. There have been some small disruptions, but I would say it's less than 1%. So it's very small year to date. And there is work ongoing in Trinidad, bringing new gas wells and gas platforms into production. So there might be some small disruptions, but it will be small and erratic, as that is certainly our expectation.

So not the 15% that we've seen in some (inaudible)?

No, that's certainly not our expectation, Fai.

Okay, thank you.

Thank you. Our next question, [Leeann Carnes], Polestar Investment Research; go ahead, please.

Hi. Thanks for taking my call. I've got two quick questions. Field volume year over year is down slightly. Can you explain how much is due to the short-term demand issues in formaldehyde and acetic acid that you mentioned versus the Chilean loss of production?

Mostly it is a result of lower production. Very little is related to supply. I read a lot written about formaldehyde and the impact that that might have on our industry. But I picked up an interesting statistic just in the last few days that North American structural wood panel production is expected to be a little over 40 billion square feet this year. And that's down from 42 billion square feet in 2006. So the panel board production which is a large consumer of formaldehyde and its large market is in the housing industry, is down by only 5%; so the amount of methanol that impacts is quite tiny.

And I guess people focus on housing stats, but they ignore the renovation market and the renovation market in the US continues to be quite robust, while housing is down sharply. So to get to the heart of your question, the reason that our sales are lower is because of the supply challenges that we've had.

Perfect. And then one other question related to the $17 million accrual that you mentioned in your release for the Argentinean duty. Is that your expectation or best guess I guess for third quarter expense, and if that's true, why wouldn't that be higher than this quarter considering slightly lower pricing and some of the other effects? I would have expected it to be higher than the $29 million you expensed this quarter.

The amount that we expense each quarter is impacted by the amount of volume from Chile or Argentinean-produced volume from Chile. So that's quite a complex calculation and it depends on when product is released from inventory and clearly we account for it on a FIFO basis, so we're never quite sure when that product will be released. What you can expect is that with slightly lower production from Chile, particularly from Argentinean gas in July at least, that we should be selling less product from Argentinean-produced methanol in the third quarter than we were in the second quarter. So we would expect -- I've got a number here in front of me, let me just clarify with my colleagues.

So the accrual was $17 million; that was based on production. $29 million was the expense that we incurred and we're expecting it to be $12 million lower, so our current forecast is for the expense this quarter to be $17 million. It's a bit of a coincidence it's the same $17 million. Is that clear?

It's Ian Cameron, speaking. I'm the CFO, if we haven't met. I think the key point is that the accrual for the duty is based on production. So it gets attached to the inventory and then it flows through the earning statement when that inventory is sold. So the duty itself, on a cost-of-sales basis, on a per-ton basis, is relatively constant as it flows through. So it depends on how much sales -- amount of duty that gets charged to earnings will depend on how much sales of production that was based on Argentinean gas.

Perfect. Thank you for clarifying.

Thank you. And our next question, [Brad Langstone], [Salman Capital]; please go ahead.

Hi Bruce, Hi Jason. I hate to go back to this. I'm trying to get my head around the production problems you guys are facing for the rest of the year in Chile. When you guys went out to the market on the 11th of June, you said your gas situation was going to improve in about one week. And then it appeared it kind of to be a little bit of posturing for the European contract negotiations, that sort of thing. At the end of June you said that gas supply would be back on line in about two to three weeks. I guess this is no longer the case and that it appears to be something that's going to be troublesome for the rest of '07. How can we be assured that this gas is going to come back online by year end and what impact do you forecast this having on the remainder of your '07 earnings?

It's not a question that the repairs to these compressors have been -- taken longer and had a bigger impact than our original expectation. As we understand, there are two compressors that are involved. One is a new one that has been recently commissioned and there is another old that had more serious damage to it. So one of those compressors is now back on stream and has improved gas deliveries. And the second one we understand is due to start up very soon. But this is all a little bit hearsay for us. We take what we're told by our gas suppliers and that's what we've communicated to the market. So it is clear now that the problems with the compressors were more serious than certainly we were led to believe in the middle of June. So we thought it would be a very short-term issue. It's proven to be a little longer term. But again, based on what we've been told by our gas suppliers, we've no reason to think that we won't have two products back on stream in the next few weeks.

And your forecast for earnings impact in '07?

We've already provided an earnings impact and I guess you've got to work through the numbers. We looked at -- we provided a lot of guidance on what the cash cost to production from Argentinean is. So there is no doubt that every ton that we don't make, we're losing potential earnings and you can see that reflected in our current accounts. As one example, I think the-- I was getting a bit off track -- so I think the impact can be seen in the second quarter and it's going to be a similar impact in the third quarter and I expect that by fourth quarter we will be back to much nearer the sort of capacities we were running in Q1 this year.

And I think the unfortunate thing is all these breakdowns have occurred in the middle of winter when gas is at its shortest. So if you look back at our history over the last few years, all of the gas disruptions we've had have tended to be in July and August. So if the future is the same as the past, then this should be behind us soon.

Great. Thanks, guys.

Thank you and currently there are no more questions.

Well it's a very good time to call a halt to the call, Operator. But thank you for participating in this. I certainly expect, and reflecting back on the answer to the last question that by our next call most of our short-term natural gas disruptions from Argentina will be behind us. So that I think is a realistic expectation. And while there are some variables, we expect methanol pricing to remain reasonably stable and in this environment we can look forward to improving earnings and cash flows over the longer term.

So I think we're excellently placed to grow our Company, to capitalize upon growing demand for methanol and energy products and with that, I'd like to thank you all for participating in this call and good morning to all of you.

Thank you. This concludes the Methanex Corporation second-quarter results conference call and thank you from Telus.