Methanex Corp (MEOH) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Second-Quarter 2008 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this call is being recorded on Wednesday, July 23, 2008.

I would now like to turn the conference call over to Mr. Jason Chesko, Director, Investor Relations. Please go ahead.

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 forecasts or projections which are included in the forward-looking information. Please refer to the bottom of our latest news release and to our 2007 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 help answer questions a little later.

Firstly, a few comments on our results in Q2; in the second quarter we generated EBITDA of $79 million and net income of $39 million or $0.41 per share.

As I mentioned in our last conference call, we had significant deferred costs in our opening Q2 inventories which we expected to negatively impact our margins during the quarter. This factor resulted in a negative margin on purchased product of $31 million in Q2. This negative margin was due to inventory timing issues and the declining methanol price environment. In a stable or rising methanol price environment, we normally make a positive cash margin on traded methanol. Listeners may recall that we earned $35 million in trading profits in Q4 2007, which illustrates the volatility in our earnings in periods when methanol prices change rapidly.

The only other notable item from our Q2 results is that sales levels were 10% above levels in Q1, which reflects the fact that demand in most derivatives continues to be good. Also, sales levels of produced methanol were more than one third higher in Q2, which offset some of the impact of declining prices.

I'll comment more on the industry environment and third-quarter pricing and our earnings expectations later in the call. But first I'd like to provide you with an update on our operations.

Production from our large low-cost plants in Trinidad during the quarter was once again excellent. We produced a total of 517,000 tonnes, which is higher than designed capacity for those plants at 481,000 tonnes.

Our site in Chile operated a little below 30% capacity during the quarter with gas supply from Chile, and we produced 261,000 tonnes. Production was slightly lower compared to Q1 as a result of lower gas deliveries, primarily because of higher demand for natural gas in Southern Chile during the winter months. Partly offsetting this, we received increased gas deliveries over the quarter from GeoPark's Fell block and from the newly producing Dorado Riquelme block in which we recently announced a joint venture with ENAP. I'll comment more on the outlook for natural gas to our plants in Chile in just a few moments.

Our Waitara Valley plant in New Zealand operated well during the quarter and produced 124,000 tonnes of methanol. We are progressing well on our project to restart our larger 900,000-tonne plant at the nearby Motunui location and are targeting to be producing methanol from that facility by the end of next month. Around that time, we will our shut down our smaller 500,000-tonne Waitara Valley plant. So this shift will have a net impact of adding about 400,000 tonnes annually to our supply chain.

We have secured gas supply, which will allow us to operate the Motunui plant until at least the end of 2009. And based on the improved outlook for gas supply in New Zealand, we have become more optimistic about the longer-term future of our operations in that country. This could allow us to keep our Motunui plant operating longer and potentially allow us again to restart our Waitara Valley plant.

Switching topics now to the industry and the pricing outlook; at the beginning of the second quarter, global inventories had improved and methanol prices had decreased from the very high levels that prevailed at the beginning of the year. During the second quarter, pricing remained relatively stable with non-discounted prices across the various global regions averaging around $500 per tonne. And in July, pricing has remained at similar levels.

Recently, we've seen tightening market conditions and this resulted in an increase in spot methanol prices. China was a key factor contributing to the tightening of the market, as it shifted from being a net exporter of about 150,000 tonnes in Q1 to a net importer of about 400,000 tonnes in Q2. This shift is equivalent to about a 2.2 million tonne change in global supply and demand balances on an annualized basis.

The increase in imports was partly due to the Chinese methanol industry operating at low rates due to various factors which included government mandated natural gas curtailments to many natural gas-based methanol plants, transportation and infrastructure issues related to the recent earthquake and the upcoming Olympics, and some methanol producers switching to ammonium production as a result of high fertilizer prices.

In addition, coal feedstock costs have continued to increase significantly in China in recent months, making the economics challenging for many high-cost producers in China and making imports more attractive.

Tight market conditions in China have also been supported by strong demand, including demand into emerging DME and fuel blending markets as high energy prices continue to fuel strong growth in these derivatives. We estimate that on an annualized basis, there is about 6 million tonnes of methanol being used for DME and gasoline blending in China; up from only about 1 million tonnes a few years ago.

In addition, during the last quarter, the government of China implemented a tax change which improved the economics of DME production and reduced gasoline subsidies which is expected to support more demand growth to methanol blending in gasoline.

Outside of China, overall global methanol demand is [firm], although in some regions there is softness in some derivatives such as formaldehyde, which is being negatively impacted by weakening economic conditions.

Supply constraints outside of China have also contributed to tightness in the market. There have been significant planned and unplanned outages across the global industry recently, including in Trinidad and Saudi Arabia, with some in Europe and most recently in Equatorial Guinea. And there have also been closures due to poor economics, resulting from high feedstock costs.

With the outlook for the current supply and demand balanced, we expect markets to be balanced to tight, unless demand is significantly reduced or until further significant supply comes on line. This environment should lead to a continued favorable price for methanol in the coming months.

I'll switch topics now and talk about some of the opportunities and challenges that we face. First, the natural gas supply to our plants in Chile; we continue to operate our plants at about 25% to 30% based on gas supplied exclusively from Chile. As I commented earlier, the solution to our gas supply challenge is to source more natural gas from Chile and we are continuing to see good progress being made on gas-development initiatives.

Firstly, as I mentioned earlier, we've recently benefited from increased gas deliveries from our recent initiatives in the Fell and Dorado Riquelme blocks. And together these two blocks are providing natural gas at levels that allow us to produce more than 250,000 tonnes of methanol on an annualized basis. The ultimate goal is that these two blocks alone have the potential to supply us about 40% of our total gas requirements in Chile.

Over the last quarter, the government of Chile also finalized the contracts for nine exploration blocks awarded to international oil and gas companies under its bidding round. And last week, the government of Chile awarded the Otway block to a consortium which includes GeoPark, Wintershall and Methanex.

Some exploration activity in these blocks has already commenced and we would expect to see further ramping up of resources later this year. Based on the significant activity and monetary commitments related to natural gas development in Southern Chile over the next few years, I'm optimistic that we can return to running all of our four plants in Chile.

However, as I have commented before, this will be a gradual process. I expect it will take a couple of years until we see significant improvement to our production levels in Chile. It is a key objective for us to accelerate gas-development activities and we will continue to focus our initiatives to meet this goal.

The next opportunity I wanted to provide you with an update on is our new project in Egypt which continues to progress well. The project is now over 40% complete and continues to be on budget and on schedule for start up in early 2010. The piling on the site is now completed, foundations are well-advanced, steel work and tank erection is progressing and the EMethanex organization has grown to over 50 employees, comprising mostly local nationals.

We continue to be very pleased with the progress on this project and the excellent relationships that we enjoy in Egypt. Our joint venture DME project in Egypt also continues to progress well. We recently selected a site for the DME plant, adjacent to our methanol project in the same petrochemical complex. This project is a good example of the viability of DME outside of China and support's Egypt's energy and environmental policies, as it allows Egypt to use its own natural gas to develop clean new fuel and substitute imported LPG.

I'll change topics now and make a few comments about our liquidity. Our cash flow from operating activities during the second quarter was $69 million before changes in working capital. During the quarter, we returned a total of $58 million to shareholders via both dividends and share repurchases. We completed our normal course issuer bid in May, repurchasing the maximum amount allowable under the bid which was 10% of our public float.

We announced a new 10% bid in May and we have been continuing to repurchase shares under this new bid.

We have a number of uses for cash as part of our consideration of managing our balance sheet. Firstly, we are in a strong position to meet our commitments on the Egypt project. Secondly, we will continue to focus on opportunities to invest to accelerate gas development in Southern Chile and to improve the security of natural gas supply to our Chilean plants. And finally, we will also continue to explore initiatives to invest to expand the demand for methanol in the energy markets.

With our healthy financial position and a strong methanol price environment, we are well-positioned to meet all of these objectives and continue to build on our strong track record of returning excess cash to shareholders.

Before stopping for questions, I'll make a few comments regarding our expectations for Q3. Firstly, with current posted methanol prices being similar to Q2 levels and with some upward pressure on pricing, we would expect an average realized price in Q3 a little higher than Q2. Secondly, unlike the last few quarters that were impacted by purchased product gains and losses due to inventory climbing issues, I would not expect this factor to have a significant impact on our third-quarter earnings.

Finally, while we are targeting to restart our larger New Zealand plant in the third quarter, I don't expect this to have much, if any, impact on our third-quarter results, as the benefits of higher production out of New Zealand would not be realized until the fourth quarter. Taking all of these factors into account should result in improved earnings in the third quarter.

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

(OPERATOR INSTRUCTIONS). And the first question is from Jacob Bout, CIBC World Markets. Please go ahead, Jacob.

Good morning. A question on the gas supply that you have locked in; if you take a look at Dorado Riquelme, Fell, Otway- what percentage of your gas do you think that you have locked in at this point as far as a capacity utilization of your plants in Chile once you start getting out into the 2010-2011 timeframe?

Well, good morning, Jacob. That's a very tough question and what I've indicated in my comments and I think we've indicated over the last few quarters as well is that exploration does not produce instantaneous results. And I think that there will be a slow ramping up of gas deliveries.

This is why I phrased the question- out into 2011 say even into 2012-- are you looking at 70% to 80%?

Well no, in that sort of period, that's when we're expecting to be operating at full plants. So I don't like to be too precise about that because clearly we are looking into the future and oil and gas exploration is going to be either hugely positive or disappointing. What we're observing is that-- point number one, up until 2006, there's almost no money spent on exploration in Southern Chile for the decade prior to that. So we went through a period where there was a complete hiatus of any development spending on exploration for gas.

From 2006, ENAP started to spend money and we're beginning to see some the benefits of that now. Some of you remember the Lago Mercedes deposit that they sank all of their money on and there's been something of a hiatus around the development of that reserve for various reasons. But again, they've started to relook at how to extract resources from Lago Mercedes. They started spending money on Dorado Riquelme and we're now receiving gas under that. We encouraged the development of the Fell block and we're receiving gas from that.

So what's evident to me is that when capital is spent and resources are applied in this area, we find gas and it's been delivered to our plants. But as I say, it doesn't happen instantaneously and I think with all of the capital commitments and resources that people have applied to looking for oil and gas over the next few years, we can look forward to continuing deliveries of gas and I think we're being very realistic in expecting that we can get our four plants back operating again.

But I don't want to be too precise about exact times and dates because we simply don't know.

Right. And then just a question on the Otway block -- if I remember correctly, originally they actually won-- Total won that tender; I'm just wondering why they didn't choose to develop it.

Yes. We've heard rumors, but frankly we don't know, Jacob. They bid quite a lot of money for it and it might be they had second thoughts. And that's only speculation that I offer. We bid somewhat less for it and that's been the basis on which we've been awarded that block.

Okay. And then just switching to Egypt; obviously Agrium [had some issues] there. I'm just wondering what's different about your project in Egypt. Has there been any type of work stoppage there at all?

No. No work stoppages at all and none of the issues that Agrium has faced. I don't want to say anything about their project, but their challenge was their site. They had a difficulty in identifying a site and the site they chose became a lightning rod for local opposition. Our site is in the port of Damietta. It's in a petrochemical complex. We're adjacent to an LNG plant. On the other boundary we have a large container terminal. So we're in a very industrial zone and methanol plants are very safe and environmentally benign projects as well. So there are lots of differences between our project and their project and we've had none of the issues that they've experienced.

Okay, and then just a last question, just on shipping costs; you mentioned in the quarterly that shipping costs were $3 million higher this quarter versus where you were last year at this time because of higher fuel costs. Can you give us a sense of sensitivity that we should be looking at-- number one-?

Maybe later Jason can give you a better indication, Jacob. But to just give you some idea, probably three years ago bunker fuel represented between 10% and 15% of our total shipping costs. Today, it represents about 40% to 45% of our total shipping costs. And we've seen continued escalation of bunker fuel and clearly it has followed the same trend as crude oil, even over the last month. So it continues to become a more expensive element.

The other little factor of course is when we keep moving our supply chain around to be sure that we're resourcing methanol in the lowest-costs jurisdictions. So we-- in Q2 we sourced most of our purchased methanol in Europe and North America. Q1 we sourced most of it in Asia. So that pulls and pushes our shipping around somewhat and we end up incurring some additional costs. But we end up saving a lot of money on buying in the lowest-cost jurisdiction as well.

And it's because of the shift-- is why you're talking about lower backhaul [profitability]?

That's correct. Exactly; so as we've used our shipping to hold more of our own methanol, we've got less opportunity to take advantage of backhauls.

Okay. Thank you very much.

Take care.

Thank you. The next question is from Sam Kanes with Scotia Capital. Please go ahead with your question, Sam.

Thank you. Bruce, with respect to the new plants coming on in low-cost jurisdictions for gas; if you could just kind of generalize how they may impact the global cost curve, especially Europe's gas-burning or creating methanol plants-- as best as you understand it at the moment. And any color there would be helpful.

Yes. Well, the expectations we have is that this plant in Malaysia seems to be making good progress. And frankly we don't know any of them that we don't read in the media. So our information is all public information. And they're certainly talking about having production available in the fourth quarter of this year; so that's certainly what we plug into our models and we know that starting those plants up is not the easiest thing and it could take them a little bit of time. But that's one variable that we should all be watching for. The plants in Iran; again, we all know the history of that plants in Iran. They seem to take quite a lot longer to start them up and operate them reliably and we don't have any particular insight into quite when and how those plants will start up.

We have seen some suggestions that the Iranians are planning to privatize some of their methanol plants. And in that environment, they will charge market prices for natural gas. I don't know what market prices means but-- it probably doesn't mean $1 or $2; it means a somewhat higher number. So I think there is certainly a probability that over the next few years as they choose to privatize those plants, they will not be the low-cost plants that they are today. But with that said, they're still very competitive in the global market.

We still see a lot of high-cost capacity and we saw the plants operating in North America Sam, that were in the last few weeks paying $12 and $13 for natural gas, and really on the cusp of profitability. They're probably back in profitability now, given the equation between natural gas prices and methanol prices.

And you mentioned Western Europe. There are facilities in Western Europe; the same in Russia-- the Russians have seen increasing gas prices as well. And those plants are-- they're certainly back in profitability today, but I think longer term they will struggle to compete in the export markets.

And then of course China-- I referred to it briefly, but if you follow coal prices in China, we've seen extraordinary escalation over both the last 12 to 24 months and over the last three months. So coal prices have tended to track crude oil prices and we've seen lots of upward cost pressure on Chinese production. So coal prices, logistics costs, the revaluation of the RMV; so we see quite a chunk of production in China now with costs approaching $400 a tonne. And a year ago, we would have said that number was more like $250 to $280 per tonne; so quite an extraordinary change in a relatively short period of time.

Thanks for those general thoughts or specifics thoughts. A follow up; you were in an ISIS chemical rag a few weeks ago on something you haven't talked about yet, but seems constructive. You are I guess a power utility in Puntarenas; supposedly converting coal for generating electricity at the cost of $40 million. That's you guys?

Yes. I wouldn't call it a rag, Sam. They might be listening on the phone. We want to be kinder than that to them. A newsletter is a better term. Yes, we are investigating a coal-fed boiler down in Puntarenas. We haven't made an investment decision. It's probably a little less than $40 million and the concept is to produce electricity and high pressure steam that will then free up natural gas that allows us to produce more methanol. So it's a project that has an outstanding internal rate of return. But there's a bit of work to be done yet. We haven't firmed up the capital. We need to finalize negotiations on coal prices. But there is a wealth of coal in that area. And we do it partly to demonstrate that coal is a viable energy resource for that part of the world and we're hoping to encourage others to see that opportunity as well.

I indicated earlier that more gas in Southern Chile is consumed in the winter months when it's cold, and that's been a factor forever. The only competing source for natural gas in Southern Chile is basically the township of Puntarenas and they're sitting on basically a very nice coal supply, which has never been used. So we're hoping, as part of-- to show a little bit of leadership here and demonstrate that there's viability in producing electricity and steam from coal and potentially freeing up some natural gas as a result of that.

How about gasified syn gas from it?

Well, I think that's another challenge. I'm very much of the view that-- I'm struggling to find the right words to express my feelings around coal gasification. My estimation; one, it's very expensive. The capital costs are extremely expensive and some of the projects we've looked at in China-- they haven't spent too much money on emissions control or environmental protection. And if you wanted to bring those projects up to Western standards, you're looking at extremely high costs.

We saw a project in Western Europe just recently; a coal gasification project, that the estimated capital was something between $1,200 and $1,300 per tonne of capacity. So if you remember, where we're spending $700 per tonne of capacity in Egypt and we were a bit horrified by that number. So we've got another significant delta to do coal gasification to Western standards. So I think it's a really big [ask]. I've looked at the project-- the Eastman project down in Texas-- or Texas or Louisiana-- I'm not sure which one.

Texas now-- they bought out 100% of that interest.

And I'm sure it will be a good project once you've committed the capital, but the capital costs building that facility is extreme. So how can satisfy if you can finance and get a return on capital on a project of that scale-- like I'm not sure I have that confidence. So you'll get from my comments, I'm not that enthused about coal-based methanol, but that said, it represents today about 30% of all global supply and it's growing rapidly. So it's not something we can ignore and we continue to look at niche opportunities. I don't think Southern Chile is one of them, frankly. But I think there are some others in the world where maybe it makes sense.

Thank you. Last small question and I'll go; the $5 million gain on sale of the ammonia assets at Kitimat; was that pre-tax or after-tax?

It's pre- and post-tax.

Pre- and post-?

Yes.

Okay. Thank you.

Okay.

Thank you. The next question is from Hassan Ahmed with HSBC. Please go ahead with your question, Hassan.

Good morning, guys.

Good morning, Hassan.

I'm just trying to get a better handle of the ebbs and flows as it relates to China in the near term. I mean there have been reports out of there that-- since you're talking about electricity cuts to industrial customers and even transportation bottlenecks; particularly as we approach the start of the Olympics.

Yes.

So now above and beyond that, one's hearing about reduced operating rates by some national downstream users like acetic acid guys. So I just really want your view on how this impacts let's say Chinese methanol supply and demand and how we should be thinking about volumes and pricing out there.

Well, I think the bigger impact Hassan, on methanol demand, is high energy prices. And the-- again a driver during the Olympics is to ensure that there is adequate gasoline and adequate diesel. So methanol plays a role in that. And I think we will see continued high levels of methanol gasoline blending in the coming months. I would say we don't have a clear handle on the exact impacts on demand and supply from the Olympics.

What we've seen, there will be some disruptions of derivatives. But there is also some disruption to methanol supply as well. There are quite high inventories of methanol in coastal China today, partly as a result of very high levels of imports in May and June, but also as a result of a recovery of production. But that inventory seems to be being consumed and there is-- the demand for traditional derivatives continues to be quite strong in that country.

In talking to a lot of our customers over the last few months, when you ask them how their businesses are doing; most of them would say well, they're surprisingly good. Demand is holding up. There are areas of softness and everyone points to anything to do with the housing market; that we have in the autos market in North America. But on a global basis, they would say that they're continuing to do reasonably well; worried about the future a little bit, but the results continue to surprise on the positive side.

So I think that's part of my answer as well that global companies or consumers of methanol, will see declining demand for their products in North America and probably Western Europe. But they're continuing to see increases in demand in Latin America and Asia. So overall, when you look across the globe, the demand from our customers for orders is exactly the same in Q3 as it was in Q2. We had a bit of a blip in Q1 for different reasons, but we've returned to the same sort of sales levels as we saw in Q4 and Q3 last year. So that certainly suggests that the physical evidence is the same as the feeling that demand continues to be as strong as it was before. And it's certainly partly supplemented by higher energy prices.

Alright, very helpful; thank you.

Take care.

Thank you. The next question is from Bob Hastings with Canaccord Capital. Please go ahead with your question, Bob.

Thanks. First, in your comments you made reference to a competing supply of gas in Chile. And I remember there have been problems with some deliveries in the past, but it seems to me it was always sort of a well problem or a pipeline production problem or access problem. And this is the first time I think I've ever heard you sort of say there was a competing source for gas and that ENAP sort of redirected the gas. How important was that?

That's [inaudible], Bob. It isn't a change. The township of Puntarenas runs on natural gas so it is the only energy source that they use to generate electricity and to heat their homes. So it has always been a factor in the demand side of natural gas. So we see more natural gas consumed in the winter time than we do in the summertime, for obvious reasons.

But is it growing?

Well, it probably is because the town is growing. But it's growing modestly, not hugely. It's a town of 100,000 people so it will always have a demand for energy, but it's not several million people and it's never going to be.

No. But we saw a 15.5% reduction in Chilean production in the quarter versus the first quarter; was that all because of that or-?

No. As you indicated, and we've said in the past, there are some issues with some of the existing fields. Some of the existing fields with inept suppliers have been in decline over the last few years. So that impact is evident in their deliveries to us as well. So a little bit frustratingly, some of the new gas is coming from the Fell block and Dorado Riquelme is replacing some of that decline. But there is still-- even in the existing fields they have, there does seem to be some interesting potential to increase future gas deliveries.

And going back to the comments earlier; you spend money in exploration in that area and we get more gas. And we went through a long period in history when there was no money spent. So we've just seen a decline in the quality of the reservoirs that are being exploited and now they're beginning to spend their money and we're seeing results from it. So I don't think there's anything too dramatic in what we're observing, it's just the way oil and gas works everywhere around the world.

Yes. Okay thank you and then the one last question is-- you're more optimistic about New Zealand or more encouraged I should say by New Zealand; and do you see potential-- can you give us the dynamics for going beyond 2009-- is it price, is there greenhouse gas emissions because the government there has made comments on that? Can you give us a little bit more info?

Sure. Well, we've certainly looked at the reserve to production ratio and four or five years ago, that had got down to 3-4 years. So it was reasonably eminent in the future that the country was going to be short of natural gas. So what happened? The price of natural gas went up which encouraged more exploration. People found gas. And now when we look out, the reserve to production ratio is more like 12 to 14 years, which is very normal compared to most other countries and somewhat higher than North America.

So it would seem that there is now a lot of deliverability and we are now part of the demand equation for natural gas, whereas a few years ago, we weren't. But people saw us as being part of the demand that was just going to simply go away; whereas now we do seem to be part of the permanent demand equation.

So there's no doubt in my mind that gas is available. So the question is-- how do we share that pie with the suppliers of gas? And I guess in every geography, people who own energy are seeking higher prices for that and we're no exception to that, Bob. But for me to say there is a big economic price here to get our plants operating at higher rates. I think we've got a very good deal with the gas from Motunui and I think there's more gas that we can secure at similar prices that give us a very competitive supply that shares some of the economic benefits of high methanol prices with those gas suppliers in New Zealand.

Does that suggest then that it wouldn't be just a straight price, but maybe a sharing?

Well, now I guess that's been the concept of all of our gas contracts around the world. So, yes; clearly I think the best way to end up with a win-win deal here is that the gas suppliers and ourselves end up with an economic benefit out of higher utilization of those assets.

Right. So would that create a range that you might be willing to share with us?

Well, no we don't want to get into talking about individual gas contracts. But we've given quite a lot of guidance on our global gas pricing and the prices we pay in New Zealand forward are in that range of that guidance so I think it's 30% sharing of our $150 Jason?

About one third sharing.

About one third sharing of around $150 and a base price of $1.25. Now that's not the gas contract that we have in New Zealand. It's not the gas contract that we anywhere. But it does cover the range of gas contracts we have around the world.

And including the new contracts that you're signing in New Zealand?

That's correct; yes.

Okay. Take care.

Okay.

Thank you. The next question is from Fai Lee with RBC Capital. Please go ahead with your question, Fai.

Thank you. First, I just wonder if you could comment on your demand growth expectations for this year- maybe in absolute terms.

Well, that's a tough one. Getting to my comments a little bit earlier if you're looking at North America and Western Europe, there's no doubt that demand is off in both of those geographies, particularly formaldehyde. We continue to see acetic acid being quite strong around the world and acetic acid derivatives are very strong. The other product line-- methyl methacrylate, silicones; I've met customers in all of those industries in the last couple of months and the consistent message is that the strength of demand continues to surprise them.

So I think the-- we ourselves have forecast 4% to 5% demand growth this year. But if you divide it up, there is negative growth in North America and then stronger growth in Asia. And then overlaying some of that is some of the growth we're seeing in China in particular and in energy applications. So in gasoline blending, for example, we were forecasting 2 million to 2.5 million tonnes at the end of last year and by the end of this year we're expecting something like 3 million tonnes of methanol ending up in gasoline in China.

So clearly there is a big drive to increase the volume of consumption of methanol and gasoline in that country. And you see some interesting moves in other parts of the world. There's a bill going through the-- or being promoted in the US that-- I don't want to sound like an expert on this because I'm not, but it is promoting the use of alternative fuels. And methanol is defined as an alternative fuel in the United States. So I'm not suggesting for a second that we're going to see methanol consumed in large quantities in that country in the short term, but I think there are moves being made to recognize that alcohol-based fuels are part of the solution to providing fuel to run our motor vehicle fleets.

So I'm sorry I've gone off the topic a bit there, Fai. But I think it's a complicated question because there are areas that are very strong and positive, other areas that are sort of normal, and other areas that look a bit slow today.

Right. And just maybe going back to this 4% to 5% demand growth expectation; given what you're seeing, the general direction; has that changed for this year?

No, it hasn't. No, it hasn't changed at all.

Okay. And what was-- what did you have for demand last year, just as your starting point- 38, 40 million?

39 million tonnes, Fai.

Yes, about 39 million tonnes.

Okay. In your outlook, you talked about the new capacity starting up and you believe that some of that-- the impact will be offset by demand growth as well as closures of high-cost capacity. And I'm wondering if you could give us some color on where you see this high-cost capacity closing, how much and how soon?

Well, it's a complete function of the relationship between the cost of feedstock and the price of methanol. So if the price of methanol went much below $400 a tonne, in the short term, we would see capacity closing I think in-- there's a number of different countries. China particularly would be -- I think would be hard hit, assuming that coal prices stayed where they were. I don't know what the future is for natural gas prices in North America, but if they went back to the $12 to $13 that we saw just a few weeks ago, the production that remains in North America would be underwater on a cash basis.

So there is no definite answer to that and it is a complete function of that relationship between methanol prices and feedstock costs.

Right. I'm just wondering like outside of China-- like in North America, I think I believe there's one plant--

No, there are two natural gas based plants- [Landell] and Tyra.

Right. The Tyra one is pretty small, though. Right?

The Tyra is 160,000 tonnes. Landell is 750,000 tonnes I think.

Right.

So between them, they're close to 1 million tonnes.

And outside of China, you've got about 4.5 million tonnes coming online. I was just wondering if there is enough outside of China to offset that or not.

Well, I don't have those numbers off the top of my head in Western Europe, but there's still--Western and Eastern Europe- there's still capacity operating in countries like Romania and Serbia that we think will come off in a lower-price environment and we think are quite restricted today. In places like India, there is production in India that's based on very high feedstock, natural gas; and products like [inaudible].

So there is-- and I mentioned Russia before. So I think the number that I've got in my head was something like 6 million tonnes with a cost structure over $300 a tonne-- does that sound something like, right- Jason?

About 10 million, globally; including China.

10 million including China, so there is still a lot of high-cost capacity around but as I said, we don't expect the price of methanol to go to $300 a tonne, but that said; I've never wanted to forecast methanol prices in the past and I don't want to do it in the future either. But I certainly don't expect that to happen.

Yes. And the last question I have -- with respect to the existing gas production in Chile; what's the average decline rate that you see on those existing wells?

Well again, that's not information we know and it's not really stuff we can share. This is private information that's owned by our gas suppliers. So if they certainly advise us that they're unable to meet their requirements under our contracts, that's part of their explanation. But we don't have insight into that [side].

Well I guess I'm just trying to interpolate into some of the exploration work that you're doing if you start up production; how often you're going to have to keep investing capital to replace what's declined.

Again, I don't have a good answer for the question. I look at the GeoPark block. We've contributed so far about $25 million to the development there and of course they've spent money as well. And they're delivering today-- they're delivering about 500,000 cubic meters a day and that number keeps increasing every month. So a month ago, it was 350,000 cubic meters a day. And by the end of this year, they expect to be at 700,000 cubic meters a day. And they're drilling-- I think they're drilling something like two wells a month, and each well costs a couple of million dollars.

So I don't know what that all adds up to, but there is continual investment and as I understand, if you get a return on natural gas of something around $2 to $2.50, then that makes for a very interesting investment. So I think that's the environment that we're in Fai, and I can't give you anymore guidance than that.

Okay. Thank you.

Thank you. The next question is from Adam Comora with EnTrust. Please go ahead with your question, Adam.

Yes, hi; thanks; appreciate it. Bruce, you said on a number of occasions that by 2011 we're going to get some substantially or more optimistic to get substantially all of your Chilean production back online from Chilean gas. Can you give us any sense for how that ramps-- how we get to that number? What kind of production or what happens in 2009-2010 to get us to that number? Does it all come on in 2011-- just any sort of ramp function would be helpful?

I don't really want to say more than I said to an earlier question, Adam. We don't know for sure, like we're not in that business and we're getting ourselves into that business and we're improving our knowledge accordingly. What I do know is that you don't get instantaneous results and you start spending money on 3-D seismic surveys and I understand even on some of the new blocks, but the equipment is now in Southern Chile to begin seismic surveys. And then you decide where to drill wells and then there are exploration wells and then you decide where to drill development wells and then you build some infrastructure. So it just all takes time. And I guess we've been a little bit frustrated that some of the results have been a bit slower than we expected, and partly that's because we're in a remote part of the world the services industries to the oil and gas business, simply don't exist. There has never been a demand for them.

And again, it's a change that we're seeing is that some of the service companies are now positioning themselves in Puntarenas to supply equipment and people and expertise to the oil and gas effort in that part of the world. So that's one of the reasons that things have happened a bit slower than we perhaps expected. But in that regard, we think we're being a little bit naïve. So I don't know and I don't want to speculate on how it ramps up.

I think from all of the evidence we see, just to kind of reiterate, that we think there is a very high probability that we can get back to our four-plant operation in the next few years. And I know that's a bit wussy, but it's probably as much as I'm prepared to say, Adam.

I wasn't going to say that was wussy. Okay. We're at about 40% of the plants this year?

Well, I think that's certainly a possibility. But again, I don't want to commit to say that that's a sensible plan. But I think there's a strong possibility that that could be the outcome by the end of the year.

And just in terms of how we should be thinking about CapEx that you're going to be spending to get us to that full production again; on an annual basis, how much should we think about is going to be going into this exploration business?

Well, what we've committed to so far is-- our friends at GeoPark, we've committed $40 million. We've already spent about $25 million, so there's another $15 million that will probably go out I think before the end of this year. The number we've talked about for Dorado Riquelme is about $100 million over the next three years, and we've already committed about $33 million of that. So that will give you some idea of what we're expecting to spend on that exploration block. And then I think on the Otway block, our consortium is committed to spend $30 million over the next three years, and we're 16% of that. So you'd expect that we'd spend something less than $10 million on that particular opportunity.

So that's probably about it. It's between $100 million and $150 million over the next couple of years. And it's like some of that spending is dependent on success as well. If we're extremely successful in Dorado Riquelme, we might spend more. But then we're also producing more methanol, so I don't want to suggest too much exactness for these numbers because I think there is some potential for variability.

And so it sounds like, from these three consortiums is that we think that you're going to get to that 100%-

No, no; not at all. No, I think we got the other blocks that are being let out. We've got a number of areas that they developed themselves exclusively and we know that they're working on those. Apache was the winner of two of those blocks down in Southern Chile and we know that the whole business philosophy of that company is to secure acreage and then aggressively develop it. So we're optimistic on behalf of Apache that they will be very successful in the way that they go about developing their reserves.

I meant from our perspective; we're not going to be-- are there additional investments that we need to make to get us to that-- close to the 100% production again?

No, I don't think so. The opportunities that we've been working on are the ones that we've talked about so there's nothing else on the radar screen today. We talked briefly about the coal boiler. We haven't made a decision on that. That's $40 million, or a little less than $40 million. As I say, it has an outstanding internal rate of return so assuming we commit to that, it will be a very good project that provides a great return for shareholders. And so we're a bit focused on that as well. We want to invest on things that are good for our shareholders and all of the things we've looked at represent great investments.

I agree with you. And just two last quick questions; one is--the last [bulb] on this is- what happens after this initial investment? Is this going to be an ongoing capital requirement of the business of $20 million to $30 million a year to keep this gas flowing or is it just an initial seed investment?

Our focus, as we've said many times, is on acceleration. So we want to take what people are doing and try and do it quicker and do it quicker by using our money and our resources. So I think everything that we have done is directed in that way. So we didn't want to turn ourselves into an oil and gas company and I don't think we have done so.

So to the extent that others are investing and developing their resources at an appropriate speed, we're very happy to be as consumer of natural gas. But to the extent that we think we need to step in to help accelerate developments, we'll be inclined to do that. But again, I'd reiterate, when we're spending capital, we're doing it with the expectation that we'll provide good returns to our shareholders. So these are not donations that we're making.

I understand that and just speaking of good allocation of capital, I noticed that the share repurchase program slowed down a bit in the last quarter. Just what is the current thinking there? Do we anticipate getting back to the usual 10% a year of share reduction?

As I noted in my comments, I think we distributed $58 million of our total operating cash flow of $68 million during the quarter. So I think that's just a little short piece of evidence that our commitment to returning cash flow. So I guess this morning, Adam, I talked a lot about the opportunities we've got to spend capital in a very sensible way that makes a lot of good return to shareholders.

So we're still very much committed to our balanced approach in looking to return excess cash flow to shareholders. But we'll continue to be looking at both the opportunities we have to grow the Company and compare that to the cash balances that we have and we'll continue to buy back share accordingly.

I think if you look at our track record, it's a track record to be quite proud of and I don't feel dissension at all about the fact that we have slowed down a little in recent weeks.

Okay. Thank you very much Bruce. I appreciate it.

Thank you. At this time, there are no further questions in the queue.

That's good. It's a good time because we're almost on an hour. That's a very good time to stop so, thank you everyone for participating in the call. And despite the continuing challenges that we face in Egypt, we've had another good quarter. And high energy prices continue to support methanol prices. We've got our large plant in New Zealand starting up in this quarter so we're positioned to generate more earnings in the second half of this year than we had in the first half.

And we're committed to continuing to return excess cash to shareholders, as I just mentioned. I feel as though there's a lot of upside potential in our business that I don't think is reflecting in the current share price. And it will take us a couple of years, as I've talked about with Chile. We're not going to have instantaneous results out of Chile, but I think we've got good cause to be optimistic that we can get back to full production.

And when we have our project in Egypt, with improved outlook for production in New Zealand, that we have the potential to double our production base in the next few years; and if we assume a high continuing high-energy environment, this is going to be a very interesting future for Methanex shareholders.

So we are very focused on delivering that to you and so thank you very much everyone, for your support and good morning to everyone.

Thank you. Ladies and gentlemen, this now concludes the Methanex Corporation's Second Quarter 2008 Earnings Conference Call. Thank you from Telus.