Methanex Corp (MEOH) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation second quarter 2009 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 29, 2009.

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 forecast or projections, which are included in the forward-looking information. Please refer to our latest MD&A and to our 2008 annual report for more information.

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

Well, thank you, Jason. And good morning, everyone, and welcome to our second quarter investor conference call. I have a number of colleagues with me in the room and they will be available to help answer questions a little bit later.

Firstly, some comments on our results. The second quarter we sold 1.4 million tonnes of methanol at an average price of $192 per tonne. We reported EBITDA of $25 million and a net loss of $5.7 million or $0.06 per share. These results represented a steady improvement over our first quarter.

Cost reductions, driven by the lower natural gas prices and cost-saving initiatives, more than offset lower realized methanol prices and lower sales volumes of produced methanol. While our Q2 results again demonstrate the strength of our assets and their ability to generate positive cash flow at a low point in the methanol cycle, they're not a good reflection of our near-term earnings capability.

After the startup of the Egypt project and increases in production expected in both Chile and Trinidad, we expect to generate in excess of $300 million of annual EBITDA at a $200 realized methanol price; and an annual EBITDA of more than $600 million, if realized prices were to recover to, say, $300 per tonne.

I'll comment more on the industry and pricing outlook a little later in the call, but first, I'd like to provide you with an update on our operations.

Our plants in Trinidad continued to run well and we produced 440,000 tonnes of methanol during the quarter. The Titan plant was offline for planned maintenance from early June until mid-July, and this resulted in about 50,000 tonnes of lower production in the second quarter, and it will result in about 25,000 tonnes of lower production in the third quarter.

With the Titan maintenance program now finished, and our Atlas debottlenecking project completed earlier this year, we are expecting about 5% to 10% increase in production from our Trinidad operations in 2010. And this will have a meaningful impact on our cash flow generation, as the marginal cost of this additional production is low.

We continue to operate one plant near capacity in Chile. During the second quarter, it produced 252,000 tonnes. In recent years, during the Southern Hemisphere winter, we have experienced quite significant production losses when gas is being diverted to residential use. It is pleasing that this year, our production has been quite steady, and this reflects some of the success in discovering and developing new natural gas reserves in southern Chile.

We received more gas from the new Dorado Riquelme and Fell blocks during the second quarter and combined, these two blocks currently provide more than half of the gas that supplies our plants in Chile.

I'll comment more on the outlook for natural gas through our plants in just a few moments. I'll switch topics now and address the industry and pricing effect.

To recap recent developments, during the fourth quarter of last year, the global economic slowdown caused global methanol demand to decline by about 15%. As a result, high-cost industries supply, particularly in China, shut down or operated at lower rates, and made imports into China increase significantly.

During the first quarter, overall global demand stabilized and a relatively stable pricing environment has existed for most of this year. Of the last few months, we've seen market conditions tighten. Industry supply has remained constrained during the first half of the year. High cost capacity in China and other high-cost regions has largely remained shut down. And there's also been several planned and unplanned outages across the industry.

In addition, we estimate that global demand has increased by about 5% in the second quarter compared to the first quarter. The improvement in demand was primarily due to stronger demand in Asia, particularly in China, while in Europe and North America, there have also been some modest signs of improvement. And while there continues to be limited visibility in the current economic environment, current indications would suggest some further demand recovery in Q3 -- again, weighted towards stronger demand in Asia.

Low global inventories and a tightening of the demand/supply balance has exerted upward pressure on pricing. In July, our average non-discounted price across the regions increased by about $20 per tonne. We have just announced a further price increase in North America of $13 per tonne for August. Our average non-discounted price across all major reasons for July/August is about $240 per tonne, up from an average non-discounted price of $211 per tonne in the second quarter.

As I've mentioned on previous occasions, demand growth in methanol into energy applications has been very strong over the past few years. This is particularly the case for methanol blending in gasoline in China. The development of this market has been part of a long-term strategy for a number of provinces and has been supported by provincial standards.

The market has grown from about 1 million tonnes per annum a few years ago to current levels around 4 million tonnes, or over 10% of global methanol demand. Despite the already strong growth, demand potential in China is significantly high and growing, with passenger vehicle sales in China continuing to grow at double-digit rates this year.

To put this growth in perspective, auto sales in China recently surpassed sales in the US. And with methanol prices significantly lower than gasoline in China, a strong financial incentive exists for further methanol blending in gasoline.

Over the last quarter, the Chinese government issued national standards for using methanol as a transportation fuel, including an M85 standard, meaning 85% methanol, which takes effect in December of this year.

While the standards do not mandate the use of methanol, they should act as a catalyst for further growth. They establish rules and specifications so oil companies can develop more infrastructure and fueling stations, and car manufacturers can develop more flex-fuel vehicles to accommodate higher-proportion methanol blends.

The government is also continuing to work on developing an M15 standard, or 15% methanol, and this standard could be introduced later this year.

These recent developments are positive for the long-term outlook for methanol demand. From China demonstrating the viability of methanol blending in gasoline, this should also increase the potential for methanol blending to be adopted in other countries.

Turning to DME, another energy application that has resulted in strong methanol demand growth over the last couple of years, it was interesting to read a recent report that the Indonesian, the state-owned oil and gas company, is considering an 840,000 tonne DME project for 2011. This strategy is similar to the one being adopted in China and for the DME project in Egypt, where DME will be used as a clean-burning substitute from imported LPG, and used in cooking and heating applications.

So I'll switch topics now and talk about some of the opportunities and challenges that we face -- and firstly, natural gas to our plants in Chile. As I mentioned earlier, we continue to operate one plant in Chile at a site operating rate of 25% to 30%, based on gas supplied exclusively from Chile.

Gas exploration in southern Chile continues to be successful, as gas deliveries from Dorado Riquelme and Fell blocks have been steadily increasing, and now provide more than half of our current gas supply.

With further new gas discoveries expected to come online and more surplus gas expected to become available after the Southern Hemisphere winter ends, we expect to be in a position to start up a second plant in the fourth quarter of this year. Specifically, our plan is to operate two plants at reduced rates instead of operating one plant at capacity. We'll expect this change to increase the operating rate at our site over the next year by more than 20%.

In addition, looking out a little bit longer term, exploration and development activities continue to move forward in the nine other exploration blocks near our plants that the government of Chile awarded to several international oil and gas companies. Seismic work is currently underway in a number of these blocks, and drilling activity is planned to commence later this year.

Based on the significant increase in gas exploration activity expected to occur in southern Chile and the success already achieved, we continue to be optimistic about returning our Chile site to a full plant operation over the next few years.

To provide some perspective -- in the 2006 to 2008 period, about 40 oil and gas wells were drilled in southern Chile. These wells demonstrated a high success rate and have already resulted in significant deliveries in new gas to our plants. For comparison, in the 2009 to 2011 period, we expect close to 140 wells to be drilled. Assuming similar success rates, these new wells are expected to significantly improve the operating rate in Chile over the next few years.

The next opportunity that I wanted to provide you an update on is our new methanol plant in Egypt. Almost all of the major equipment is now installed and the commissioning of utilities has begun. The organizational buildup continues and EMethanex now has around 100 employees. The project continues to progress on budget and is on schedule for startup in the first half of next year.

We are excited about adding this first-class project into our supply chain to increase methanol supply to our customers. As is one of the most competitive plants in the world, it will significantly increase our cash generation. Even in today's price environment, we would expect our 60% interest in the project to generate about $100 million of annual EBITDA.

I'll change topics now and make a few comments about our liquidity and capital allocation in the current environment. During the second quarter, we generated $18 million of cash flow from operations before changes in working capital, and continue to be in a strong financial position. We have $278 million of cash on our balance sheet, low leverage, no refinancing requirements until 2012, and a $250 million undrawn operating facility.

We have two key priorities for the use of our cash -- firstly, to complete our project in Egypt, which requires a remaining equity contribution of about $50 million. And secondly, we expect to continue committing capital to accelerate gas development in Southern Chile. We are in a strong position to satisfy these commitments and our planned maintenance expenditures.

Maintaining a strong financial position and a conservative balance sheet is a key priority for the Company at all times, and this continues to be especially true in today's environment. While the economy and the methanol industry are showing some signs of improvement, there's still uncertainty around the future and limited near-term visibility.

We continue to be focused on opportunities to reduce costs and limit discretionary capital, and to further strengthen our financial position. In the long-term, our philosophy around capital allocations has not changed; we will continue to employ a balanced approach for the use of cash -- a balance between reinvesting in our business and returning excess cash to shareholders.

Before stopping for questions, I will make a few comments regarding the future and our expectations for the third quarter.

With methanol prices increasing recently, we would expect to achieve a higher average realized price in the third quarter, and this will positively impact our earnings next quarter. However, you may have noticed that our sales of produced methanol have exceeded our production levels over the last couple of quarters.

With our Titan plant recently offline for maintenance, these factors have led to a lower produced methanol inventories. As a result, we would expect sales of produced methanol to be lower next quarter, and this will partly offset the benefits of increasing methanol price environment. But overall, we expect to again see improved earnings next quarter.

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

Yes, thank you. (Operator Instructions). Jacob Bout, CIBC World Markets.

I had a few questions here on the Chinese methanol industry. I guess, first off, we've seen high import levels of methanol into China, much higher than anything we've seen historically -- close to 6 million tonnes.

Yes.

What are your thoughts internally? How long does that continue? And how much Chinese methanol capacity is shut in currently?

Well, I'll make a few comments and I might pass it on to John Floren, who's with us in the room here.

I guess our long-term view has always been that the coastal provinces of China will be supplied by imported methanol, and the inland province would be supplied by domestically produced methanol. And that's exactly what's happening today.

It is more or less what's happened over the last five or six years. The difference is now that, as the price of methanol has come down, imported methanol becomes more competitive and pushes more of the coal-based ethanol into the inland provinces. So, longer term, that's exactly the scenario that we foresee.

Now, what is the inflection point then for methanol, when we could actually see this capacity start up?

Well, it's a function mostly of coal prices, and coal has been relatively stable over the last year. So we do think if the price of methanol went into the $250 or $300 a tonne range, then we would see more domestic capacity starting up in China and maybe that would change the inflection point.

But I think in the current environment, we would expect to continue to see quite large levels of imports. I think our own forecast for Q3 is around 5 million tonnes for the third quarter, so it's still a very high rate.

So maybe -- I'll just ask John. Do you have any comments to add, John?

That's annualized, Bruce. (multiple speakers)

Annualized, yes.

As prices have increased in the last month here, we've seen the operating rates in China increase as well; as well as the winter time is over, so we had some of the natural gas plants start up. We see an operating rate in China today around 45%.

Having said that, imports -- at the height of the imports was around 600,000 tonnes a month. And I think we're forecasting over the next few months about 400,000 to 450,000. So, a little bit lower of imports, but still pretty high imports on a historical basis.

If prices continue to rise to the levels of high 200's, you would expect to see more plants starting to operate and less imports. But it's strictly a matter of price.

And would that be an additional -- on an annualized base, another 5 million tonnes capacity that could start back up? Or what is that number?

Well, the total market today, it's probably about 12 million tonnes of demand. So, say -- I believe another 5 million, I would say, yes.

Some of the stuff that's shut down was small, inefficient high-cost plants that really were high cost, that would never come back again, John, so.

It's hard to know.

Yes, so it is hard to know; but it will be less than that number, but it's still a significant number, Jacob.

Okay. And then maybe just focusing in on the demand side. Can you talk a little bit about DME versus direct fuel blending?

The economics clearly support direct fuel blending. It continues to be extraordinarily attractive from an economic point of view. And in China, we're never quite sure as to how they value methanol and gasoline, but you can value it on a volume metric basis or value it on an energy equivalent basis. And the reality of it doesn't actually matter; it's still extraordinarily attractive.

So at around $70 a barrel on a volume metric basis, you can afford to pay $600 a tonne and still be competitive with gasoline. On an energy equivalence basis, it's around $300 a tonne.

We think the true number is somewhere between those. It's probably more like $350 to $400 as being the current affordability for methanol in China. So, there's a big economic incentive and people will continue, I think -- I think with the regulation that's occurred, it's establishing an environment that's conducive to increasing the volume of methanol-blended fuels.

DME is more challenged economically. And at the current LPG methanol prices, there is a modest positive margin for some producers. Isn't that right, John? It continues to operate at around 20%, the operating rate for the industry?

Correct, yes.

So there's a lot of over-capacity in that DME industry in plants that are hardly operated since the day they were built. But albeit, that industry still is going quite nicely. If you look at the methanol demand growth, it's good in that industry. In the last few years, it's been quite extraordinary. So we're still reasonably positive about DME, but I think the larger potential for demand growth is in gasoline blending.

Okay. And just longer-term then for DME's -- is this more of a product now, just for blend with LPG? Or -- because there was some talk historically about it being used as a diesel replacement.

Yes. And that's the huge potential for DME is as a diesel replacement. But clearly, there are modifications that need to be made to diesel engines to accommodate DME. So this is not a demand growth that occurs overnight. It occurs over a long period of time.

And there are taxi fleets in China that are running on DME and in Japan, there are fleets of trucks and taxis as well running on DME. So the viability of the fuel has been demonstrated. The challenge with substituting DME for diesel is an infrastructure problem.

And I think there is a reasonable market in the meantime for blending DME with LPG, and using it in heating and household applications. And that's where the market exists today in China and that's what Indonesia is pursuing, and also substantially what Egypt is pursuing. So that's a smaller market with less potential for growth but still an interesting market.

Okay, well, that's it for me. Thank you very much.

Samuel Kanes, Scotia Capital.

Maybe just catching right up on Jason's conclusion there or observations -- you focus on Egypt obviously and capital for Chile gas, but you didn't mention anything about, I guess, your own personal investments for DME in Egypt. Has that changed? And/or the Chinese position changed?

Obviously, the 20% rate of the industry is clearly a show-stopper, I guess, short-term. I guess, along with that, could you see your partner getting involved with that Indonesia DME project, if that was to proceed further? And what would your interest be there?

Well, we've always wanted to be a catalyst for DME development, and we participated in the project in China in order to understand that industry a little better. That -- our project has continued to operate (multiple speakers) high rate of utilization, 100% utilization. It's been a very profitable investment for us, albeit a rather small one; I wish we had some more money in it.

Where the project in Egypt is going a little slower than we'd planned and anticipated but we still anticipate it going forward. We're only a 20% shareholder. We're not really the driver of the project. And to be fair, we're focused 99.5% of our input is on getting the methanol plant started up. So we'll pay a bit more attention to DME when we've got a primary target out of the way.

In terms of Indonesia, it's one press release that we've read about it from Pertamina, so as the Chinese involvement, I don't actually know -- do you know anything else, John? (multiple speakers)

No. No, so we have no more information on that, Sam.

Okay, thanks, Bruce. So one follow-up, just a quick clarity. Trinidad, you're saying the production will be up 5%, 10% in 2010. Is that productive capacity year-over-year or just actual production?

No, actual production.

Okay, thank you.

Steve Hansen, Raymond James.

With respect to global demand, you suggested that traditional demand is starting to show some signs of life outside of China. Can you just elaborate perhaps on what sectors this demand is stemming from?

You want to handle that, John?

Yes, sure. It's mainly coming in Asia. We're seeing some increases in formaldehyde in Asia and acetic acid. And the other -- we have another category which includes silicons and methylamines, et cetera.

So the demand increase we're seeing is mainly in Asia, although we are seeing some better demand numbers in North America and Europe, but from a very low base, and I would say moderate increases in the quarter over Q2.

Okay. And so is your sense that this is sort of initial signs of demand picking up? I guess what I'm trying to get at is, is it sustainable demand increases that you're seeing in those areas? Or is it just the restocking of levels? Or what is your sense for how it's linked to end production on the industrial level?

Well, visibility is really tough, but our customers are telling us in Europe and North America they are getting additional orders. The inventory throughout the chain, whether it's methanol or its derivatives, are really low. So they're almost making on a campaign -- not on a campaign basis, but as a order basis. So that hasn't changed. The working capital is still an issue.

So it's not a restocking, per se; it's actual demand. Is it sustainable? I don't know. I really don't know.

And you know, it's reflective a little -- I've seen a little pick up in [Hazom] new builds and we've seen a little pickup in auto numbers. So, a lot of chemicals end up in those segments. And so what we're seeing is a bit consistent with what we are seeing reported in some of those big end-user markets.

Certainly, the demand in Asia is China-driven, so even the demand increases we're seeing in Southeast Asia and Korea is for export finished goods to China. And China, it's an internal stimulus, so a lot of new houses, new apartments being built. A lot of automobiles being purchased. Is that sustainable? I'm not sure.

Okay, great. Bruce, could you comment, perhaps, where exactly you are on the cost savings plan? You noted some good -- or some strong improvements quarter-on-quarter. Should we continue to expect to see cost savings initiatives going forward? Or where are you sitting?

Well, I think we set ourselves a target for 2009 to cut $40 million off our overhead costs and we're tracking along rather nicely on that now. I think some of the things that we've cut corners on are unsustainable.

So I think half of it is -- we can sustain those cost savings but others we've cut back on. One example, things like training. And I think companies can afford to take a holiday on things like that for a short period of time, but longer-term, we're committed to training and developing our staff and we need to return to the practices we've had in the past.

So, I think we've done a really good job in this year when it's been a tough time, we've really cut back to the bone. But some of those costs savings are not sustainable longer-term.

Okay. And then one last one, if I may. Could you, perhaps, comment on what impact, if any, you expect the Chinese anti-dumping investigation will have on the global markets? And whether there's any specific impacts, even on Methanex? Although I understand you're probably not named in the suit.

Well, there are four countries. One of them is New Zealand. So we have a pretty modest volume of methanol going from New Zealand into China. So we are part of it. We're part of the process. And the Chinese government has established the process and we're participating in it and also supporting the Methanol Institute and its position regarding anti-dumping.

Getting to the big picture, though, it's very hard to see that this process will result in any difference in pricing in either China or the rest of the world. That there are still some very large producers who have been specifically excluded from the dumping campaign.

So to the extent that some producers are excluded from China and others are not, we're still going to see imports flowing into that country. And we're not going to see a two tier price system emerging in the methanol industry.

So I think the worst impact is some reconfiguration of people's supply chains. And we would still be able to supply China out of Chile or out of Trinidad. And so we have lots of options in our supply chain to supply the country without incurring dumping charges.

So we don't know where this is going to end up. It's a political process. And -- but it's hard to see it having much impact on the global industry.

All right, thanks for the update. Appreciate it.

Fai Lee, RBC Capital Markets.

Bruce, with respect to the $100 million of annual EBITDA that you mentioned earlier from Egypt, is that based off of the $200 realized price assumption?

It's based on the current pricing environment, Fai. The posted prices are in the $230 to $240 range.

Okay, so it's current pricing. Okay. And for your forecasting, I know Egypt is -- my timing might be a little in error -- when would you expect to start realizing that $100 million?

Well, I think in the second half of next year. We've --

Q3?

Yes, I think Q3 is a reasonable expectation. And without being too aggressive, we're working hard to make it earlier than that. But I'd rather under-promise and over-deliver than over-promise and under-deliver.

Okay. But maybe Q2 then.

Maybe, but I wouldn't put too many numbers into Q2.

Okay. You mentioned about China, the $250 to $300 perhaps more production would start up. Is that on a realized or a non-discounted basis?

Realized, in China.

Okay. Posted prices would be higher.

That's right, yes.

All right.

Yes, it's a CFR-equivalent price, Fai, in China.

All right. And can you comment a little bit about your agreement with Magellan and perhaps the prospects of building a methanol plant in Australia? And would that be something using existing assets like Kitimat or would that be something just completely new?

Well, we always have an inventory of things that might happen in the future and we were reported as building a plant in Vietnam a short time ago. And it's the same sort of context that -- we've always got our antenna up, looking for the next opportunity.

And we were in Australia in the early part of this decade and got very close to committing to a project, and then pulled out at the last minute for all sorts of good reasons. So we've kept our finger on the pulse of Australia, and we were aware of Magellan's activities and we've had some discussions with them. But it seems extremely early days. There is lots of natural gas in that part of the world and it's superbly positioned to supply the Asian market.

So we are, over a long-term, we're interested in Australia and building a methanol plant in Australia. But I'd say, boy, there's a lot of water to go under the bridge, and it's in the same context as lots of other countries that we have a -- that we visit and keep in touch with. So I wouldn't expect to hear much on this for the next year or so.

Okay. And with respect to the other prospects, is there sort of a -- in your mind, sort of certain countries where you think you're maybe a little bit more ahead of the game than others?

Well, the work we're doing today is really focusing on our four sites. And there, interestingly, we have opportunities in every one of those sites. Clearly, Chile represents a huge opportunity to get our plants back running at capacity.

In New Zealand, we have one plant running and we have a second plant idle today. We think there's lots of natural gas that we think we can buy at the right sort of prices, to provide a good return to gas suppliers and a good return for ourselves.

And in Egypt, of course, we're getting close to completion of the project. And adding further capacity there always make sense, but, yes, we'll do that on a slow and steady basis.

And in Trinidad, we've gone through some debottlenecking. There's some opportunities in Trinidad as well. So today, we're really focusing almost all of our efforts on the four sites around the world. And in addition to that, as I've said, we've got our finger in lots of pies around -- different projects in different parts of the world as well. But none of them is anywhere close to reaching any conclusion.

Bert Powell, BMO Capital Markets.

Bruce, I just want to go back to gasoline blending in China. You gave a number, I think you said 4 million tonnes per year is the current level of demand?

That's right. It's around that level.

And what would it have been last year? What is your intelligence tell you it could be sort of 12 months hence?

Well, it was about 3 million tonnes this time last year so it has increased quite dramatically. What's the potential? It's really hard to know. The 70 million tonnes of gasoline consumed -- I think it's the number, John? Did I get that right? (multiple speakers) -- 70 million tonnes of gasoline consumed in China. And clearly that's growing.

They're filling 1 million vehicles a month there at the moment, the amount of gasoline and diesel is growing dramatically as well. So if all of that was blended with 15% methanol, which it won't be, that's 10 million tonnes of methanol.

But there is potential -- the Chinese are also working on diesel methanol blends, which for those of you have been around Methanex a few years, we were excited about that a few years ago. And we could never really crack the market. But the potential certainly exists to blend methanol with diesel, and it improves the combustion and the emissions characteristics of diesel fuel. So there's lots of good reasons to have some optimism, that makes good sense.

So the ordering potential is millions of tonnes in excess of where we are today. And I think we're really at the very early stages of adoption of methanol fuels in China and in other countries around the world.

So I'm just trying to understand a little bit more detail, and if you can help us on this -- just in terms of -- is this sort of broad-based you're seeing? Is it sort of a little bit going a lot of places? Is there one increasing segment?

Yes, it's increasingly broad-based. Like Shaanxi Province is the place where this -- probably 20 years ago, John? They've been at this for a long time and they've done lots and lots of work on it. I visited refueling stations and blending plants, and methanol plants in the Shaanxi Province, and they are very serious about turning their local resource into a liquid fuel that can power the nation.

And so Shaanxi has been leading. We're beginning to see other provinces being equally aggressive and beginning to pick up from the learnings that have accumulated over a long period of time in Shaanxi Province.

So what would be the average blend percentage? How much methanol is going in?

In Shaanxi, they have everything from M100. I know there are trucks and buses running on M100 fuels, and taxis as well (multiple speakers) --

(multiple speakers) be very specific designed vehicles that can handle --

Yes, exactly. Yes, they are adopted for alcohol fuels. And the good thing about methanol, if you have high-level proportions, you can tune the engine to run on it, on methanol and it has fantastic performance. That's why it's used in a lot of the racing industry. So there's nothing wrong with methanol as a fuel; it's a great fuel.

And then they have M15, M10 blends, so they -- and M30 blends, M50 blends. So they really -- they've experimented with a broad range of different blends of methanol and gasoline.

So I can't answer your question. I don't know -- John, do you have any better insight into --?

No, I think it's a low level blend is the most popular, so around an M10 to M15 would be the most popular because you don't have to do any engine modifications. But like you said, there's many other higher proportion. Many of the Chinese automobile companies make 100% methanol engines as well. And we would expect them to start to look to export markets as they grow for these engines.

Yes, I'm just trying to understand if this is -- the bump in demand is because there was an installed base of application-specific vehicles that went into public transport that had a step function up in demand, versus broad-based -- auto sales are up and therefore there's a 5% blending across the country (multiple speakers) therefore.

I think it's the second. It's a fact, there's a huge financial incentive -- it's a lot easier and cheaper and less of an issue to blend low level blends of methanol into gasoline. And with increasing demand, it's a good way for their country to meet those demand increases.

So base level demand really just as an [oxygen] (multiple speakers)?

That's right. I think so, yes.

Okay, fair enough. And then, Bruce, just on the comments you made with respect to Chile, I think you said you're going to go to two plants at half versus one at full?

That's right, yes.

And the output would increase by 20%?

Yes, we expect production in 2010 to be 20% -- more than 20% higher than it is in 2009.

Okay. So when would that start?

Well, we're saying fourth quarter. So, I know our guys in Chile have got an actual date that they're going to start the plant, but I'd rather not commit to that. I've got them committed to it, but I'd rather not commit to you to it.

Okay. No, fair enough. And then just lastly on Egypt, I think last quarter, you said this was the stickier point in the finishing details. Is everything there going according to [oil]?

Well, I've got Michael MacDonald, our VP of Corporate Development with us, who's just off a plane, returned from Asia. So why don't I ask Michael to give you a comment on that.

Thanks, Bruce. Yes (multiple speakers).

It was my fault, yes.

No, the -- it's looking like a methanol plant, which is obviously good. We've got around 4,000 people still on the site. Bruce mentioned before, we've got over 100 people there in the operating organization. And our guys have now moved into the control room. We're starting early commissioning. So I think things are going pretty well.

Okay, perfect. Thank you very much.

Paul D'Amico, TD Newcrest.

Bruce, just to follow up. Most of my questions have been answered, but just a few of them. On the China price, you mentioned about the 5 million to 6 million tonnes being idle with the trigger point threshold probably around $250, $300 a tonne.

The pricing I'm seeing now from CMEI -- and I wouldn't mind knowing if you see something different -- but they're quoting around $234, so most recent week pricing. So not too far from the $250 starting kind of range.

So my question would be, is it fair to assume then -- because you talk about China imports staying high -- is it fair to assume that this might be something that's very tenuous, with respect to China demand, such that we're very close to idle capacity coming on, such that they capture pricing on the near-term? That's my first question and I've got several follow-ups.

Just to clarify that 5 million to six million tonnes, there's a strata; that's not all going to come on at the $260 to $280 pricing.

Oh, absolutely, yes.

Some of that is even way north of $400. So there are chunks of production that would come on if prices increased by another $20, but it's nowhere near 5 million to 6 million tonnes. The current prices in China on a CFR basis are between $230 and $240 for imports. And the current prices in China on an RMB basis are 19 to 1975.

So, at those prices, there's still a lot of production that doesn't make sense. If we see a $20 increase, you'll have some additional production come on, but there's still a lot of production that doesn't make sense, even at the high $200's, $300 level.

Okay, understood. And getting back to -- just some quick ones -- on EMethanex, you mentioned about the $100 million EBITDA -- just to be clear, that's on 100% consolidated basis?

No, that's a 60% share based on the current methanol price.

That is 60%?

Yes.

And on the Chile question, just so I can understand it better, where do you expect to end [for] 2009 in terms of an operating for Chile?

It will probably be around 40%, Paul. Again, that's -- I haven't actually looked at the number; it's a little bit off the top of my head. Today, we're generally between 25% and 30% and we are stiffing up in the fourth quarter. So it will be in the high 30s to close to 40%, I think, by the end of the year.

There is a little bit of seasonality as well, so when I said more than 20% during 2010, I've taken account of the fact that we produce less in the wintertime and more in the summertime. So, if we go up to, say, 40% during the summer months, it might dip down to 30-something percent in the winter months, so.

Okay. [I noticed it.] And just if you can give me more color on this -- the two plants instead of one -- is there numbers you can test that on a cost basis as to an improvement in that approach?

Well, it's very much an incremental cost calculation that -- there's no increase in fixed costs. We have all the people there. The plants operate with similar efficiencies. So, it's just the cost of natural gas and the cost of shipping that is added to our cost structure. So on an incremental basis, this is very profitable.

No, sorry, maybe I'm missing something this morning (multiple speakers) -- why choose to operate two plants partially instead of one plant full?

Because you get more production. One plant full represents about 30% of capacity. And I just said, we're aiming to get to 40% of capacity.

Sorry, I wasn't realizing the ramp up is what was being [put] in that statement.

Okay, and last one, in terms of the 10% production increase expected in Trinidad for 2010 -- you made a statement that there's marginal cost increase attached to that. Can you qualify that a bit?

Well, again, it's the same answer as Chile -- that it is only variable cost; it's an increased gas cost and it's some shipping costs. So other than that, there is no fixed cost impact. So we've given lots of guidance around what we pay for natural gas in different parts of the world, so you can work that out for yourself; but you'll work out then both Chile and Trinidad, are incremental production at the current methanol process prices -- we're [under] $100 to $120 a tonne. So you can see there is a lot of incremental earning capacity for incremental molecules coming out of those sites.

Got it. No, I wasn't really clear whether or not it was just linear with respect to variable costs, but that explains it.

Sorry, one last one -- on the 4 million tonnes in terms of fuel blending in China, can I get an update on your expected growth rate with respect to that segment?

Well, it's impossible to say. I don't know, John, what are we forecasting ourselves?

We're always under-forecasting energy demands. I think we're 9%, 10% at this point. We've always under-forecasted.

Last year, I said it was 3 million tonnes; this year it's 4 million tonnes. We didn't forecast that 30% increase in demand this year. And it's a little bit of a function of the price of oil as well. If oil prices are high, you'll see more demand. If oil prices collapsed, you'll probably see -- I don't think you'll see much less, but you certainly -- oil will have an influence on how the attractiveness of blending methanol with gasoline.

Okay. Thanks, Bruce.

Gary Lenhoff, Ironworks Capital Management.

Bruce, can you guys maybe quantify for me by year what you expect CapEx to be, if you summarize what's in the release and from your comments earlier, for the balance of '09 and then in 2010 and 2011, what you expect to spend CapEx in total?

Well, the balance of '09 -- the numbers I've got in my brain, we've got [$15 million] to go in Egypt. Now some of that will be spent this year and some of it next year. And there's probably a little bit of working capital on top of that -- Ian? -- sort of (inaudible) or [$15 million] worth of working capital that we would get tied up in that (multiple speakers) --

And there would be some capitalized interest as well. That's before financing costs.

Right, yes. So that's one element. The second element then is what we're spending in Chile. And each year we're budgeting around $50 million to $70 million. We're probably more than half -- we're probably halfway through that. So we would have -- the balance this year is another $20 million to $30 million this year. But I would assume that we will spend a net $50 million to $70 million again next year. And then after, that it's just maintenance capital.

Next year, we have cut back our discretionary capital significantly and we expect the number to be around $10 million. We pretty well finished our capital maintenance spend this year. The Titan plant was our last big sum of spending. So it will be a few million dollars towards the end of this year but very much second order. Is that all right? Does that give you some guide?

It does. So $70 million to $80 million next year plus whatever is left over in Egypt is probably a good ballpark?

That's right, exactly. That's good.

Great. Thanks very much.

Steve Hansen, Raymond James.

(multiple speakers) Just wanted to follow up on the latest developments with the MHTL block that was up for sale. I understand it's complicated legally and it tends to be hung up in the government process. But can you provide an update as to where that is at? Have you heard any new intelligence in whether or not there's any sort of numbers in the marketplace that might be floating around, or even scenarios that could be floating around, whether they split up the Amman's stake or just anything you might have heard.

No, we haven't heard anything. I did indicate on the last call that it is very complicated. And I know they've appointed a new Board of Directors to the Holding Company. And I think they're working their way through unraveling what they're confronted with. So, no, there's been nothing happening as far as the methanol assets are concerned.

Okay, great. That was it for me. Thank you.

(Operator Instructions). We now have a question --

Is there -- are there any more questions, Operator? Are you with us, Operator?

Well, I don't know. We can't -- at this end, we can't hear anything, so I don't know if anyone's on the line. We've gone through 50 minutes. It's probably a good time to call a close to the meeting anyhow. So if anyone's on the line, just a few closing comments.

I think we have been pleased with where we're at. And the current environment is not fantastically profitable for us, but we are making positive cash flows, and every quarter is an improvement. So Q2 is an improvement over Q1, and we expect more improvement in Q3.

And then longer-term, as Egypt comes on, as Chile recovers, and I think as the energy demand in our industry takes off, Methanex is just superbly positioned to take advantage of all those dynamics and produce a lot more in the way of earnings and cash flow.

So, with those few comments, I'm sorry if we've cut this call off in a rather uncomfortable fashion. I'm not quite sure what happened to Mr. Tellis --

Yes. I do apologize for that. We had a question from someone who just dropped off, so we have the next question here from (multiple speakers) --

We'll make this the last question and I think we're reaching the one hour level. So, we'll just take this as our last question.

I tried to ask the question earlier. I'm not sure if I got cut off --?

Yes, there's something funny happening with the phone. I don't know ; we lost everything for awhile, so we're not sure whether anyone was there or not.

Okay, I wasn't sure. Based on the response, it didn't sound as if my question was (multiple speakers).

You'd mentioned earlier about the budding methanol demand in China for an energy alternative. And I'm wondering if you can kind of just reconcile the difference between that derivative of methanol versus MTBE, which was tried in the US and ultimately, the EPA said it was kind of cancer-causing -- or it was likely to be cancer-causing. I'm just curious (multiple speakers) --

(multiple speakers) about this question for a long time but I'll try and resist the temptation. You know, it's -- MTBE, interestingly, has been widely used -- I think almost everywhere else in the world except the United States. And I would summarize the MTBE issue in the United States as being an issue around ethanol; that the ethanol lobby worked very hard to get rid of MTBE and were extremely successful.

And MTBE is a widely tested product. It's -- it certainly has no more carcinogenicity characteristic than gasoline has. So all of that I think is falsities that have been put in the marketplace by a competing product.

And MTBE, interestingly, as I say, it continues to be widely used. It's still manufactured in quite a little scale in the United States and exported to markets around the region. So, I think that says something about the credibility of the product.

It's a very clean burning; it's high octane; it's a fantastic blending component in gasoline. And it's -- maybe I shouldn't use such strong words, but it's lunacy that it's not included in the gasoline pool in the US, because it's -- again, it's made from natural gas. If you want dependency -- independency from crude oil, MTBE is another great way of getting that independence from crude oil.

So, that's probably enough of my emotion around MTBE. I think the difference with MTBE and methanol is like methanol, doesn't blend as well with gasoline. It is -- like ethanol, it is soluble in water and you need to have a dry distribution system to be sure that methanol and the ethanol stay within solution in a gasoline pool.

So it's not quite as easy to handle. And I think that's one of the reasons you've seen -- when ethanol began to get some real scale in the United States, there was a lot of push-back from the oil and gas -- from the oil industry. I think they finally overcame their reticence and they worked out how to handle ethanol. And it's a little bit the same with methanol.

But there are some issues around distribution and a dry system and -- all of which are easily solvable. And I think the biggest plus for methanol is it's very inexpensive. Today, we're selling it around -- in cents per gallon, around $0.70 per gallon. Ethanol today is selling at around $1.70 per gallon. Gasoline sells, in wholesale, they were, like, in the $1.70 to $2.00 a gallon range.

Now, those numbers are not completely comparable because they have different energy levels in each of those products. But even if you adjust for that, methanol is still a very competitive liquid fuel that can be consumed in the gasoline pool. I think longer-term, alcohol-blended fuels, whether they be ethanol in Brazil or methanol in China or a mixture of both, I think have a great future as transportation fuels.

So, yes, I thank you for that question because it gave me a nice soapbox to talk about something I'm a bit passionate about. But I think with those comments, I will cut the call off and thank you all for your participation once again, and I'll look forward to talking to you again next quarter. Good morning.

So, this concludes the Methanex Corporation second quarter 2009 earnings conference call. Thank you from Tellis.