Methanex Corp (MEOH) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation fourth-quarter 2014 results conference call. I would now like to turn the conference call over to Ms. Sandra Daycock, Director of Investor Relations. Please go ahead, Mr. Daycock.

Thank you. Good morning, ladies and gentlemen. Welcome to our results conference call. Our 2014 fourth-quarter report, along with presentation slides summarizing the Q4 results, can be accessed at our website at www.methanex.com.

I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information is by its nature 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 our latest MD&A and to our 2013 annual report for more information.

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

In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and other nonoperating items. We report our results in this way to make them a better measure of underlying operating performance. And we encourage analysts covering the Company to report their estimates in this manner.

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

Good morning. Our results in the fourth quarter were very good. We generated adjusted EBITDA of $150 million and adjusted net income of $80 million or $0.85 a share. Our earnings were $0.10 a share below consensus, with the main differences related to analyst average posted price and realized discount assumptions.

Our average price discount was wider than expected and this is a function of rapidly declining spot prices in Asia which pressured the effective discount off of our posted prices. As well in the declining methanol price environment, we experienced product inventory losses, which occurred in Q4 and we expect to be even higher in Q1.

We have reached a significant milestone on our Geismar relocation project, having produced the first methanol from Geismar 1 facility. The plant is making on-spec methanol and is currently running at about 80% rates. And we plan to ramp up the operating rates over the coming weeks. Geismar 2 continues to make solid progress and we are targeting to produce methanol from this plant in late Q1 2016.

In 2014, we recorded record sales volumes of methanol, totaling 8.5 million tonnes, and enhanced our market leadership position. During the quarter, we returned over $100 million in cash to shareholders in the form of dividends and share repurchases, bringing the total cash returned to shareholders in 2014 to just over $340 million.

We issued $600 million of unsecured notes, with $300 million at 4.25% due in 2024, and $300 million at 5.65% due in 2044. We were able to access the 30-year bond market for the first time as a result of our investment-grade credit rating. We renewed and extended our $400 million revolving credit facility for a five-year term until 2019.

We announced today that we will extend and increase our normal course issuer bid to allow for up to an incremental 3.751519 million common shares to be purchased, for a total of 8.577716 million common shares, or 10% of our public float. To date we have repurchased just over 4.8 million shares since the initiation of the bid. We want to emphasize that with the current methanol market uncertainty, we are planning to start buying a moderate amount of shares per day and gauge how market conditions evolve over the coming weeks and months.

The Stena Germanica ferry engine conversion to run on methanol is on track. In February, the ship will have the first of four engines installed, as well as the associated fuel system.

Regarding our Medicine Hat operation, we have hedged 80% of our 2015 and 2016 natural gas requirements at around $3 an mmbtu, which translates to a plant gate cash cost of less than $190 a metric tonne. We are also in the process of looking to hedge an additional 10% of our 2015 and 2016 natural gas requirements, with the current prices ranging between $2.25 and $2.60 an mmbtu. Given current market conditions for natural gas in Alberta, we are looking to lock in our Medicine Hat gas requirements for periods beyond 2016.

Production for the fourth quarter of 2014 was 1.207 million tonnes compared with 1.204 million tonnes for the third quarter of 2014. This was less than we forecasted going into the quarter.

In Trinidad, our Titan plant was impacted by 30 days of downtime due to mechanical issues. The Atlas plant experienced some mechanical downtime in addition to production constraints associated with the air separation unit. Both Trinidad plants were further impacted by a regional power outage that resulted in an additional outage during the quarter. Gas restrictions in Trinidad during the quarter were less than anticipated going into Q4.

In New Zealand, our Waitara Valley plant experienced downtime due to mechanical issues. In addition, Motunui 1 and Waitara Valley were taken off-line to conduct a statutory methanol pipeline inspection.

Medicine Hat production was impacted by an outage due to a mechanical failure and lower availability of CO2. The plant continues to be constrained by mechanical issues, which is leading to a production running at 10% lower than full operating rates. This issue will be fixed during our major plant refurbishment later this year.

Egypt production ran at a rate of 66% on average for 2014. In the current environment it is difficult to predict operating rates for 2015, and our best guess at this point would be average operating rates being similar in 2015 versus 2014, although we have seen significant gas restrictions in the month of January related primarily to an explosion to a pipeline in the Western Desert of Egypt.

With the addition of our new operations in Geismar, we expect the production of methanol in Q1 to be substantially higher than in Q4. Due to the accounting related to inventory flows, we believe the bulk of this additional product flow will be into inventory and not be reflected in our Q1 results. We also expect our purchased product inventory to be reducing throughout the quarter.

A stronger US dollar is beneficial to our business, as most of our selling prices are denominated in US dollars and some of our costs are incurred in foreign currencies, which leads to lowering our overall cost structure. The rapid oil price decline dragged down energy-related downstream product pricing, impacting methanol affordability into methanol to olefins, dimethyl ether, and methanol to gasoline.

LPG and propylene prices were the hardest hit, with both being below historic correlations to oil, and impacting demand in the DME and MTO sectors. The current environment has caused several methanol to olefins producers to postpone the startup of their new plants until Q2 2015. In January, we are also seeing slightly lower operating rates from existing MTO producers.

Q1 methanol demand is estimated to decline by 3.5% compared to Q4, mainly due to the decline in demand for methanol energy applications. Global methanol demand grew about 1% in Q4.

In China, the majority of the natural gas-based plants are shut down due to economics and winter gas restrictions, and are expected to remain shut in through the quarter. Only a fraction of high-cost coal-based production is shut down at this time. We believe the shutdown of marginal production in China is required to bring prices back to cost curve levels, which we estimate to be in the range of $260 to $280 per metric tonne.

We are uncertain at this time how long the high-cost producers will sustain operations. As we head into the Chinese New Year, we would expect some marginal cost producers who use coal as a feedstock to shut down.

I will now stop and take questions from the audience.

(Operator Instructions)

Ben Isaacson with Scotiabank.

My first question is on MTO demand. You mentioned in your press release about 6 million tons of methanol is the run rate that's consumed annually. Can you talk about what you're seeing for the new plants coming on in 2015 and what that run rate should look like by the end of the year? Thank you.

I think it's very difficult to predict the run rates on any of these energy applications in the current environment. In our plan today, between now and the end of 2015, I think we have six different plants coming on, consuming between 1 million to 2 million, and most of them at 1.8 million. So, significant, in the order of 8 million to 10 million tons of methanol at full rates. I think when we forecast in a traditional environment we think about 80% rate but, in the current environment, it's really difficult to predict what the operating rates will be.

Great. Thank you. And then just as my follow-up, can you just talk about -- you talked about the strength of the US dollar, but can you talk about it specifically with respect to the euro? Obviously, that's a big chunk of your business. And as the euro continues to depreciate, how are you managing that? Are euro prices set to rise in a flat US dollar-price environment?

It's a global commodity that's denominated in US dollars, so all prices that are set around the world are based on the US dollar price. I'll remind you that prices in Europe are set on a quarterly basis. Again, we see quite a bit of fluctuation in exchange rates because of things like the easing of the Central Bank in Europe, as well as the Swiss franc change. So, it's really hard to predict. But we do have the ability, on a quarterly basis, to adjust pricing and certainly the currency at the given time it is taken into account.

Great. Thanks, John.

Hassan Ahmed with Alembic Global.

Obviously, a big disconnect in terms of where contract pricing in Asia is and where spot is, and was taking a quick look recently, and it seems spot is down in low $200s. Now, you obviously just talked about how you feel that coal-based producers are probably producing at $260 to $280 a ton. So, is there any business being done in the spot market at all at these pricing levels?

The current spot prices today, Hassan, are around at $240 to $245 RMB for local produced product. Import products is at $250 range today. You're right, it was down in the lower $200s earlier in the month. Again, we're watching it on a daily basis.

We do see activity in the spot market but, how liquid it is, it's probably not as liquid today as it was some months ago. We are seeing people clearing inventory and we've seen inventories drop. Again, very difficult to predict what's going to happen in the coming months in the current environment.

Fair enough. And you obviously talked about demand ticking down on the back of lower oil prices and the like. But, call it, through the course of 2013, 2014, we had seen a variety of at least new-build announcements in the US on the methanol side of things. So, are you hearing any further news on potential cancellations and the like?

I heard yesterday, or read yesterday, that Sasoil cancelled or delayed their large [multiple speakers] $60 billion. I would expect in the current environment, with the methanol pricing we're seeing, the capital costs and the uncertainty with regards to the energy outlook for oil, that it would be very difficult to get projects financed. And if you didn't have a solid balance sheet, it's probably going to lead to delays, if not cancellations.

Fair enough. And a final one, if I may. You talked about how early in the year you'd give further guidance on the MLP side of things. I know a bunch of moving parts right now and you are only just building inventory on Geismar 1. But any thoughts around the MLP?

Yes, we are still looking at it, obviously. We don't have to make a decision until we have some operating experience with Geismar. The messaging's the same. We'll make a decision around an MLP in the first half of this year.

Very good. Thank you, John.

Daniel Jester with Citi.

On natural gas hedging, since you don't have a gas contract for Geismar 2, any thoughts about layering in some long-term hedges to lock in the cost structure as that plant starts up next year?

Were you in our meeting room, Daniel? (laughter) You make a great point. I think we're always looking for G2 to have a similar structure that we have with G1, which is a floor price and a sharing mechanism. With the current environment of gas in North America, you can look at 10-year hedges at very attractive pricing, on average, throughout that period. And we're certainly really focused on that.

So, you may see us prefer to go that route in the current environment. We haven't made any decision and we're not going to be operating G2 until the end of Q1 2016, so we have a bit of time. But, yes, I would say in the current environment it's pretty attractive.

Okay. Great. That's very helpful. And then, on the mechanical operational issues on New Zealand and Trinidad, is there going to be any carryover into the first quarter for that? And then, similarly, I noticed that you cut your sustaining CapEx guidance for 2015. So, is there anything driving that, specifically? Thank you.

I don't think we cut our sustaining cap. We probably revised it, based on what we spent in the fourth quarter. The sustaining cap is similar to what I've guided at $80 million a year per million tons of operating capacity as we get to G2. So, think of $10 million a year per million tons of operating capacity.

It will be a little higher in 2015 because we have a major refurbishment at our Medicine Hat facility. But that guidance is still valid.

These technical issues, they're unplanned, they're not expected, so it's really hard, again, to predict. We expect to run our plants at very high operating rates, and things happen that are out of our control sometimes -- a country-wide power outage in Trinidad, as an example. Our goal is to run our plants at very high rates and we believe we can do that under normal operating conditions, provided we get all the gas that we need.

I'll remind you, as we do have gas restrictions at various sites, our plants don't like to be running in a variable mode. They like to run at high rates and a steady mode. So, that does contribute to some of the technical issues we experience.

Great. Thank you very much.

(Operator Instructions)

Jacob Bout with CIBC.

Maybe you can just give us your current thoughts on future expansions, specifically Medicine Hat, or what you are thinking about G3 or New Zealand.

The current view of expansions for our Company, you're right to point it out, would be Medicine Hat 2 or Geismar 3. I'll talk about Medicine Hat 2 first. I think in the current environment, we're probably going to see some favorable labor market conditions in Canada with what's happening in the energy sector, which could make the capital costs a lot more competitive.

I'll remind you, when you are building a plant, about 60% of the cost is actually labor construction. So, that actual labor rate is very important. We are continuing to work on that project. We're continuing to look for a partner that can take methanol and bring gas to the equation. We are continuing to look at how we get the product out -- terminaling, rail -- as well as the pre-feed for our plants. Our current view is to have something ready to be able to execute at the appropriate time, and we will work on that throughout 2015.

As far as Geismar, I think we've looked at a couple of options, either relocating a third plant from Chile or building something in Geismar that's similar to what we have in Chile 4, which is not a real full plant, which takes some of the offstream from the other two plants and makes methanol. So, we are looking at both options and I think we'll progress those throughout 2015, as well.

I'd say in the current environment for pricing and energy, it would be very difficult to pull a trigger today on a new build, but we still have our teams working on both those projects. There's other places around the world that we're looking. As far as New Zealand goes, I think we would have to see a much more robust gas environment there, than we do today, to think about expanding capacity there.

Great. Thanks for that. And then just a quick follow-up. Maybe talk a little bit about the mechanism to determine the discount rate between -- you're talking about spot and contract rate -- is that basically just a renegotiation? And is this Asia-specific?

I don't want to get it too detailed on commercial terms, for obvious reasons. But we're thinking about this business in 10- and 20-year lengths, and our customers are the most important part of our business chain and we have long-term relationships with our customers. When you see significant changes in a marketplace in a very short period of time, we think it's good business to think about the long term when we're looking at pricing our product to our customers.

Thank you.

Steve Hansen with Raymond James.

Just a follow-up to the discount rate question. John, can you maybe give us a little bit of color on how we should think about the discount rate in 2015 and 2016 in the context of a generally lower price environment, and I think the rolling off of some legacy contracts over time, here?

Yes, I think the guidance that we've given is still applicable at this point. In a steady-state pricing environment we would expect our discounts to improve over the period of 2015, 2016.

Okay. That's a little bit helpful. Then, just generally speaking, on the demand side, broadly speaking in Asia, in particular. The energy-based applications that you mentioned seem to be working to some degree at the lower price environment. But are you getting a sense for the commitment level that you're seeing from the sense of the existing projects still going ahead? You described many that are still underway. Any signs of those slowing down in terms of the actual capital spend thus far?

We've seen a bit of a slow down in the ones that we were expecting to start up in Q1, so they've delayed by a quarter. I think, again, they're watching daily, like we are, on what the affordabilities are and what the relative substitutes are priced at -- and they're changing on a rapid basis, on a significant basis, daily.

I think, longer term, both plants will run, and they will run at good rates. And I think in the short term, they're going to look at the economics of cash costs, like we all do. So, I think, again, it's really difficult to predict.

And even in the month of January, the existing plants have had significantly variable operating rates. We've seen things like DME improve a little, recently, but is that going to last? It's really hard to predict in the current environment.

Okay. Very helpful. Thank you.

Joel Jackson with BMO Capital Markets.

Just trying to get a little bit more granular on the discount. In Q1, would you expect the discount to be similar, looking [where] Asian price [set] at Q4, looking where Asian prices have been, looking at the fact that some of your competitors signed European contracts a little bit lower than what your benchmark was?

I'd rather not get into guidance on the discount in Q1. There's just too many moving parts. Generally, in the steady-state methanol price environment, we expect our discounts to improve over time.

Okay. Thanks for that. In Argentina and Chile, maybe you can give an update on where you are seeing some gas potential in the near future or in the mid term.

Yes. I was down there in December and there's lots of activity in Argentina, not only in the unconventional but in the conventional. We're expecting to continue to get gas from Argentina through their summer periods, our winter periods. That would be our current expectation.

We had a view that the Neuquen basin has the reserves it does, and those get developed. There's billions of dollars being spent. As Argentina becomes self-sufficient in energy again, exports could be viable at some point in the future. How long? Three, five, seven years? It's hard to know, again, because it's a factor of how much money is spent and how it's developed. But they're certainly very prospective and very similar geologies to what we've seen in the US.

On the Chile side, ENAP has been relatively successful in the unconventional. They are looking to develop those resources in the first half of this year, and I think we'll know more by the summer exactly how much gas is there and how much we could expect.

Thank you.

(Operator Instructions)

Laurence Alexander with Jefferies.

Two questions. First, if your various competitors are going to face more uncertainty, and might delay decisions on projects, how do you think about the trade-off between committing capital to stock buybacks compared to entering into a partnership with somebody who might have been looking at doing a standalone methanol unit previously?

We look at this all the time, Laurence, when you look at the current economics to build a new plant, and you look at the gas price you can get, and the long-term price of methanol versus our stock price. I think the stock is trading somewhere around $650 a ton on replacement cost. I don't think even in today's environment you can get anywhere close to building a new plant at those types of numbers.

We announced another stock buyback yesterday for a reason. And it makes a lot more sense, in the current environment, to be buying back stock than to be building new capacity. That could change but that's the way it is today.

And, secondly, can you give a little bit more detail on how you're thinking about the fuel blending demand in China? How close we are on the economics to reaching a level where all the demand that can be stripped out has been stripped out?

The fuel blending in China is still economical today. Obviously, the low-level blends that tend to trade at a volumetric basis are much more appealing than the high-level blends attained on the energy value. We haven't seen any real slowdown in the blends.

Where we've seen the slowdown is in the methanol-to-gasoline, which is a different set of economics. But the actual fuel blending itself continues to be robust in China. I'd say if you had a view of $40, $50 oil for the next 10 years, then the growth that we are anticipating in that market is probably not going to occur.

Thank you.

Robert Kwan with RBC Capital Markets.

When you were talking about potential expansion in New Zealand, it sounded like, maybe, you were a little less positive on the gas market there. Just wondering, is that the case? And, if so, is that just because the lower liquids prices and what that is meaning to produces, or is there something else going on?

No, I'm actually more positive in the gas market in New Zealand. I think late last year they redetermined their reserves that are close to our plant, and there was another three years of life. So, I think we have, at least through the end of this decade, fairly good view that we will be running a high rate of operations in New Zealand.

I think I have been consistent and, maybe, the confusion is coming from the different gas pockets in New Zealand around where our current plants are. I think the reserves are continuing to be developed here. You are right to say that there are associated gas. If you have a low oil price environment, low condensate price environment, that could impact exploration over the medium term.

But the reserves that we've reported on is what we're seeing. Again, I'll remind you, we are a big part of that market and there's not many other places for that gas to go. So, we would expect to continue to run New Zealand at higher rates.

When we talked about expansion, it was really related to the South Island and all of the activity that's happening in the Great South Basin on the exploration front to develop oil and gas. Now, could that be impacted in the current environment? I guess so, but it's pretty deep water and it's pretty long-term views. If there was success there, you're talking into the next decade before we'd think about new production there. So, maybe that's where the confusion is coming from.

Got it. The other question here on the share repurchase, when we looked at the base, you are very committed and very confident that you were going to buy back that number of shares, and obviously you've done that. With this new amount, it sounded like there's a little bit more cautiousness, just given what's happened with methanol prices.

Just wondering, is that what you are trying to signal? And, with this share repurchase and where the share price is, how you are thinking about that versus dividends. Or, put differently, is the dividend increase consistent with prior years being next quarter factored into what your plans are on the share buyback?

There's quite a bit there. Let me think about that for a second. As far as the share repurchase that we announced to the normal course issuer bid, the rules are that, because we announced one last May, if we announce a second 5%, we have to complete that by this coming May. So, 3.7 million shares in a 90-day period in a very uncertain methanol price environment.

So, like I said, we're going to be cautious. We're going to start slow and monitor how we see the markets. I think in the current market, price of our shares we're very bullish about buying back shares at the current price based on replacement cost and where we see the intrinsic value of the Corporation.

So, we'll take a balanced approach and make sure that we can continue to have a very robust and bulletproof balance sheet. The future is very hard to predict in this type of environment and we'll continue to balance that on a daily, weekly basis. But we will start slow.

As far as the dividend, we tend to look at that around the AGM, which is April of this year. Our current yield is 2.2%, which is on the high end of the range of where we would like to see the dividend. But we have a balanced approach to how we distribute cash. We like to distribute it between the dividends, which is sustainable, growing and meaningful. So we'll have a look at it in April and announce around the AGM time what our thoughts are at that time.

That's great. Thank you very much.

Duffy Fisher with Barclays.

A question around MTO. When you look today, if you just straightline [nap] the prices the rest of this year, what kind of a methanol price do you think that would imply for MTO, your marginal MTO producers in China to actually want to run this year?

It's not that simple, unfortunately. It's really -- each plant is a little unique. Each plant has different derivatives and different things that they're doing. So, you have to not only look at naphtha but ethylene glycol, ethylene oxide, and mite propylene, et cetera. There's many different things you look at.

I think we're seeing at current methanol pricing and current relative substitutes on many of the different plants, that most of the MTO is still economical. I think there's just too many moving parts to predict how these plants are going to operate over the coming 10 or 11 months.

Okay. Then, on the back of this fall in oil, are you guys seeing any change in the behavior of the Iranian product, either the trade flows, methanol coming out of Iran, or their willingness to push more volume?

We're not seeing significant changes, Duffy. I think we've seen some parcels end up in some parts of the [Med], but that's second nature in order of volume. The majority of the product is still going to India and China. And I think what happens in Iran is more around sanctions and the possible lifting of sanctions on a more permanent basis than energy. So, we'll watch that file and we don't have any more information than what you read in the press about how those sanction discussions are evolving.

Okay. Great. Thanks, fellas.

Cherilyn Radbourne with TD Securities.

Just wondering if you could give us a feel for the magnitude of the product inventory losses you incurred in Q4 and expect to incur in Q1?

I can't, Cherilyn.

Okay. Fair enough. Could you, then, just give us a view on gas availability in Trinidad this year versus last year and where you think the capacity utilization of your facilities will be?

We expect the gas restrictions in Trinidad in 2015 to be similar to 2014. I think there's an election there this year and we wouldn't expect to see any change in 2015. As far as our plants go, we again try to operate them at very high rates, and that would be our goal, assuming we get the 85% to 90% of the gas that we require.

In terms of the mechanical issues that were encountered in the quarter, should we think of those as one-time in nature?

I hope so.

All right. That's it for me. Thank you.

Chris Shaw, Monness Crespi.

Is it safe to assume that demand growth for methanol and the traditional chemical products still gross at that global GDP rate? Or is there something, maybe, different happening this year that could offset that?

No. The 60% of the demand for methanol, which goes into chemical derivatives, should grow at between GDP and IP growth rates globally. 3% to 4%, I think, is the numbers I've seen on average.

Okay, thanks. And then, you sort of touched on this. I was curious -- and I wasn't covering you guys when you made the decision to move the Geismar 1 but, in the environment we're in now, the methanol environment we are under now but, with maybe the construction costs that you were facing back then, would the decisions you made still be made today to move Geismar 1?

Geismar 1's been an outstanding project. I think we did it in about half the time of a new build, and still at a much better capital cost than a new build. So, I think it's a home run.

What was the -- again, when I wasn't covering it -- what was the cost per ton initially that Geismar 1 was supposed to be moved at?

The initial estimate was $550 million.

Okay. That makes a lot of sense. That helps. And you talked about currency but, on the Canadian dollar itself, is the corporate costs there in Vancouver, is that large enough to be a significant bit of a benefit when reporting in US dollars this year?

We are a lean, low-cost operation. Most of our costs are natural gas related. We do have some people here, about 100 people, but in the order of magnitude, it's second order.

Okay. Thanks so much.

Steve Hansen with Raymond James.

Just to follow up here on the concept of operating leverage. Clearly, Geismar 1 coming online is a big step for you guys. But I'm trying to understand or trying to think about on an operating cost per ton basis the benefits for adding Geismar 1 to the broader platform from just a fixed cost spread basis. And then same question applies to the Geismar 2. Is there some sort of guidance you guys can give us in the sense of what those fixed costs spreads will be and how we should think about the operating leverage into 2015 and 2016?

Again, we run our plants low cost. We'll see some minor advantages because of you're amortizing a larger volume over the same amount of people, as well as the same amount of infrastructure for shipping and terminally. We add less proportional amounts of those than we would if we built 1 million tons brand new in a new location. So, it's minor, Steve, but you'll see our fixed costs improve.

Okay. Thank you. That's it for me.

Brian MacArthur with UBS.

Just two questions. John, I think you said -- and I apologize if I got this wrong -- Medicine Hat would be like $190 with your gas prices that [you've] locked in for 80% of production. Is that a delivered cost? I know it goes North America, it's not huge, but are you talking delivered cost with that, if I want to try and back into the gas price?

I wouldn't want to get that specific, because each of our contracts is a little different with customers. But think of that gate. But a lot of the freight that we do incur in Canada and North America, we do recover. But I don't want to get too specific on that.

Okay, great. Thanks. That helps. And the second question, just to be clear on the startup of Geismar 1, you said it all goes into inventory, which I can understand. Do we get a catch-up in Q2 on sales -- i.e., if you run it perfectly in Q2 you will be able to sell more than a Q2 run rate? Or is it, just, goes through the flow process and I should just think of delaying it, like ramp up quarterly as far as it flows through the income and cash flow statement?

It's a fact of really of how much we produce at Geismar 1 in the quarter. So we're being a little conservative. Having said that, I've also been clear that as we add more of our own productive capacity you won't see our sales increase to the same extent. We'll lower the amount of purchased product that we buy on an annual basis.

So, some of it will be a one-time switch out on our inventory where our produced will go up and our purchased will go down, and that's what's occurring in Q1. But ongoing, how that's going to flow through on the different levels around the world, it's very difficult to forecast.

Right. But I wouldn't get -- like if you said a run rate is 250 a quarter, and so we produce something this quarter, whatever it is,100,150, it's not like I'm going to be able to get 300 in the second quarter for sales from Geismar, never mind, I get the offsetting third-party sales, but it's not like there's a catch-up so that on a [pipe] profit ton I get more than, say, a 250 run rate in Q2.

You might see some of that. But, again, it's really hard to predict how these things flow through. The way I think about it is, this is a great project, it's going to be there for a long time, we've got gas for 10 years. Look at it over 10 years. It's a fantastic operation and project.

No question about that. It's just trying to get the near term, because we've got so much volatility, as you pointed out. That's helpful. That's great. Thanks, John.

Charles Neivert with Cowan and Company.

Two questions. One, in China, I know they still run some ethanol in their gasoline blend. Do you think there's a chance, or does it look like there is a possibility, given that ethanol is operably more expensive than methanol is, that methanol will start taking some of that market-share going forward?

I'm not up on the current policies in China but, what I do recall Charlie, is that ethanol, especially from food, is not going to be used too much in China. So if there's technical grade ethanol, I think it's being used for industrial and not too much into the fuel pool. That's my last recollection.

I know there's some in the fuel pool. They just said no more being put into it after this point. But, again, on the cost side, if they can pull it out, they might.

The other question, on a landed basis into New Orleans or into the Gulf, comparable to Geismar, is Trinidad technically, including the transport to get it there, lower cost or higher cost given the gas contract differential between the US Geismar operation and the Trinidad operation?

I'm not going to get that specific on our cost structure. I think how you should look at is, with the advent of Geismar 1, we'll back out some Trinidad product out of the US. And between where it goes versus our cost structure on delivering Geismar 1 it's about a wash.

Okay. Great. Thank you.

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

Thank you very much. In closing, despite the short-term uncertainty in the methanol market, we believe the longer-term fundamentals underpinning our strategy are intact. We continue to make excellent progress on our capacity expansion initiatives. We have a strong balance sheet, over $900 million of cash on hand at the end of December, and expect to have more than sufficient cash flow to complete our Geismar project and meet our other financial commitments. As well, we remain committed to our disciplined approach to capital allocations. Thank you very much for your time.

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