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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Q4 2017 Earnings Call. I would like to turn the conference over to Mr. Dean Richardson, Vice President, Treasury and Investor Relations. Please go ahead, Mr. Richardson.
Thank you. Good morning, ladies and gentlemen. Welcome to our fourth quarter 2017 results conference call. Our 2017 fourth quarter news release, management's discussion and analysis and financial statements can be accessed from the Reports tab of the Investor Relations page on our website at www.methanex.com. I'd like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially 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 fourth quarter 2017 MD&A and to our 2016 annual report for more information.I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's date. It is our policy not to comment on or update this guidance between quarters. For clarification, any references to revenue, EBITDA, cash flow or income made in today's remarks, reflect our 63.1% economic interest in the Atlas Facility and our 50% economic interest in the Egypt facility. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and the impact of certain items associated with specific identified events. We report these non-GAAP measures 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 now like to turn the call over to Methanex's President and CEO, Mr. John Floren, for his comments and a question-and-answer period.
Thanks, Dean. Good morning, everybody. 2017 ended up on a very positive note. Our fourth quarter financial results illustrate the strong earnings power and cash generation ability of our business. Methanol prices increased throughout the quarter, and this, combined with another record quarter of production volume and sales, drove fourth quarter adjusted EBITDA to $254 million. For the full year of 2017, we achieved EBITDA of $838 million, a record that was achieved with an average realized methanol price of $337 per tonne. Adjusted net income for the fourth quarter was $143 million or $1.70 per share. After increasing sharply in late 2017, methanol prices have remained firm in early 2018 in all 3 major regions.January contract prices in North America and Asia Pacific were $479 per tonne and $470 per tonne, an increase from December prices by $67 and $40, respectively. Our first quarter 2018 posted price for Europe is EUR 380 per tonne, up 15% compared to the fourth quarter. We recently announced increases to our February contract prices for North America to $506 per tonne and in Asia to $480 per tonne.We believe that the strength in methanol pricing lately -- late in 2017 and into 2018 can be attributed to a number of factors. Methanol demand in 2017 from both traditional and energy sectors was solid. Olefin prices in the fourth quarter supported high affordability for methanol-to-olefin MTO production, and demand from that sector was strong. More recently, a number of MTO facilities have undertaken planned or unplanned downtime for maintenance and technical issues. We continue to observe high operating rates at MTO facilities that are not experiencing technical issues. We expect 3 other MTO plants currently under construction to be completed in 2018 with the combined capacity consumed over 3 million tonnes of methanol annually at full operating rates.On the supply side, a combination of environmental controls and the diversion of natural gas away from methanol production to residential heating curtailed supply in China. In addition, methanol plant outages in the Middle East and South East Asia during the quarter contributed to demand exceeding supply and drawing down global inventories. As a result of these factors, methanol prices increased sharply and continue to sit well above the cost curve.Turning now to our operations. We had an excellent fourth quarter with production volume at 1.9 million equity tonnes, another company record. All plants in all regions ran very well during Q4. In Trinidad, we continue to expect to receive approximately 85% of our contracted gas supply for the foreseeable future. In Egypt, we continue to receive a 100% of our contracted gas supply, and the plant has operated at capacity since mid-November 2016, excluding the turnaround completed in the third quarter last year.We continue to be optimistic that we will receive a strong allocation of gas at this facility for the foreseeable future, and reiterate our guidance of 85% annual operating rates in Egypt.The Chile I plant produced 109,000 tonnes compared to 78,000 tonnes produced in the third quarter, operating solely on natural gas from Chile. In January 2018, we began to receive natural gas from Argentina under a tolling agreement with YPF, which will enable us to run the Chile I plant at full rates. The plant is currently running at high rates, and we would expect to get to full rates over the coming weeks. We expect production from the Chile operations to be higher in 2018 than 2017. We announced in December 2017 that we had contracted sufficient natural gas through ENAP to support the restart of our Chile IV plant. We are making good progress on the project, and we expect to -- which we expect to complete late in Q3 2018 at a cost of approximately $55 million.We continue to work with our gas suppliers in Chile and Argentina, and remain optimistic that we can secure additional gas supply to underpin a 2-plant operation, operating at full rate by the end of the decade.If we are successful in securing sufficient gas to support a 2-plant operation, we anticipate spending an additional $50 million to refurbish our Chile 1 plant. These modest capital investments have the potential to add approximately 1 million tonnes to our current operating capacity. Annual maintenance capital expenditures for existing operating capacity are approximately $85 million on average, over a 3- to 4-year cycle, and maybe higher or lower in any given year depending on the timing of turnarounds.Our planned maintenance capital for 2018 is estimated to be in the range of $90 million to $135 million, and will be finalized in the coming months depending on the number of turnarounds to be performed during 2018.Other than our planned $55 million capital investment in Chile, we do not anticipate any significant growth capital expenditures over the next 18 months.Regarding the recent enactment of U.S. tax reform, at today's methanol prices, we estimate a future effective global tax rate of approximately 25% with a slightly slower rate expected at lower methanol prices. We ended the quarter with $375 million in cash on the balance sheet. Methanex share of the cash, including our proportionate share of the Egypt and Atlas cash, was $303 million. During the fourth quarter, we are pleased to reach an agreement with the lenders in Egypt -- lenders to the Egypt debt facility that allows us -- allows for distributions of cash to shareholders.In keeping with our track record of returning cash to shareholders in 2017, we returned $388 million through our regular dividend and the completion of our normal course issuer bid.Looking forward and building on our long track record of growing the regular dividend, I'm pleased that the board has approved a 10% increase to our quarterly dividend to $0.33 per share. It is also our intention to initiate a new 10% normal course issuer bid in March 2018, which is the earliest time allowed under securities regulation. The pace we complete the bid will depend on the methanol price and our ability to generate excess cash.Our outlook for the first quarter of 2018 is positive.We expect higher average methanol prices in the first quarter of 2018 compared to the fourth quarter of 2017, based on our posted contract prices in January and February. We also anticipate that production in Q1 2018 will continue to be strong. As a result, we expect adjusted EBITDA to be much higher in Q1 2018 compared to Q4 2017.I would now be happy to respond to any questions.
[Operator Instructions] And our first question is from Daniel Jester from Citi.
So I think, John, you mentioned this in your prepared remarks about the production issues in China, the natural gas issues and then the environmental shutdowns. Can you just kind of parse the effects that both of those have had? And as you look into the second quarter and the third quarter, is there any way to size how much you expect this capacity to come back on line?
Yes. It wasn't only that natural gas was diverted, but the price is much higher than it was in the fourth quarter as well, which has led to a much higher cost curve in Q1 than we would have seen last year or late last year. We would expect, as things normalize there, that some gas -- natural gas methanol plants will start up again. It's really hard for us to estimate exactly how much, but we would expect some additional capacity to be operating in natural gas as we get into the late second quarter. As far as the environmental, I mean, it's been pretty clear in the 5-year plan in China for some time, especially on the East Coast, they're looking to clean up the air. And part of that is getting rid of industries that consume coal. So we would expect that trend to continue. To what extent, really hard again to guess. As I've mentioned before, there's over 200 plants in China. We monitor them all, but how they're all going to behave at any given time is really hard to guess. But fundamentally, we do expect the environmental restrictions and improvements to continue, and probably a little bit more supply from natural gas-based methanol late into Q2.
Okay. That's helpful. And then 3 or 4 months ago, the Chinese government set some targets for ethanol usage. And I was wondering since that's been out there for a bit, if you've had some time to think about what the implications that could be for methanol in the gasoline pool in China in the next couple of years.
Sure. We don't see any impact on the use of methanol on the gasoline pool as a result of the announcement. We're reading the same stuff you do. Ethanol will be part of the gas pool in China. But what we're seeing in China is a move to more high-blend methanol by 85% and 100%. And that's what we think and we've always said the future of methanol is in the fuel pool. The early stage is low level blends, which we've seen in China. And now, we're seeing a lot of work at the high-level blends and yearly producing 100% methanol engines for cars.So we continue to be very optimistic even at current prices that methanol is a very affordable clean burning fuel. So it not only meets the goal of reducing imported oil dependency, but also cleaning up the air. And I think cleaning up the air in the environment is going to be more important in the future than it has been in the past. So I think methanol will continue to be used, and we'll see more and more movement to high-level blends over the months and years.
The next question is from Joel Jackson from BMO Capital Markets.
I could be wrong about this. I think in the past, you've talked about maybe a 25% to 30% tax rate range. Looking at U.S. tax reform, looking out to this year, considering a G1, G2 maybe have a disproportionate share of earning versus capacity or production, what is sort of the tax rate numbers, guidance rates we should be going with for this year?
Yes. I'll have Ian Cameron, our CFO, answer that for you, Joel.
Yes. So, Joel, we have guidance for that 20% to 30% tax rate depending on methanol price. As John mentioned in his remarks, we would expect that the future tax rate globally to be about 25% at today's methanol prices and slightly lower at lower methanol prices. So we do benefit from the lower statutory rate, but there are certain deductions that were available to us pretax reform that have less value for us today going forward. So overall, guidance not that dissimilar to what we've guided in previous periods.
Okay. That's helpful. And also, I mean, I think you talked in your release about seeing 4% methanol demand globally in 2017. It's a tiny bit lower than kind of the 5% range, I think, you've been discussing over the midterm. Can you maybe share, John, what in 2017, what parts of demand mix was better than expected? What was weaker than expected?
Well, I think we had those MTO technical issues as we came out of February of last year and lasted for most of the -- rest of the first quarter and the second quarter. I think that was the big difference. These are very large plants consuming very large quantities of methanol and when they're down, it has a big impact on the supply-demand balance and the overall growth and demand. So that really, to us, was really the only hiccup versus what we were forecasting.
Nothing stronger than you're expecting?
Well, the coal boilers. Coal boilers In China would've been surprise on the upside. Everything else, pretty well within what we were expecting.
The next question is from Cherilyn Radbourne from TD Securities.
Clearly, I thought strong production was a highlight of the quarter. And just understanding that there are turnarounds and seasonal fluctuations in gas availability, can you just talk about whether you're going to be holding the team to that kind of a standard in 2018?
Well, I think we can produce more. So I'm going to hold onto a higher standard. If you look at our reliability rate, it's still -- we've still got room there. So I think we achieved around 93 and our goal is 97, so we think there's another 200,000 to 300,000 tonnes on a normal run rate that we can get. And that's our goal and that's what we are going to be looking at. As far as gas availability, Egypt's great. Trinidad's been basically where we've been guiding, and Chile is better. So as long as we run these plants well and we've invested a lot of capital in these plants, and we've invested a lot in people and training, we expect to get a little bit more. And I think there is opportunities for us to debottleneck certain plants like in the United States. And there, we can get another 10% to 15% as we do that. So I don't think we're at the end of our growth in production volumes. I would expect us to continue to look to set records on quarterly production. Having said that, we will have turnarounds. And I've guided to 2 to 3 per year depending on the schedule. And in those quarters, we'll probably have a little less than record production. But overall, I think our production is showing to be quite strong and based on the investments we've made over the last years and we're not done yet.
Great. And separately, I realize it's early days on this. But can you talk about what you're seeing and hearing in terms of the Chinese decision to ban the import of recycled plastic, just in terms of enforcement and what implications that may have for Chinese olefin demand?
Yes. It's still early days, like you mentioned. But if the ban does take full effect, it's the equivalent of 4 world-scale crackers. So very significant amount of olefins coming out of the global chain. They've also, I think, recently banned imports of newsprint as well, I think. So I think they're looking to not be the recipient of the world's recycled product, because I think their resources like water, et cetera are really limited. So I think directionally, this is going to continue. And I think it's really good for the MTO producers in China, and I think it's good for the olefin industry.
The next question is from Jacob Bout from CIBC.
John, looking for a little more color on the gas situation in Chile. So just remind us again in Argentina, the supply coming from there, how seasonal is that and what type of volumes should we be thinking about?
Yes. It's a contracted volume that we have the ability to vary the offtake. So you should think of it as a chunk of gas. It will be seasonal. I wouldn't expect the tolling gas we're getting today to be available in their wintertime, our summertime. But we have the ability to take it at a rate that allows us to run the plant at 100%, and that's what we'll do with the gas. We'll fill in whatever shortage we have from Chile and fill it in with Argentina gas on the tolling arrangement to allow us to run the plant at full rates, which really gives us a lot better efficiency on the gas that we are using from Chile. So that will improve our economics and obviously, helps our fixed cost as well. So I think it's a real positive. And I've said before, I think, longer term, especially in their summertime, we are expecting to get gas from Argentina, from other gas suppliers that we used to deal with. Now that the board is open and the meters are flowing, I think it's a really positive thing, and I think there's a lot more gas being found in the Neuquén Basin in Argentina. And as that becomes more and more successful, we would expect the gas in the South that's still there, to become available for export. We haven't secured anything beyond the tolling arrangement now. We're working hard to do so. But I think it's really trending positively for getting more gas in the future from Argentina.
And then, as we think about the ramp of Chile IV, what would be the conventional versus the nonconventional gas split there?
Well, it's all nonconventional in Chile. The gas from YPF, I'm not sure which pool is probably conventional, the gas they've had in the ground for some time. But the unconventional gas in Argentina is really a bit more in the North. So probably what will happen is, as that gets developed, they will back out the southern gas, which is conventional.So it depends on what time of the year, because I'll remind you that the town of Punta Arenas in their winter doubles their consumption of natural gas. So I think Chile gas will continue to represent the vast majority of the gas that we're going to run Chile IV on. And I think that the Argentinian gas that we're hoping to contract will allow us to underpin the refurbishment of Chile I as well as additional Chile gas. So lots of moving parts. It continued to be moving in the right direction and for modest capital investment, and we think we can get some additional capacity as we come through the end of the decade.
Maybe just one more quick one. Just on MTO capacity utilization in China. How do you think about that? Have we hit a floor here, even though prices may go higher?
Yes. I think what's been written by the industry experts is a little bit misleading. They include in their operating rates MTP or methanol-to-propylene, which hasn't run for 4 years, so I don't know how you can include that in an operating rate. They also include plants that are down for planned or unplanned maintenance. So if you exclude those, the plants that can run have been running at really high rates, 85% to 95% operating rates. We didn't see any change as we saw 450 methanol spot pricing in China. So this -- I think this whole affordability equation is really misunderstood by the industry experts as well, and we've been saying that consistently for the last year. We've had a real nice run here for 2 months to test the affordability, and it appears to be a lot more inelastic than people have thought. And so we're not seeing any change in the operating behavior of the MTO participants based on $400 methanol today. So it's been there for quite some time now. So we would think if they were losing tons of cash, they would shut down. So we'll continue to monitor. Like I've said before, this is all new space for us and what we're seeing is pretty well what we thought would happen, and it's nice to see our models being reinforced by behaviors. But we'll continue to monitor it.
And as far as those 3 new plants coming online, is there -- do you expect any sensitivity there?
We don't. I mean, we think the MTO that -- once it starts up and it's integrated, will run. I think there will be teething issues like we've seen with some of the other MTO plants or any major chemical plant as it starts up. We would expect technical issues to arise, especially as these plants are fairly complicated and integrated. But once they get these issues lined out, we would expect them to run at high rates. In fact, some of the guys that are running today are planning to do turnarounds this year to debottleneck and add significant capacity over and above what they have today, which will lead to a lot more methanol demand that has not been talked about by any industry expert I've seen. So I think the MTO space is really misunderstood and it, obviously, is a key driver for methanol supply-demand balance and pricing.
The next question is from Hassan Ahmed from Alembic Global.
John, a question on the supply side of things. Obviously, you mentioned earlier as it relates to the whole sort of environmental curtailment side of things that there are 200 plants in China, and sort of tough to keep track of each and every one of those. But associated with that, could we -- or could you sort of say for sure, if there is X amount of capacity that's never going to come back online on the Chinese side? And part and parcel, with this question on the supply side, again, are the SABIC facilities still off-line and what are you guys hearing about sort of gas allocation there? Will they come back online? Will they run at reduced operating rates? I mean, any thoughts around that would be great.
Yes. So as far as SABIC, I think they've had some issues in the fourth quarter. We understand there are some continued on issues. We've been told or have read that they're technical in nature. We have no inside information that it's gas related. But they've had ongoing issues of supply -- available supply out of their plants and that has not been resolved as of today based on our understanding.As far as China, I mean, it's a guess. We can't predict behaviors of what people will do. But what I would say is that China is not -- you need to have approvals to do things. And directionally, they want to clean up the environment. So even if I wanted to start up my coal plant, I would need permission, and those permissions may or may not be granted depending on a number of factors that are really hard to predict. But directionally, especially on the coast, we would expect less coal consumption for methanol, ammonia, heating, et cetera, as they look to clean up the air. And how does that get related quarter-by-quarter, it's really, really tough to predict. But I'll remind you too, Hassan, that the coal price has gone up significantly. We're over RMB 700 for coal now. So that has had a huge impact on the cost curve as well. So if you think prices are going to fall dramatically here in the next 9 months, I think you have to look at that cost curve with $700 -- RMB 700 coal and RMB 300 gas where it is. There's a lot of production that's well above $250 a tonne that would have to turn off. So you'd have -- in order to get to that kind of level, you would have to see demand destruction like we saw in 2008. So we're not predicting that, but certainly there are people out there predicting that. So we'll see what happens.
Understood. That's helpful. Now on the demand side of things, towards the end of last year, couple of news items coming out of India talking about how India may consider as much as 15% methanol blend. So what are you hearing about that, be it in terms of timing, how serious these guys are and what that could actually mean in terms of global demand?
Yes. I think they're very serious. We've read a lot of stuff about it, and they're moving forward quite quickly. I think their long-term plan is to produce the methanol from coal in India to service that demand. So probably if there was any demand drivers, it would be shorter term and not a lot. I think they'll gradually ramp it up. But their coal is not high quality, and it's in the mountains. So it's hard to access as well. So I think that's an -- I've said this before, it's a natural market for Middle Eastern and Arabian Gulf producers to service. And the more that they take there, the less that'll be shipped elsewhere. So I think it's again, a positive directional move by India. But I don't have any real predictions on how much and when and how it's going to be serviced. Like I've said all along, this is a global commodity. Supply always equals demand. It's just a matter of at what price. And the more demand, you would think the more affordability for the higher affordable applications. So I think it's a positive development.
Makes sense. And one final one, if I may. Over the last couple of months, obviously, it seemed that inventory levels, particularly in China, were quite lean. Where do you see inventory levels right now, particularly in China?
Very lean. Around the world, very lean. We've had a very huge drawdown. We had, I think, some consumers and people in the industry thinking production from new plants was going to come on late last year, which hasn't and is further delayed, which has led to a real shortage of product, especially in China, but not -- also in the Atlantic Basin. If you look at the spot prices in the Atlantic Basin, they've moved up quite rapidly and well above $400 a tonne. And there are a lot of industry experts out there predicting that the price in the Atlantic would collapse. So here we are with real data showing that, that hasn't happened and the pricing continues to be quite strong and demand continues to be quite strong. So we'll continue to watch what happens as new production eventually makes its way into the market. But at the same time, if you have a normal growth this year, excluding the 3 new MTO plants, you're still going to grow by 2 million to 3 million tonnes. So I don't know where all that methanol is going to come from, but we'll certainly watch it closely.
The next question is from Jonas Oxgaard from Bernstein.
I have a follow-up on the earlier question on Chinese ethanol. My understanding is that there is -- the biggest this year is oxygenate levels. China has already effectively maxed out in oxygenates and so any ethanol consumption has to be at the expense of methanol and MBTE (sic) [ MTBE ]. So how do we see the Chinese increase in ethanol without seeing a similar decrease in methanol demand?
That's not our understanding. We don't view it that way. They continue to increase MTBE production in the country, and we would expect them to continue to use more and more methanol, especially high-level blends. So we would have a difference of opinion on that point.
And is that [indiscernible] of it that would produce engines that run on higher oxygenates? Or is it the oxygenate limit doesn't apply to methanol?
As I mentioned earlier, people like Geely are producing 100% methanol engines and cars that run on 100% methanol. I've mentioned earlier that they have that B85 that you see in North America can run on very high-level blends of methanol as well. So the technology there is being implemented, and we would expect the trend in China on methanol consumption for automobiles and trucks to be at the high-level blends.
Okay. Do you -- is there any kind of figures for these 100% methanol vehicles?
Figures as far as production?
Yes.
Yes. They're producing about 100,000 of these per year. And they plan -- from what I understand, Geely has announced a doubling of that capacity.
[Operator Instructions] And the next question is from Nelson Ng from RBC Capital Markets.
John, you mentioned that you expect 3 MTO facilities to come online this year. I was just wondering whether that includes or excludes the Jiutai energy facility in Inner Mongolia, because I wasn't sure whether that one was officially pushed out to 2019 or not.
Yes, that's one of them. That includes that one.
And could you comment about whether it's been pushed out to 2019 or is that -- or has that yet to be determined?
No. I don't know where you're reading that. But our current information from our team in China is it will be second half of 2018.
Okay. Great. And then..
That may be pushed out a little bit from their initial -- maybe it was first half of '18. That may be the confusion, but our information is still the second half of 2018 for that plant.
Okay. Got it. And then just a clarification for Egypt. So I presume you'll be trying to make cash distributions as early as allowable. But in terms of the 12-month test period on plant capacity, would any of the 2017 quarters be used in that test period? Or does it start from, I guess, like January 2018 in terms of months to be used in that test period?
I'll let Ian Cameron, our CFO, answer that question.
Yes. Nelson, it would include the 2017. It's a trailing 12-month period, but it excludes periods where you're under turnaround.
Okay. Got it. So there was a turnaround in Q3, I believe, right?
That's right. Yes. So effectively as long as we're running at more than 70% for the next 60 days, we'll be able to do distributions. And that's our intention is to distribute to our partners and to ourselves the available cash.
The next question is from Steve Hansen from Raymond James.
Just a quick one on Trinidad. Just looking at the production data over the last 3 years, the guidance really hasn't changed that much, but you have seen a notable step-up in production here in '17 at least. And I think the export data from the country would support that as well. What's changed there? Is it just the new fields that have come online in the upstream? Do you see that as continuing at current rates, getting better? Just give us a bit of a sense for where we should expect the cadence to go going forward.
Yes. Yes. Our guidance has been consistent. Again, it's a complicated market. We have seen some new gas come on. We've seen some depletions, and we've seen some of our competitors be less fortunate as far as their gas contracting strategies and having to shut down capacity. And you would have seen an announcement from an ammonia producer last week shutting down capacity. So as those capacities get shut down at point, there is more gas available for other users. But how do you predict that in the future, all we can do is give you the guidance that we think is fair for what we expect to happen. If we overachieve that guidance, that's great. I mean, we'll take that all the way to the bank. But I think we're comfortable in the guidance. And if we have other information that -- we think we'll produce at higher rates then we'll change that guidance. But right now, we're really comfortable with that 85% on average. But if we overexceed it, penalize us, Steve, please. Okay.
Fair enough. And just one follow-up on the MTO side. You've given us some good description here about how you've been pleasantly surprised by the MTO operating. I'm still a little bit surprised they've held in so strong given the move we've had in methanol. Olefins have certainly moved as well, but they've lagged relative to methanol. What is it that we don't understand about the economics of the MTO producer level or the -- suppose that experts don't understand? Do you have a sense for that? Is it contractual downstream obligations? Is it just a misunderstanding of the actual economics of the facility? I'm just trying to get a sense for that so we can better gauge what the true economics might be?
Well, tons of misunderstanding, many different parts. You mentioned we've been pleasantly surprised. Well, we're not surprised. I think our models have proven out what we thought. I mean, it's nice to be reaffirmed when you are the lone wolf in the wilderness talking a different story than everybody else. So that's always nice to have that confirmation that we're not really off our rocker and the analysis we do is quite solid. I'd say, the big change from what people were thinking is the olefin prices themselves have been much higher. If you look at Q4 olefin price, you look at oil, it's almost at $70 now. That has an impact on ethylene and propylene and naphtha, et cetera. But the integration as well, we've always said that the plants that are integrated, you can't just take the price of propylene and ethylene and 3x the price of methanol and run an affordability model. That's -- doesn't -- that's not how it works. No. That's definitely how it worked for the methanol-to-propylene plants that aren't running. But they haven't been running for 4 years since we saw the collapse of oil in mid-2014. So I think there's a number of misunderstood factors, and people reporting things that people are shutting down for economic reasons when they're technical. So I don't know why people do that. But we'll just have to live with our data, live with what we know. We're talking to these -- they are customers of ours. We're talking to them on a daily, if not, weekly basis. And our understanding of the industry is different than some of the industry experts. And I think it's led to a lot of confusion. And until we see more data of how they run at different price points, there'll probably continue to be confusion. So we'll do our best to clarify and to put our position out there. But at the end of the day, people will make the wrong decisions based on what they think and what they believe.
The next question is from John Roberts from UBS.
You normally guide for minimal profits on the methanol that you buy and resell. But in a rapidly rising environment, like pricing like we had in the quarter, do you actually make material profitability on the distribution because the price is moving up after you bought it?
Yes. We make material profitability on the products we produce. If you look at our EBITDA generation at $400 a tonne, it's about $150 a tonne. That's where we make our money. We've guided on our purchase product, which includes commission, long-term offtake and spot, that over the cycle will break even or make a few million dollars. You're right to point out -- when prices are rising, we'll make a few more. But when price is low, we might lose a few. But it's immaterial. I mean, it's not in the tens of millions of dollars. So it's a rounding error. Really, when you produce a quarter like we did this quarter and the quarter ahead of us, that's just a rounding error. If our production behaves, we'll more than make up for that increase in the produced price -- or the produced -- sorry, the purchase product sale. So it's all about production and methanol price -- equity production.
And then, I think you normally talk about $1,000 a tonne in terms of reinvestment costs for methanol. The IGP Methanol project made an announcement during the quarter with a much lower capital cost number. Is that apples and oranges? Is there something not comparable about the Haldor Topsoe process that they're doing with what you normally talk about in terms of reinvestment economics?
Yes. Pretty preliminary stuff. We haven't seen much data. What I would say, the data that's out there in the public were two other projects that we monitor. They're at $1,200 a tonne today, so -- and climbing maybe, because nothing's been completed. So I think there's a lot of announcements with a lot of numbers. They never -- haven't -- at least that project hasn't said what's in that number. And is it just EPC, what is it? So until we get more data, it's a bit of a guess for us. But all of the hard data that we have today with the plant that's under construction and others that are looking to move forward like Yuhong are in that $1,200 range. So if they can do it for that price, I may buy one from them. So we'll see.
The next question is from Laurence Alexander from Jefferies.
Two questions. One, can you flesh out a little bit your thinking around the U.S. or North America capacity additions that you think the industry would do over the next, say, 3, 5 years? Because, as you say, there's some very large projects being floated, but it's parsing which ones are likely. And secondly, can you just remind us as your capacity -- as your new plants ramp up, when we -- which quarters we should see the working capital build?
Okay. So as far as new production, I think there's an OCI plant that's under construction that we would expect to be completed in the next 3 to 5 years, probably sooner. And that allowed about 1.7 million tonnes. There's a Yuhong plant that I just mentioned that we expect to be completed toward the end of the decade into 2020, probably at the earliest. Beyond that, there's nothing under construction. There's a lot of things announced, a lot of things talked about. But I'll remind you that the labor construction availability and productivity for building anything in the United States, especially in the South, is really tight as well our current estimates that when you start with FID to when you turn on the tap is about 40 months. So what are we now, February 1, 2018. Unlikely we're going to see anything beyond those 2 plants that I just mentioned in the United States in the time frame you're talking about. And if there is something more, it will be at the end of that 5-year window that you're talking about. Can you just clarify for me the question you asked about our working capital? Are you saying, our inventory is going to go up as we add the Chile production? I wasn't really sure, Laurence, what you were getting after.
Exactly. Just as -- to the extent you have a bit of a working capital build as the plant ramps up, is it -- just how does that flow through? And -- or does it just get -- or does it turn over so quickly, it won't be noticeable?
Yes. I think we're getting more and more efficient all the time. It may -- there may be quarters where we have a bit more inventory and quarters with a little less inventory. But if we're carrying 1 million tonnes and we're selling 11 million, that's pretty good turnover, considering about 1/3 is on the water and 1/3 is at the plant. So it's not staying in the tanks very long.
The next question is from Matthew Blair from Tudor, Pickering, Holt.
You always seem to have good insights on methanol start-up timing due to your shipping capacities and capabilities. Are you expecting any new Iranian methanol supply in the first half of 2018?
No.
Got it. And then any updated thinking on a potential longer-term U.S. methanol expansion for Methanex? It seems like you can make a pretty good case here just given the commodity environment in the U.S. with natural gas staying below $3, even though oil is above $70 or around $70. You also have a more favorable tax environment. And then your financial position is pretty strong here. So could you just kind of lay out how you think about a potential U.S. expansion?
Yes. So we're really fortunate to have some really low-cost options in front of us to expand capacity like Chile. And I mentioned earlier, we have some debottlenecking capability or opportunities in Geismar for both plants. So we're going to be focused on those. But we still have teams -- internal teams working on a second plant in Medicine Hat and a third plant in Geismar. We think they're privileged projects. We haven't done the FEED work, et cetera. But based on our initial basic work, we think they're pretty privileged projects. And we'd love to execute those when the timing's right. And we have these other projects that are adding capacity to our company for a fraction of the new build even if it is a privileged project. But we're continuing to work on those, and you should expect us to add capacity, our next new brownfield or greenfield addition to be in North America. That's where we would be focused. And the timing on that is really subject to market conditions and as we complete our other lower cost opportunities. But I said in my remarks, don't expect us to be spending any significant capital on newbuilds for the next 18 months. But we'll continue to work on these projects and be ready to execute them when we think the timing is right. And that's as we complete our other opportunities to grow our company for a fraction of brownfield cost. But these plants, I think you have to look at them, any new brownfield builds that are over 1 million tonnes are going to have to -- all that projects is going to have to find its way to China. And that's how we would do the economics. So we do agree with you that the gas market here is quite attractive and the conditions in the United States are quite attractive, especially with the new tax rate. And considering we have a workforce and a site and terminal, and all that stuff in Geismar, and we can buy oxygen across the fence and utilities. Yes, it's pretty attractive. We can use the off-gas from our existing G1 and G2, which would allow us to lower capital on a brownfield site. So we think we have the projects there that's better than anything that's currently under construction or being considered. But we'll focus on the brownfield -- sorry, the debottlenecking and the Chile opportunities and stay tuned.
The next question is from Charles Neivert from Cowen.
Few quickies, I guess. if you look at the discount off of the list price for the year, it was about 15%. But then more recently, it's 13%. Is it something that we might see just down even a little bit more in a rising price scenario? I mean, it typically goes up when things are going -- when the prices are coming down. Could we see this either stabilize around 13% or maybe even get a little bit lower from here?
Well, thanks for bringing that up because I've been pretty consistent in guiding to 15%, so I'm glad that's where it ended up. So I look good again for a change. But guidance is the same. When pricing is going up, you should expect the discount to be a little lower than 15%. And when prices are going down, you should expect it to be a little higher. But on average, 15% is a good number and I'm glad that's what it was in '17. So good news.
And when we look globally, is there any difference between regions in that discount? Is it a little bit -- again, without knocking -- hitting a number, but is it a little bit bigger in one place than any others? Or is it pretty much similar across the board?
Yes. The only differential, I would say, is in Latin America and Western Canada. Those are pretty regional markets where we get a little bit better. But rather markets are fairly -- this product moves around the world pretty easily. So discounts are fairly similar. I mean, there may be slightly differences, but it's immaterial.
Okay. Last, the -- well, two things. I'm sorry. One, the number in New Zealand was clearly higher than it's been. It started to -- was there any high CO2 gas involved in there? Or are we still running on the normal gas that you guys have typically gotten?
Yes. We have some CO2 gas, but that did not change in the quarter. We're still actively pursuing higher CO2 gas. And I think that's one thing I've been talking for a long time now. We haven't achieved it. So we'll continue to work on it. But I said before, with the Todd and Shell group separating, I think there's more opportunity for us in the future to get the high CO2 gas. But certainly wouldn't be putting it in your models at this time.
Right. And that would increase output if it were to come?
Yes. If we got all the high CO2 gas we needed, we would go from 2.2 million to 2.4 million.
Okay. And were there any turnarounds in 4Q? Or it was pretty much we're running flat out? I mean, where you could run, you did? But you had no turnarounds in 4Q.
We didn't have any turnarounds. I think we could have squeezed out some more production. But I'm not unhappy with the record as well. So I'll continue to be more happy as we increase our regular production from our current facilities. There's degrees of happiness, Charles.
And the last question is from Chris Shaw from Monness, Crespi.
Curiously, start the year on a pricing basis. I was just wondering, if we're sort of following a pattern from last year, reaching sort of high level early February, March, and then some plants -- MTO plants go down for technical reasons. You had the Chinese New Year and pricing weakens from there. I mean, is that going to be -- you think there could be a similar pattern to this year? Or is demand stronger? Or these plants that have gone down, the MTO plant, they're not as big as the ones that went down last first quarter?
I never predict the future. But what I would say is the conditions today are quite different than this time last year. We have more demand, less supply. And the MTO guys have been running for a year longer. They're lined out more. So again, we're in a high price environment that none of the experts were predicting. I think the predictions were less than $300 a tonne, and we're north of $400 a tonne. So I don't like to be in the prediction business because you're always wrong and you're wrong by a lot most of the time. So I think we like the supply-demand conditions that we see today, which should lead to a really good price environment. The next milestone for us that we're watching is any new production that might come on. And there will be some around the edges, extra. Like I said, natural gas possibility in China and maybe temporary demand slowdown because of Chinese New Year, but that happens every year. And inventories are really low. So it's going to -- even if production came back to perfection, it'll take some time for inventories to build back up. So again, the future is hard to predict. We like what we see right now and we'll continue to monitor as new production comes on, where it flows and what that does to the overall supply-demand balance. But a big change this time this year versus this time last year, the oil price is close to $70, which is impacting affordability. Coal is over RMB 700, which has really impacted the middle to 3/4 part of the cost curve. And natural gas is really high in China, which has led the cost curve to move up quite nicely. So even if we see some moderation, I think we demonstrated at $337 a tonne, we recorded a record year and that was with production that we think we can improve on. So we'll do well at any price of methanol over the cycle. And, obviously, at current pricing, we're going to do extremely well. And we'll continue to return that excess cash that we don't have to grow the company or our regular dividend to shareholders through share repurchases. And we've been very consistent about that, and that's what we will continue to do.
You don't see any pricing developing any seasonality then?
Seasonality?
Yes.
The past doesn't predict the future. You could look and see the last few years as we get into the fourth quarter, pricing has gone up and that's -- there's not one reason for that. So I think to say that in the future would be a stretch. But we've never really witnessed a lot of seasonality in our business, and we don't expect that to change. So we'll continue to look at. I think, like I said, the next new marker is new production that may come on sometime this year, and we'll watch how that impacts the supply-demand balance.Well, if there's no more questions, I'll close. So I'm very pleased with our 2017 performance, generating adjusted EBITDA of $883 million, the highest in the company's history driven by record sales and production volumes. These results reflect the improved earnings power of the company, and our ability to generate significant cash flows across a broad range of methanol prices. Our priorities for capital allocation are to meet our financial commitments, meet the near-term growth objectives in Chile and return excess cash to shareholders.Thank you for the interest in our company, and have a great day.
Thank you. The conference has now ended. Please disconnect your lines at this time. And thank you for your participation.