Methanex Corporation (NASDAQ:MEOH) Q2 2022 Earnings Conference Call July 28, 2022 11:00 AM ET
Company Participants
Sarah Herriott – Director, IR
John Floren – President and CEO
Conference Call Participants
Ben Isaacson – Scotiabank
Joel Jackson – BMO Capital Markets
Steve Hansen – Raymond James
Nelson Ng – RBC Capital Markets
Matthew Blair – TPH
Josh Spector – UBS
Laurence Alexander – Jefferies
Hassan Ahmed – Alembic Global
Charles Neivert – Piper Sandler
John Roberts – Credit Suisse
Operator
Welcome to the Methanex Corporation Q2 2022 Earnings Call.
I would now like to turn the conference call over to Ms. Sarah Herriott. Please go ahead.
Sarah Herriott
Good morning everyone. Welcome to our second quarter 2022 results conference call. Our 2022 second 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 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, 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 second quarter 2022 MD&A and our 2021 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, average realized price, EBITDA, adjusted EBITDA, cash flow, adjusted income, or adjusted earnings per share made in today’s remarks reflects our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility, and our 60% economic interest in Waterfront Shipping.
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. These items are non-GAAP measures and ratios that do not have any standardized meaning prescribed by GAAP and therefore, unlikely to be comparable to similar measures presented by other companies.
We report these non-GAAP measures in this way because we believe they are a better measure of underlying operating performance and we encourage analysts covering the company to report their estimates in this matter.
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.
John Floren
Good morning. I hope that everyone is continuing to stay safe and healthy. Today we will review our second quarter 2022 financial results, provide an overview of the methanol markets, discuss our operational results, and share our near-term outlook. We’ll also make a few remarks on the capital costs and schedule review of our Geismar 3 project and the recent announcement to increase the quarterly dividend. We will then open up the call for questions.
Our average realized price of $422 per ton generated adjusted EBITDA of $243 million and adjusted income of $84 million or $1.16 per share. Adjusted EBITDA was lower in the second quarter compared to the first because of lower sales of Methanex-produced products, coupled with higher natural gas and higher logistics costs due to higher bunker fuel prices.
I wanted to remind everyone that we have a gas hedging program in place for North American assets, where we are target hedging 65% of our gas needs to allow us to run our plants at minimal rates if spot natural gas in the United States becomes an economical.
Next year, we were very well-positioned with 85% of our gas needs hedged at significantly lower prices compared to the current stock prices. After 2023, our hedge position reverts closer to our target of 65%.
Global ethanol demand in the second quarter was 3% higher compared to the first quarter of 2022. Methanol-to-olefins or MTO plant operating rates remain high to the quarter and demand from traditional chemical applications rebounded following the seasonal slowdown of manufacturing activity during the Lunar New Year in China.
Industry operating rates improved in the second quarter with increased production from Iran, as seasonal gas supply constraints ease with partial offsets with plant turnarounds in Europe and Southeast Asia.
As a result, we saw an increase in availability of methanol in Coastal China. This combined with weaker sentiment from global economic headwinds and the COVID lockdown risks in China as resulted in lower methanol market pricing in China and other major markets globally.
We estimate the industry cost curve based on the marginal coal producer costs in China to be above $350 per tonne, and expect that a significant amount of production in China is under economic pressure at today’s spot pricing levels. We’ve seen a reduction in Chinese plant operating rates over the last few weeks and affirming of spot pricing in China,
Our August posted prices remain robust, but were slightly lower in all regions. North American prices decreased by $10 per ton to $595 per ton. Asia-Pacific and Chinese prices decreased by $30 and $35 per tonne to $420 and $375 per tonne, respectively. Our European contract price is set quarterly, and we decreased our third quarter 2022 price by €15 per tonne to €555 per tonne.
Decreasing spot prices in the second quarter, primarily in China led to a higher discount rate of 23% as we adjusted our discounts in this pricing environment.
Entering the third quarter, our demand outlook remain stable and despite global economic uncertainty. We see demand growth outpacing supply growth in the medium term and a favorable market outlook even if GDP growth rates are lower than expected. High global energy prices, enhanced methanol cost competitiveness against alternative fuels, and we continue to see growing demand in energy applications.
Methanol has emerged as a top alternative marine fuel for the shipping industry as a focus on decarbonization and the transition to the low carbon economy.
Demand for dual fuel vessels that can run on methanol continues to accelerate. We estimate that will be over 80 methanol dual fuel vessels on the water in the next few years, which represents potential methanol demand of approximately 1.7 million tonnes per year. We are currently in discussions with over a dozen shipping companies expect the number of new methanol vessel orders to continue to grow.
Our production levels were lower in the second quarter, compared to the first quarter due to lower production in New Zealand and Chile. In Chile, as expected, our production in the second quarter was lower than the first quarter. We typically experienced lower gas deliveries in the southern hemisphere winter months, impacting our second and third quarters.
We expect to receive higher gas deliveries in the fourth quarter. New Zealand, The Maori [ph] Gas Field had planned maintenance in May, which extended into June due to weather events in emergent work during the maintenance, which restricted gas availability to the plants and resulted in lower production in the second quarter. Based on our revised download for natural gas in New Zealand, we are lowering our guidance for the year to 1.3 million metric tonnes.
We ended the second quarter in strong financial position with approximately $900 million in cash, at $600 million of undrawn backup liquidity. Our cash balance was impacted this quarter by the timing of interest and tax payments.
Our disciplined approach to capital allocation has not changed. We continue to focus on maintaining our business, pursuing economic value added growth opportunities that exceed our cost of capital by three percentage points, and that can be executed without undue risk, while returning excess cash to shareholders.
Construction over advantage G3 project is progressing it’s progressing safely. The team completed a cost and scheduled review in July and we’ve updated our guidance for the project to begin operations and produce first methanol in the fourth quarter of 2023 and have lower the upper band of the capital cost range by $50 million to $101.3 billion.
The team has done an excellent job of derisking the project and minimizing the impact of inflationary pressures. I’m proud that we’re able to narrow our capital cost estimate downward and this inflationary environment.
We have spent approximately $725 million to the end of the second quarter on G3. We expect approximately $525 million to $575 million of remaining capital costs before capitalized interest, which is now fully funded with cash on hand.
For those of you that were not able to visit the site at our Investor Day in June, I would encourage you to view the project update video on our Investor Relations page to see the latest drone footage of the site.
I’m excited to have G3 online by the fourth quarter of next year, as it will significantly enhance our cash flow generation capability and reduce our overall portfolio greenhouse gas emissions intensity.
Early in July, the Board approved a 20% dividend increase, our third dividend increase in the past 12 months. This increase reinforces our commitment to return cash to shareholders and highlights the strong cash flow generation capability of our assets. Our next reviews of our dividend are planned around our Annual General Meeting in April 2023 and after the completion of the Geismar 3 project in the fourth quarter of 2023.
We completed our upsized share buyback program in July and a new buyback program will be evaluated in September. With our strong cash flow generation capability, we will continue returning excess cash to shareholders through a sustainable growing dividend and share buybacks.
Based on our lower posted prices for July and August, we expect lower adjusted EBITDA and earnings in the third quarter. In the medium term, the methanol market outlook is positive and we have growing cash flow generation with G3 coming online at the end of next year and we will continue to deliver on our capital allocation commitments of returning excess cash to shareholders.
We’ll now be happy to answer any questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]
First question is from Ben Isaacson from Scotiabank. Please go ahead.
Ben Isaacson
Thank you very much. Good morning, John. I think you said 2Q demand was up 3% quarter-over- quarter, what was that right?
John Floren
That’s correct Ben.
Ben Isaacson
Can you just go into a little bit more color maybe in terms of the main buckets of methanol demand? And how are those playing out to get to that 3%? And kind of where do you see those buckets going for the balance of the year?
John Floren
Yes, predicting the future has never been my strengths. So, we have not seen any impact in our forecast from our customers for the third quarter, and we have those forecasts in place.
But that — we all wherever the economic headwinds that are certainly present out there. So, I think we’re at a time where predicting the future demand is really, really, really tricky, harder than most times.
The main reason for the increase in demand Q2 over Q1, we continue to see very strong MTO operating rates, and we had a bounce back in the traditional chemical derivatives. As you know, China came out of its lunar holiday, usually in the first quarter, we see less demand for traditional chemical applications in China.
Ben Isaacson
And then just a follow-up question, if I may. I understand in Trinidad that there’s a bid round due in January for upstream development with awards likely in April? Is it fair to say that we probably won’t hear anything from you on Atlas and/or Titan for about a year because we need to see how those bid rounds develop or is that separate?
John Floren
I think that bid round from what we understand is for deep water and that’s probably longer term gas than what you should expect in the next 12 months. I think what has to happen in Trinidad, we’re aware that the upstream contracts are coming due over the next 12 months to they have to be renegotiated as well as most of the downstream contracts are coming due in the same period.
The government’s been very clear, they want to have everybody survive on the island and depend to find an economic situation allows the upstream to do well that the government to do well and the downstream to do well. So, nothing’s really changed.
I think, it’s going to take some more time for this to play itself out in Trinidad. But the government’s been very clear they want everybody to continue to operate. So, we’re still optimistic that we’ll get something for Titan that allows us to stay cash positive through the cycle, but certainly won’t be at the same economics that as our previous deal at Titan.
Ben Isaacson
Thanks so much.
John Floren
Thanks, Ben.
Operator
Thank you. The next question is from Joel Jackson from BMO Capital Markets. Please go ahead.
Joel Jackson
Hi, good morning, John.
John Floren
Morning,
Joel Jackson
John, how do you see production — attributable production playing out in Q3 versus Q2, and in terms of a $20,000 reduction expectations for volume out of New Zealand? This year looks like about $100,000 that came in Q2, if that’s right, and then the $100,000 left to go with that the more in Q3 than Q4?
John Floren
Yes, in New Zealand, we’ve adjusted our guidance down by 200,000 tonnes. And that’s just based on what we’ve seen in Q2, with the Maui outage being extended because of weather and some additional repair work that we expect to continue into Q3. So, that’s why we’ve adjusted our guidance down to 1.3 million times.
The industry operate as I mentioned better in Q2 and Q1 and that’s mainly as a result of Iran coming out of their winter season and having more gas availability for methanol and other petrochemicals.
Joel Jackson
Sorry. For yourselves Methanex, would you see — would you see your own production being lower in Q3 than Q2? And then it sounds like your New Zealand impact, you’re not expecting anything in Q4?
John Floren
We don’t guide on our production, Joel. We typically guide that we have two to three turnarounds for a year and we didn’t have it in the first half. So, but we don’t give specific guidance on our production numbers.
Joel Jackson
Okay, just my last question would be, the world around us is changing. I mean, gas differentials have gone crazy, as you know, right? I mean, the fact Henry Hub is $79 on a given day is crazy. The fact that your BTTF is $40, $50, $60, $70, it’s crazy on a given days.
Does this change your world like short-term thinking on anything, how you view what you should be doing on gas contracts and hedging? How you should look at your negotiating position, which Trinidad government for Titan, does it look at where you want to put your next capital — your next dollars? How the methanol market may develop hitting on gas spreads? Like what does it mean for you kind of short-term and long-term thinking?
John Floren
I think we’re in really good shape. I mean we had starred in 65% of our needs in North America, whether it’s on fixed price or pure hedges, and those were out of the money for six years, and we’re getting criticism, we should have bought spot gas in a couple of quarters of what’s happened in those hedges are now in the money by quite a lot.
So, nothing’s really changed in our view of gas supply is our biggest input cost 50% of our cost structure with gas. And we want to have gas firmed either in a fixed way or hedged away, or the sharing mechanisms that we have everywhere outside North America for these very reasons that you just pointed out, because the future is hard to predict.
And when gas was at $2.50 in the United States and Canada, nobody thought it’d be at $8 and here we are. So, I think we’re really, really well-positioned next year with 85% of our gas hedged in North America. And when I look at our average cost of gas in North America in Q2, it was very similar to the gas price we’re paying and other parts in the world with the sharing mechanism. So, I think we’ve done a really good job in insulating us from this current energy crisis that we’re seeing.
Joel Jackson
Okay. Thanks, John.
Operator
Thank you. The next question is from Steve Hansen from Raymond James. Please go ahead.
Steve Hansen
Yes, good morning, guys. John, just the first one for me is just around sales mix and sales allocation to different regions, has there been any meaningful shift in where you’re steering your tonnes in the last sort of six months or so I’m just noting that the global weighted average contract seems to be shifting a little bit towards some of the lower price regions, at least, that’s how math would suggest?
John Floren
Not really, Steve, I mean, we set our supply chain on an annual basis. So, we don’t change our customer base all that regularly. So, the amount of product I’d say over the last year is a bit more going to China than previously. But it really doesn’t change within a calendar year. We’re in the process now of, looking at what we’re going to do for next year, and I know our marketing team are looking to sell more in Europe as the Russian material, the 1.5 million tonnes of imports into Europe, from Russia, most customers are indicated they don’t really want to deal with Russian product in the current environment and are asking suppliers like us to sell more.
So, I think as we go through the contracting period, in the second half of this year, we’re going to try and sell more in Europe and then last in Asia, but in any given year is about maybe a quarter of our contracts come up. So, we don’t have the ability to change, things quickly. But directionally, as much as much product as we can keep in the Atlantic Basin, that would be our preference, especially in the current freight environment, where fuel prices are so high, it’s very — it’s like a $50 advantage to keep the product and just not freight alone to keep the product in Atlantic never mind that the net backs are better as well.
Steve Hansen
No, of course. That makes sense. And just one follow-up is just around contract structure, specifically in Europe and reading that there has been some customers now finally willing to enter into monthly contracts, which is provides just a bit better, I guess, more timely update to the markets. Have you guys contemplated moving down that road here at some point in the future, we’ve been dealing with your quarterly contracts for as long as I can remember?
John Floren
Yes, we’d love to move to monthly in Europe. I think you know, with all the volatility that is going on in the world, quarter seems like forever when you’re setting a price. So, sometimes you win, sometimes you lose but I think monthly has been our preference for a long time. We just haven’t been able to be successful. So customers want to move to monthly with us, we’d very be very welcome with that kind of change.
Steve Hansen
Okay, great. Appreciate the color.
Operator
Thank you. The next question is from Nelson Ng from RBC. Please go ahead.
Nelson Ng
Great. Thanks. And good morning. So, my first question relates to G3, you are now guiding to first methanol production in Q4 of next year, can you just talk about how long it generally takes for the facility to reach full commissioning after for production? And are we looking at a few months or longer?
John Floren
Well, the last few plants we’ve commissioned commission were G1 and G2 and they took weeks. So, our team is really, really good at commissioning plants. And that starts when you design a plant that doesn’t start when you go to turn the plant on and all how you build it, how you design it, the expertise we have in place to do the commissioning.
We’re fortunate that gentleman that did the commissioning for our G2 is going to be commissioning for G3, and he did an outstanding job on commissioning for G2, and we have a really talented and experienced team in place. And we’d be very disappointed if it took months to commission that plant.
There’s — when you commission a plant, you align it out, and you may take it down for a few days to fix some things that may not have been apparent, but I’m expecting the commissioning on that plant to go really well.
Nelson Ng
Okay, so we should probably expect first methanol production and full commissioning sometime in Q4?
John Floren
I mean, we’ll start the plant up and our anticipate that, will take a number of weeks to commission the plant and that that product starting to flow through our actual sales in the first part of 2024.
Nelson Ng
Okay, got it. And then just moving over to logistics costs, like obviously, that was one headwind in Q2? Are you seeing logistics costs moderate in Q3? Or is there a bit of a lag in terms of the high oil prices and bunker fuel and outflows into your costs?
John Floren
Yes, so I’ll remind you, our logistics costs, with the exception of fuel are set annually with waterfront shipping for Methanex. So, those are in place for 2022. And there’ll be renegotiated with waterfront the end of the year. So, we’re fixed on our shipping costs.
Where we’ve seen higher costs is really to do with the fuel that we’re burning. So, all of the ships that can burn methanol or running 100% on methanol, because the economics are much better than ultra-low sulfur diesel or marine gas oil.
So that’s a really advantage for us with almost half of our fleet running on methanol. And I look at the shipping market itself, the clean petroleum products, liquid carriers, no, they never really benefited from all of the other like containers and dry bulk rates that went up over the last few years. And with what’s happened in — with the war in Ukraine, Russia is looking to move its product to far farther markets like Asia, India, China, which has really tightened up that liquid shipping market quite significantly, which means the rates that you would be paying on a spot basis have gone up quite substantially.
We’re not impacted by that, because we’ve got the race negotiated with waterfront. So not only — so do we have a benefit of running methanol in our ships, but we have the benefit of having these fixed prices on our shipping for the year. So we’re in a really good position right now to take advantage of even all the backhaul that we do, we’re getting a much higher rate for the one-third of the product that we carry on our ships that is not methanol, clean petroleum products. So, that we get that additional revenue in a market like this. So, we’re really well-positioned on our shipping side.
Nelson Ng
Okay, so just to clarify the higher logistics costs seen in Q2 versus Q1, that was mainly due to higher methanol costs that in terms of fuel costs?
John Floren
Well, higher fuel costs this time last year, right, so if you look quarter — year-over-year, and every quarter where we send product based on outages, based on where we think the optimizer global supply chain in an environment where you’re paying higher for fuel, it gets exasperated a little bit and that’s what we saw on the quarter.
Nelson Ng
Okay. And then just finally on the hedges, you mentioned that you’re 85% hedged next year and 65% thereafter, how are you hedged for the rest of this year? Or when you say next year, is it for the next 12 months starting Q3?
John Floren
For 2023, we’re at 85% hedged. For 2022, we’re 65% hedged or fixed priced.
Nelson Ng
Okay, got it. So, should we think — like so from that perspective, should we think of it in terms of taking 35% of the North American production and plugging in the spot price for gas to look at the change in gas costs from a production perspective?
John Floren
If we choose to run at full rates, yes. But we’d have the ability to go down to 65%. If it makes more sense to buy product in China, than to make it North America and ship it to China, then we’ll make that decision. So, if we do run at higher than minimum rates, spot gas would be a good proxy for — the gas price for the 35% that’s not hedged, but that’s assuming we’re going to not go to minimum rates.
Nelson Ng
Okay, that makes sense. I’ll leave it there.
Operator
Thank you. [Operator Instructions] The next question is from Matthew Blair from TPH. Please go ahead.
Matthew Blair
…for taking my question. Circling back to the 3%, quarter-over-quarter demand improvement which seemed like a pretty good number, do you have a sense of how much China locked down might have played a role in Q2? And I guess what I’m getting here is, is was that 3% actually muted due to China lock downs?
John Floren
Yes. Our view is if China didn’t have the COVID lock downs, demand would have grown more than 3%, that the impact is really on, fuels for driving like in 100 Mtbe, when you’re locked down, you’re not getting in your car and traveling so. And so our view was, if we didn’t have the COVID lock downs during the quarter, we probably would have seen additional demand growth in China.
Matthew Blair
Great, I’ll leave it there. Thank you. Thank you.
John Floren
Thank you.
Operator
Thank you. The next question is from Josh Spector from UBS. Please go ahead.
Josh Spector
Yes. Hi. Thanks for taking my question. I guess, when we looked at your realized pricing in the quarter, it appears to be about 25% weighted average discount to your posted contract price. Maybe that’s more normally around 20%. Pricing was sequentially similar. So, what was the driver of that? Is that more mix of where you’re selling? Or is there anything else to consider? And what would you think about that discount into next quarter?
John Floren
Yes. Well, Q2 discount was 23%, we guide to 20%. And that was mainly caused by spot pricing in China falling quite rapidly, faster than the contract price, which meant we adjusted our discounts to stay competitive in that market. Hard to predict what’s going to happen in Q2, we’ve seen China’s spot prices rebound quite nicely here, even overnight, another significant increase. So it’ll be a factor of what does the Chinese spot price does, which will impact our discount. So, again, difficult to predict in this environment, but certainly spot markets in China and other markets — other regions in the last week to two weeks have bounced back nicely.
Josh Spector
Okay. Thanks. That’s helpful. And just curious, is there any point where Europe gas economics matter for global, global methanol pricing? Or is that just so far at the end of the curve, there’s so much other excess capacity never really becomes a meaningful driver?
John Floren
It matters today, because you have methanol production shut down in Europe, that’s an economical. You’ve got in Norway, the ability of the producers there to make methanol, methanol, or take the gas and sell it into the European market. And you’ve got a big demand for LNG in Europe as well. So in today’s environment makes a lot more sense to be making taking gas and making LNG than making methanol and selling it for $400 at a time.
So yes, high energy environment is overall very good for our business, very good for demand. But I think, maybe trying to build a new plant or getting a new plant started or it would be really difficult in this environment, because you’re probably unlikely to get economic gas that would allow you to make a 25 year investment. So yes, it’s really interesting what’s going on how long it lasts is anybody’s question. And like I said, we’re really well positioned for the next 18 months and longer, that we’ve locked in our cost position.
So I wouldn’t want to be naked on the gas markets today and try to make methanol and sell it at 400 bucks a time it wouldn’t be very economical. So, we’re well positioned and we’ll see how things unfold.
Josh Spector
Got it. Thank you.
Operator
Thank you. The next question is from Laurence Alexander from Jefferies. Please go ahead.
Laurence Alexander
Hello, just two quick ones. Can you give a some perspective on how the volatility in the gas markets is affecting, how the marine customers are thinking about incentivizing new plant construction given how large the marine domain could be in the medium term? And secondly, how is the volatility in feedstock prices affected the Chinese discussion and strategy around industrial boiler conversion to methanol?
John Floren
Yes. So I’m not aware of any marine customer today asking to have a, share in a methanol operation to underpin their plans to buy these flex fuel vehicle — flex fuel ships. And I think that’s the reason is that their flex fuel, so they’re not going to be stuck into one, one fuel, they’ll be able to switch back and forth from methanol, marine gas oil, ultra-low sulfur diesel, provided the environmental regulations are such that allows them to run diesel or NGO.
I’m aware of mayors signing a bunch of alloy use or letters of intent with a number of green methanol projects. To my knowledge, none of them are under construction. None of them have made FID. None of them have come to commercial arrangements with the type of pricing that’s needed to underpin those investments. So not aware of anything, Laurence at this time.
And the second question was sorry, just repeat it for me.
Laurence Alexander
Sorry, on the Chinese industrial boiler strategy.
John Floren
Yes. We’re continuing to see developments there. And in high coal price in China, 1,200 RMB per tonne, certainly makes the economics of methanol even more attractive versus natural gas or diesel. And it’s always been driven by environmental concerns on the coast. So those environmental concerns are still there. And now the economics for methanol are much more attractive than diesel or natural gas.
So we would continue to see positive uptake in that demand not only for boilers, but for klim [ph], which is the new newest application for methanol replace coal in kiln. I don’t know if you saw those little mascot, ceramic mascots during the Olympics, but they were made from a kiln that ran on methanol.
Laurence Alexander
Interesting. Thank you very much.
John Floren
Thank you.
Operator
Thank you. The next question is from a Hassan Ahmed from Alembic Global. Please go ahead.
Hassan Ahmed
Good morning, John.
John Floren
Good morning.
Hassan Ahmed
John wanted to revisit, the demand growth, a couple of questions around the sustainability of this 3% sequential uptick you guys saw in methanol demand in Q2? I mean, if I’m hearing correctly, your commentary sounds quite positive and bullish despite all the sort of headwinds and tailwinds, just want to sort of think through it, obviously, a high crude oil slash energy price environment positive for methanol demand growth, the ethylene polyethylene side of things seems a bit negative, because pricing hasn’t been great. But then again, you obviously have the whole sort of China locked down, easing side of things as well.
So now, with all these factors considered, is it fair to assume that at least in the near term, there’s sort of 3%-ish sequential uptick in demand that we saw it sustainable? And also, where does inventory factor in, in thinking through the whole sort of demand growth side of things in the near term?
John Floren
Well, if I’m selling — if I’m sounding bullish on demand, I need to change my tone because it’s very uncertain. So, there are tailwinds, but they’re and headwinds. And, when we balance them out, we see, based on our forecasts we got from our customers today continue to be very good demand. I’ll remind you there’s a new MTO plant being commissioned in the quarter, which will add 1.8 million tons annualized at full operating rates that wasn’t there, in previous quarters.
So that’ll have a nice bump, a high energy environment like I mentioned, all of our ships are running on methanol and I’m sure other ships that can are as well. MTBE demand continues to be quite good in markets where, there’s no lock downs and we expect that to rebound in China as well.
But, we all read the same headlines about recession. And, if you get a recession, you could see the traditional chemical derivatives not grow as quickly. But, you’d have to see a real drop in demand. The last few times we saw methanol pricing get below 300, it’s when we had the double digit kind of demand shocks around through all oil crisis in 2016, the financial crisis and COVID.
So we are certainly not expecting a double digit, demand drop in methanol. But again, I can’t predict the future. And based on our current outlook from our customers, and from what we’re seeing in the marketplace, we still expect the demand to be quite solid, remind you as well, there’s two idle MTL plants in China that have the ability to restart and the whole dynamic on the ethylene and propylene chain. And, the relative price of NAFTA, we understand that some of the North Asian crackers have reduced rates because of the economics in their chain as well.
So I think at current methanol prices, MTL continues to be okay, and running at high rates, but that’s something we watched very closely the affordability of methanol in MTO versus NAFTA into crackers. So, yes, all these dynamics are really complicated. And they add up to what we think is a pretty good demand profile, everything else be equal going forward in Q3.
Hassan Ahmed
Understood, very helpful. And as a follow up around Europe, I mean, it’s not obviously an insignificant amount of methanol capacity, call it 10% of global capacity sitting in Europe. The commentary coming out of places, particularly like Germany, sounds pretty dire, right, with some of the producers out there. And I’m not talking about methanol producers, but call it producers that have polyurethanes and the like that use methanol as a raw material, talking about shutdowns and the like. So the question really, is that, are you having some initial conversations with some of these downstream sort of producers of products like polyurethanes and the like that are maybe potentially considering outsourcing the methanol side of their operations to you guys?
John Floren
Yes. I’m not aware of any discussions like that. But I would agree with your assessment on the dynamics there. And there’s a couple of refineries in Germany that make some 100s of 1,000s of tons of methanol is part of their complex as well. So how does that continue in the current energy environment in Europe is a big question mark. And how does it even our customers or customers of our customers survived paying $40 in MMBtu for gas. So there may be some shifts of where derivatives get made over the coming years, but certainly hard to predict. And the nice thing about being a global supplier with a global integrated supply chain, we can move very quickly to go where the demand ends up being if it’s not in Europe. So I think we’re again, very well positioned to make sure that we continue to be a good supplier to our customers, wherever that demand may end up.
Hassan Ahmed
Very helpful, John. Thank you so much.
John Floren
Thank you.
Operator
Thank you. The next question is from Charles Neivert from Piper Sandler. Please go ahead.
Charles Neivert
Good morning, guys. Just a quick thing, one, would you — I guess, you answered this earlier, but just want to make sure you can or might conceivably adjust production in different areas where the gas prices high. Like, if you have $9 gas on unhedged stuff in the US, you might adjust production to another site, assuming it can be done or would purchase if it’s cheaper to do it that way. That’s something you’ve already done or we plan to do again.
John Floren
Yes. Outside North America, we have the sharing mechanism in our gas contracts. So our gas prices are set. And we’re cash positive through the cycle and in this environment, 100 plus per ton of EBITDA. So, I don’t see us adjusting operating rates outside North America based on high price gas that — because we’re our contracts are set with a floor plus a sharing mechanism.
Inside North America, about 65% of our requirements are hedged this year, 85% next year. So take this year, if pricing of gas gets to a situation where it’s more economical to buy product in China, and reduce operating rates in North America, mainly Geismar 3, then yes, we would do that. And I’m not about to say today what we’ve been doing what we plan to do, but directionally if it makes more sense to buy versus make, that’s what we’ll do.
Charles Neivert
Okay. And then as a follow-up, how much more Iranian capacity is available? Should it have be able to have gas? I mean, I looked at the numbers of the different operations that are running, are there any more yet to start off, or that might conceivably start off during the course of the quarter? Or are starting to continue to ramping?
John Floren
No, not the short-term, Charlie, I think we understand there’s one under construction, we believe some time, maybe next year or hard, it’s pretty opaque, but nothing imminent. What we saw in the quarter was the plants that are able to operate today increase operating rates, because of more available gas as they came out of their winter time. But this phenomenon has been going on for quite some time. And around until money is invested in the upstream to build out the infrastructure, we would continue to see restrictions on gas to the uranium production. The same pattern we seen in previous years, in the summer, they get a little bit more gas and make it a little bit more methanol. And until they make those investments probably that’s what’s going to be occurring going forward.
Charles Neivert
Okay. Thanks very much.
John Floren
Thank you.
Operator
Thank you. [Operator Instructions] The next question is from John [indiscernible] from Credit Suisse. Please go ahead.
John Roberts
It’s John Roberts, but hi, John.
John Floren
Hi, John.
John Roberts
The progress on the methanol ships or — the progress on the methanol ships is impressive. But there’s also industry discussion about ammonia ships as well. Do you know if those ammonia ships are being planned as dual methanol and ammonia, or maybe try fuel flexibility with diesel as well? Or will the ship operators have to choose between methanol or ammonia, and not both?
John Floren
Yes. I’m not aware of any dual fuel vessels with methanol and ammonia. I’m aware of, ammonia being discussed as a fuel for ships. I think they’re behind where we are, I’m aware of engine manufacturers looking at producing engines that will run on ammonia. That’s a bit challenges with ammonia around the handling and the storage is quite different than methanol a lot more, it has to be colder. And it’s a bit more hard to handle, not to mention, ammonia leaks or releases are not good for any anybody.
So I think that from a safety perspective, I think methanol certainly has it has advantages. So yes, I’ve never said it’s going to be 100% methanol, I think back in the day, when we were proving up this technology, the big noises around LNG, and the whole industry is going to go to LNG. And we know that didn’t happen for obvious reasons, so a handling and price.
And now ammonia, I think will take up some of the space. And again, methanol doesn’t need to have very much of a penetration to have a significant impact on nothing all demand. So I would expect some ammonia ships to be built and that to be a viable product going forward, provided they can get the engines may get the handling issues resolved. And then bunkering of ammonia and availability of ammonia all the terminals in the world. So all doable, but I think it’ll take some time.
John Roberts
And then back onto the question if there’s actually methanol rationing that occurs with some of the capacity being down, what are the highest values in use of methanol or chemical applications, almost always the highest value use of methanol and not fuel given how high oil prices or in fuel prices are?
John Floren
Well, the one that’s always on the margin today is MTO. And that’s really depending on what happens in the olefins markets. And that’s really a factor of NAFTA pricing and how much that feedstock costs for all the crackers around the world that aren’t using methanol or ethane as a feedstock, and that’s a lot a lot of capacity.
So, it’s MTO is the one that we watch that’s on the margin. And I don’t expect that to change unless you have a view that olefin prices are going to go up 50% from where they are, and that’s certainly not our view.
John Roberts
Great. Thank you.
John Floren
Thanks, John.
Operator
Thank you, there are no further questions registered at this time. I would like to turn the meeting back over to Mr. Floren.
John Floren
Okay. Thank you for your questions and interest in our company. Before we close the call, I want to emphasize we produce an essential chemical building blocks, which is used in hundreds of consumer and industrial products. Methanol is also a cleaner burning fuel that has increasing demand as a marine fuel.
We believe that the methanol industry has a positive outlook with growing demand and minimal new capacity additions are well positioned asset portfolio generates meaningful cash flow across a range of ethanol prices, which allows us to execute on our capital allocation prior priorities. Excitement is growing across the organization for the startup Geismar 3 in the fourth quarter of 2023. This plant will deliver significant shareholder value and further enhance our asset portfolio. There’s a lot to look forward to and we hope that you will join us in October when we update you on our third quarter results. Thank you.
Operator
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
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