Earnings Call Transcript - MEOH Q1 2020

Operator, Operator

Good morning, everyone. Welcome to our First Quarter 2020 Results Conference Call. Our 2020 first 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 outcomes 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 first quarter 2020 MD&A and to our 2019 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 impacts 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.

John Floren, CEO

Thank you, Kim. Good morning, everybody. I hope everyone is safe and staying healthy during this extraordinary time. This morning, I'd like to start with a few comments about the current situation. I will then comment briefly on our Q1 results, provide an overview of what we are seeing in the methanol markets today and discuss how we're managing our business to navigate this challenging environment. Our number one priority is the safety of our employees, contractors and communities where we work, and I am thankful that our team is safe and healthy today. We are fortunate that our manufacturing operations have been allowed to operate in all of our regions. Our operations and global supply chain are running effectively and have not been significantly impacted by COVID-19. We are continuing to produce methanol with a limited number of team members on site and are managing the rest of our business to deliver secure and reliable supply to our customers, mostly working remotely. I wanted to acknowledge and thank our team members from all around the world who have demonstrated tremendous dedication and agility over the past weeks as we faced multiple challenges from the COVID-19 pandemic and low oil price environment. Now turning to the first quarter results. We recorded adjusted EBITDA of $138 million and adjusted net income of $8 million or $0.10 per share in the first quarter of 2020. These results are similar to our fourth quarter of 2019 results of adjusted EBITDA of $136 million and adjusted net income of $10 million or $0.13 per share. Our first quarter results reflect a higher average realized price partially offset by lower sales volume of Methanex-produced methanol. In addition, our fourth quarter 2019 results benefited from a $25 million insurance recovery associated with the production outage experienced in Egypt in 2019. We recorded $5 million of additional insurance proceeds in the first quarter of 2020. In the first quarter, we saw global methanol demand decline by approximately 7% compared to the fourth quarter of 2019 due to the impacts from COVID-19 pandemic combined with a sharply lower oil price environment. Methanol demand into traditional chemical applications declined as manufacturing activity was severely curtailed starting in China in late January and later in other countries as a result of the COVID-19 pandemic. Methanol-to-olefins or MTO demand declined due to several planned and unplanned outages. Demand into other energy-related applications also declined due to government restrictions, which limited ground transportation and service industry operations. Methanol industry supply declined in the first quarter due to various outages in North America, the Middle East, Southeast Asia and particularly in China where government restrictions related to the operations and movement of people substantially disrupted domestic methanol production. Our overall production results in the first quarter were 117,000 tons lower than the fourth quarter of 2019 primarily due to the outages in New Zealand, Chile and Egypt, which were partially offset by strong production in Geismar. In addition, as we previously announced, we idled our Titan plant in Trinidad in mid-March, which also reduced our first quarter production volume in our Chile IV plant as of April 1. Both plants were idled for an indefinite period in anticipation of lower methanol demand. In Q1, we continue to progress our Geismar 1 debottlenecking project. However, this incremental production from our Geismar 1 facility will be delayed as we have moved to minimum staffing levels at our plant sites to ensure the safety of our team members. Now turning to what we're seeing in the methanol market midway through the second quarter. We expect to see a decline in methanol demand in the second quarter of 2020 compared to the first quarter. We are seeing a substantial reduction in manufacturing activity in North America, Europe and Latin America combined with continued weakness in Asia Pacific outside of China, where we're starting to see a slow recovery with our customers. This decline in manufacturing activity is impacting methanol demand into all traditional chemical applications with products going into automotive and construction markets being the most impacted. We're also seeing government mandates restrict ground transportation and curtail fuel demand, which reduces methanol demand into methyl tertiary butyl ether or MTBE and biodiesel derivatives. We also expect demand into the MTO sector to decline in the second quarter as three facilities are undergoing maintenance activities. In addition, a sharply lower oil price environment indirectly affects methanol prices as oil prices impact the price of products that methanol goes into, including MTBE, dimethyl ether, biodiesel, olefins and olefins derivatives. We estimate that the industry cost curve, which continues to be set in China, is approximately $220 per tonne, which is a decline as a result of a slight decline in coal prices. Current methanol spot prices in China are below this range. In previous methanol price cycles, when methanol prices fall below the marginal cost of production, high-cost production shuts down and supply and demand rebalance. To date, in addition to our own production cuts, we have seen some other production rationalization globally. We believe that more production cuts are required to balance the global methanol market. We recently posted our May North America price, which decreased by 13% to $313 per tonne, and our Asia Pacific price, which decreased by 13% to $225 per tonne. Our European contract price is set quarterly, and our second quarter posted price is €260 per tonne. At this stage, we don't believe it is possible to accurately predict the full extent of the duration of COVID-19 and the low oil price environment. As a result, we are planning for a wide range of scenarios, including situations where we see a deeper and more prolonged reduction in methanol demand and low prices while positioning ourselves to deliver long-term value for our shareholders as the global economy recovers. We have taken several prudent steps to further strengthen our balance sheet and preserve liquidity through this uncertain economic environment. First, we have placed our Geismar 3 project on temporary care and maintenance and deferred approximately $500 million in capital spending for up to 18 months. This proactive step will enable us to further strengthen our balance sheet while maintaining long-term value and financial flexibility. This action will also allow us to complete this highly advantaged project when market conditions improve. Up to this point, the project has been significantly derisked and execution was safe, on time and on budget. We continue to explore partnership arrangements for the Geismar 3 project and we plan to continue those discussions. However, in the current environment and with most companies focused on navigating the significant uncertainty in the global economy and with the project on temporary care and maintenance, we're not expecting these discussions to progress meaningfully until market conditions improve. In addition to greater financial flexibility and preserve liquidity, we have reduced our 2020 maintenance capital spending by $30 million. Increased financial flexibility through a $436 million draw on our credit facilities, reduced our quarterly dividend to $0.0375 from $0.36 per share, which represents approximately $100 million in annualized cash savings. We're also working with our banking partners to obtain flexibility on certain financial covenants for an existing $300 million committed revolving credit facility and an $800 million non-revolving construction facility. We have agreed on key parameters with our lead bank and are working with other members of the bank syndicate to finalize these changes to the credit facilities, which is expected in the second half of May. We have a flexible cost structure as the price for approximately 60% of our natural gas supply, which is our most significant operating cost, is linked to methanol pricing. This means that our operating costs move down as methanol prices reduce, although there's a time lag of up to one quarter. Also, we expect to see lower logistics costs primarily through lower fuel prices for our methanol shipping fleet in a low oil price environment. We have a strong liquidity position and ended the quarter with over $800 million in cash on the balance sheet. We expect we only need to maintain a minimum cash balance of approximately $150 million to run the business. We are focused on cash preservation in this challenging environment and continue to evaluate all capital and operating spending. We do not expect to undertake share buybacks in this environment as any excess cash will be used to further strengthen our balance sheet. Before I comment on the second quarter outlook and pause for questions, I'd like to highlight a couple of points regarding the resilience of our business. First, methanol is an essential ingredient that is used in countless industrial and consumer products, including building materials, foams, resins, plastics, paints, polyester and a variety of health and pharmaceutical products. In addition, methanol demand is continuing to grow as a clean burning and alternative economic fuel. These are essential products, and we expect demand will recover after the pandemic, as has been the case with prior global economic downturns. Second, we have a low-cost structure, and our assets are positioned on the low to mid-portion of the industry cost curve, which allows us to be competitive across a wide range of prices and economic scenarios and serves us well in the current environment. Third, we benefit from our integrated global capabilities with a network of production sites around the world and global supply chain, which is a competitive advantage and enables us to deliver secure and reliable methanol supply to our customers around the world. Now turning to our outlook for the second quarter. We expect the coming months will be challenging, and we expect that the headwinds we face from the COVID-19 pandemic and a sharply lower oil price environment will be significant in the second quarter. With lower methanol prices and lower production levels as we've idled our Titan and Chile IV plants, we expect that adjusted EBITDA will be substantially lower in the second quarter compared to the first quarter. As a reminder, in the declining methanol price environment, our margins tend to be lower than in a stable price environment due to the timing of methanol production and purchases versus the timing of sales. We continue to monitor the impact of the COVID-19 pandemic and low oil price environment and regularly review our plans across a variety of scenarios in order to respond quickly as conditions change. We are focused today on keeping our teams safe, running our plants safely and reliably, delivering secure and reliable supply to our customers and protecting our balance sheet to navigate this unpredictable environment. With our strong liquidity position and the resilience of our business model, we are confident that we are well prepared to weather this global pandemic and its impact on methanol demand. I would now be happy to answer any questions.

Benjamin Isaacson, Analyst

Good to be back on the call, and glad to hear everyone is doing well. John, you said that demand was down 7% in Q1. What's your early read on how April has played out?

John Floren, CEO

It's down more, Ben. It's very difficult. It's changing daily. But if we saw a 7% reduction in Q1, I think where you should expect a much greater reduction in demand in Q2. Certainly, when we look at our own demand, we're down significantly. We don't know what our competitors are doing. But when you freeze the global economy and a lot of manufacturing ceases, I think demand for methanol is going to follow right behind.

Benjamin Isaacson, Analyst

And just as a follow-up, I've noticed that the discount growth has been widening out over the last few quarters, 16%, 17%, 18%. How do you see that progressing in the normal cycle going forward? Is that going to kind of go back towards that 15%?

John Floren, CEO

Yes, our guidance remains the same. In a stable environment, which we haven't experienced much in recent years, 15% is the appropriate guidance. However, as we've seen in the last quarters, a rapid decline can lead to a wider range. I can refer to 2018 when prices increased quickly, followed by a contraction. I'm still comfortable with the 15% guidance, but in the current environment, you should prepare for a higher percentage as prices decreased in Q2 compared to Q1.

Steve Hansen, Analyst

Just very quickly, John, you guys have taken some pretty proactive and certain measures here thus far. I applaud you for that. I'm just trying to get a sense for whether we should expect any additional actions on the production front. Are there any other facilities that you would contemplate taking down to help balance out the market on your side? Or is that going to be left to others?

John Floren, CEO

Well, the reason we took Titan and Chile IV down is because those were the only really two plants where we had total flexibility where we didn't have take-or-pay gas. All of our other sites, we have take-or-pay gas. We have some ability to reduce Geismar by about 30%, where we're buying spot gas, but spot gas is under $2. So hopefully, prices don't deteriorate to such a level that we would have to take that action, but anything is possible in this environment. I think we have some other opportunities as gas contracts expire here over the coming months, but we're not anticipating today to take any additional production out. But we're looking to try and create as much flexibility in our supply chain as we can to allow us to prepare for any eventuality that we might see in the markets. I think others in the industry need to take some supply out as well. There's a lot of material today that is well above from a cost delivered cash cost perspective, where we're seeing pricing around the world. So I don't think people like to lose cash. Certainly, we don't. So hopefully, we'll see some of the high-cost producers that are still operating curtailed over the coming weeks and months.

Steve Hansen, Analyst

That's helpful. And just as a follow-up to that, is it fair to say that your discussions with the NGC in Trinidad are currently at a pause?

John Floren, CEO

No. We're still discussing with the NGC. All countries are really dealing with the COVID-19. So whether it's our discussions on a gas contract or any other discussions, the government are taking a back seat as they deal with the pandemic. But we're still negotiating. We're negotiating in good faith. We'd like to secure a contract that makes sense for us, the government and the upstream, and that's our intention. So we're going to continue to work towards that.

Jacob Bout, Analyst

I wanted to review the total CapEx spend expectations. We're calculating around $310 million in 2020, $330 million in 2021. Is that the right order of magnitude? And what type of wiggle room do you have there?

John Floren, CEO

We have cut maintenance spending for this year by approximately $30 million and have reduced the G3 project budget by about $500 million over the next 18 months. We plan to spend up to $200 million during that time for G3, and we are challenging our team to spend less. Our maintenance capital is continuously under review, and we will reduce it when it makes sense as long as it does not compromise the safety of our plants. We will invest the necessary funds to ensure our plants remain safe and will explore opportunities to decrease maintenance capital without impacting safety. Most of our maintenance capital is associated with turnarounds, and we have postponed some of these because we faced challenges executing them in this environment. We need to assess how much maintenance capital we can defer. If a turnaround cannot be executed safely, we will shut down the plant. Currently, we believe that the delayed turnarounds can still operate safely and are performing adequately. While I cannot provide exact figures, we will evaluate all areas, including operational expenses, to determine what can be deferred or canceled, and we will continue this process as we assess market conditions.

Jacob Bout, Analyst

And then how much liquidity do you have available today? And what type of covenant relief are you looking for?

John Floren, CEO

Yes. So we have $800 million of cash on our balance sheet at the end of Q1. I've said we need probably $150 million to run the company. So that guidance is still there. And maybe I'll ask our CFO, Ian Cameron, to comment about the covenants and the bank relief.

Ian Cameron, CFO

So Jacob, there are probably three things we're looking for in terms of flexibility. One is we have two covenants, interest coverage and EBITDA to interest test, and we have a funded debt ratio, which is like a leverage test. And today, we're in compliance with those covenants. But if we saw a sustained lower price environment, those covenants could come under pressure. So we're trying to get some short-term relief around and flexibility around those two covenants. The other covenant that is around G3, we're just trying to create more flexibility in terms of timing of the completion of G3. So that's the third area where we're trying to obtain some more flexibility.

Joel Jackson, Analyst

So I'm not going to ask you a question about whether or not you continue with G3, you are. But let's pretend that you have to decide that it didn't make sense because of demand in China or the global demand for methanol this decade that it didn't make sense to build G3. So I guess the question would be what penalties, what minimum spend would you have to still go out the door in winding down that project?

John Floren, CEO

Yes. It's too early to give you a number there, Joel. I mean we're negotiating all the time with our partners on the G3 project. It's our intention to complete it at some time. If it comes to a point where it's just not needed or the world is still in a really serious significant downturn, then we'll do what we have to do to mitigate the cost around canceling that project. It's not our current view on the project, but everything is on the table. I would say that we've been issued a number of force measures and delays on equipment, et cetera, because of the COVID-19, which gives us some additional flexibility as we negotiate with our partners. So we want to have win-win situations here, and we will continue to negotiate and try to find a solution that makes sense for everybody. But I think it's a bit premature to be thinking about canceling. And I think it's when you make that decision where you are and what you've negotiated, which will drive how much additional capital you may have to spend. But we're trying to minimize that as we go forward.

Joel Jackson, Analyst

And my second question would be on cost curve for methanol in China. Can you give an update on where you think it is and what's driving marginal cost today in thermal and so in gas? You've obviously seen somewhat coal prices get down to below the bands, and the government has said it's coming off. So a lot of stuff going on over there. Maybe talk about where you see the marginal cost from ethanol.

John Floren, CEO

$220 being set by coal producers. We've seen coal slightly decrease. It's around just over RMB 500, RMB 510 which is just at the lower end of the ban that the government had put in after the last oil collapse in 2016. Something we're watching pretty closely. And certainly, if it does go a lot lower, that will impact the cost curve. But here we are, China has been dealing with COVID since the end of January. So three months and the ban seems to be alive, but that doesn't mean it's going to continue. So it's something we'll watch pretty closely.

Michael Leithead, Analyst

I wanted to return back to the conversation around your natural gas costs. And obviously, the variable cost dynamic where you tie your cost to methanol prices has been helpful throughout the cycle. But can you just maybe give us a little more help on how these contracts work now that are at a uniquely low part of the methanol price cycle? Is there any sort of variable cost floor, whereas methanol goes further down, that doesn't equate to lower realized natural gas costs?

John Floren, CEO

Yes, each contract has its unique characteristics, and for reasons of commercial sensitivity, we don't discuss them individually. What we continue to stand by in our guidance is that for methanol realized prices above $180, we share about one-third of the revenue with a gas supplier on average through our contracts. Currently, our realized price is over $200 per ton. Even if there were a decrease in the methanol price, once we reach $180 on a realized basis, you should consider that, on average, there's a floor for the gas contracts, although some may have a slightly higher floor and others a slightly lower one. This is the guidance we have provided and it remains applicable.

Michael Leithead, Analyst

Got it. That's really helpful. And I appreciate the outlook is very foggy today. But just given what you've talked about with the moves in price, the timing lag of inventory and costs flow through and just presumed increased overhead absorption from the lower volumes, would you still expect to be EBITDA positive in the second quarter?

John Floren, CEO

I think it's too early to say that. But if you ask me today, we will be, but things are moving pretty quickly here. We're only in early May. We've set May pricing. I think if I see a complete collapse in June, which I guess is possible, we would be EBITDA positive in Q2.

Hassan Ahmed, Analyst

John, I found it very helpful to hear your insights on demand growth and declines. In Q1, there was a noted 7% decrease, and I understand that some facilities were idled. Can you provide your perspective on how the industry fared in terms of supply during Q1? Did you observe a global supply decline that matched the demand drop? Was it greater or less, especially considering the shutdown situation in China? Additionally, where do you currently see supply figures?

John Floren, CEO

Most of the shutdowns we observed were in China, which is an important point to mention. Our actions took place late in the quarter, impacting Q2. While we've encountered a few other shutdowns elsewhere, as I pointed out earlier, we need to see more shutdowns based on current demand. Production levels remain high, especially in China, despite prices being lower globally. We expect supply to decrease, as seen in prior downturns, when cash margins are negative. This process can take weeks or even months, and is largely influenced by expectations for the next couple of quarters, which is difficult to predict right now. A halt in global manufacturing certainly affects demand, and we've noticed this shift globally, starting in China back in January, followed by Asia in the first quarter, and now in Europe, North America, and South America as manufacturing has slowed down. To achieve balance, we need to see more supply reductions. Additionally, there's insufficient storage for the current methanol production, leading to a situation where facilities may have to close regardless of their cost structure. It will be interesting to observe how this situation evolves over the upcoming quarter or two.

Hassan Ahmed, Analyst

Understood. Understood. Helpful. And as a follow-up, John, obviously, all sorts of stress within the oil and gas markets. And the like, question around your contracts. I mean if I remember correctly, back in 2013, you announced a 10-year contract for gas supply to Geismar with Chesapeake Energy. Obviously, that company, reading the news recently, seems to be in fairly deep stress, and enough sort of reports out there about bankruptcy filings and the like. So just wanted as best as you can, what sort of moves are you considering? What optionality do you have in case of a bankruptcy out there? I mean, is in terms of security of gas supply, upholding of the contracts and the like?

John Floren, CEO

Yes. So I think it's a short-term and a medium-term issue. I mean, if we were to have the supplier of Geismar 1 go bankrupt, it'd be very positive for us because, obviously, the spot market today is much lower than what we're paying in Geismar. So when we signed these contracts in North America for Medicine Hat and Geismar, we had the view that if markets got really tough and people went bankrupt, we had natural hedges. That meant the gas price was very low. I'm not worried about the supply of gas in North America for the foreseeable future. But I think the medium-term is a bit different. If you have a very low oil price environment and gas environment, then you're going to see production budgets being slashed and exploration and development budgets being slashed. So places like New Zealand, Chile, Trinidad, I get more concerned around how do those assets become sustainable long-term because you know in this business of oil and gas, if you're not investing, you have the declines each and every year, which could lead to not enough gas to go around at some point in the future. So I worry more about that than short-term bankruptcies in North America.

Nelson Ng, Analyst

My first question concerns the debt covenants and flexibility. I assume you utilized your credit facilities because there might be a time in the future when they are no longer accessible. I am curious if, upon receiving relief on debt covenants, you would consider using that cash to reduce the credit facilities to avoid paying the carrying cost of holding cash.

John Floren, CEO

We don't know. I mean we're still in negotiations. So everything is on the table. We're looking for relief on the covenants to give us more flexibility. I mean we didn't do anything on those lines of credits or credit facility that we weren't allowed to do. So we thought it was prudent with all the uncertainty to get a bit more cash on the balance sheet, which is what we did. But we're negotiating many, many different things related to those covenant relief. And when we have a deal, we'll certainly let the market know what that deal looks like, including paying down debt with cash. So it's too early to say anything about that. But once we have a deal, we'll certainly let the market know what it looks like.

Nelson Ng, Analyst

Okay. And then the next question relates to methanol demand. You mentioned that, obviously, the manufacturing sector is very weak, but you saw some signs of recovery in China. Could you give a bit more color on what you're seeing in China? I'm just thinking about whether there's a potential read-through of things to come for the rest of the world, in terms of the recovery profile you're looking at in China.

John Floren, CEO

Yes, it's slow, I would say. We are seeing recovery, but it's slow. Looking to me like a U-shaped recovery instead of a V shape, but that's early days. I think we'll see how Europe comes out of this pandemic. And certainly, the United States is in the middle of it right now. So they're starting to open up. So we'll see how that pans out for cases, et cetera. But China is starting to unthaw and get back to more manufacturing activity, but it's still nowhere near what we saw in the fourth quarter of last year. Obviously, China is a very export-driven economy, and they rely on the rest of the world's economy to be chugging along to have somewhere to send their exports. And obviously, in the current environment, everything has basically stopped.

Jonas Oxgaard, Analyst

I want to revisit your earlier comment about storage being nearly full. What actually happens physically when we run out of storage? Historically, Chinese producers have struggled to halt production quickly, even when facing negative cash flows. If we find ourselves in a situation where methanol production continues globally despite a lack of demand, could we potentially see negative pricing like WTI, where we pay someone to convert it into DME? Have you encountered anything similar before? I know this raises several questions in one, but have we seen any situations like this, and what are your thoughts on the direction we're headed next?

John Floren, CEO

No, we haven't experienced anything like this before. I slightly disagree with your comment about production in China. During previous downturns in 2009 and 2016, we observed high-cost production being reduced, which is happening again now. Producers in China are likely to react more quickly than some of our competitors globally because they don't want to incur losses. They have significantly reduced production over the past couple of months. When I mention a lack of storage for product, I'm referring to imported products in various regions rather than just Chinese producers. Storage capacity is limited, an issue that existed even before COVID-19 as demand in China increased, particularly for MTO. The amount of storage created was not sufficient to match the surge in demand. This has created challenges in supply chains and timely product movement due to minimal storage space. When storage reaches capacity, similar to what happens with oil companies, you can fill ships, and we've seen spot rates for shipping rise significantly, likely due to storage issues. Once that storage is full, production must be halted or product must be dumped elsewhere. Therefore, it makes sense to stop production instead of having no place to store it. While we haven't encountered this situation historically in our market, oil has never had negative pricing for such an extended period before, and these are indeed unprecedented times. Trying to predict conditions in this environment seems unwise.

Eric Petrie, Analyst

What is your exposure to MTO compared to the industry? And how does methanol demand fare into MTO given naphtha-based ethylene economics have turned more advantageous? And are those customers advancing or extending turnaround times?

John Floren, CEO

Yes. So our MTO exposure is less than many of our competitors. We have a couple of customers we're selling MTO. I'd say the MTO rates have held up quite nicely, even in a very low environment for naphtha and a very low environment for olefins. I mean ethylene, I think, at historical low prices. So that's today. That doesn't mean that's going to be the case tomorrow. But we've seen MTO demand hold up quite nicely. And again, we'll continue to monitor it. But we've seen some planned turnarounds, and these turnarounds were planned in Q4 before the whole COVID-19 shock. So are they being extended because of economics? We don't have that kind of intel. But we're seeing the operating rates in the 70% today in that market, which is quite healthy. So we'll see how these current turnarounds pan out and what the operating rates look like when they return. But again, making a forecast in this environment is foolish, and we'll have to monitor things as they happen, not try to predict things that are unpredictable. Yes. There are two projects that we expected to finish in 2020, one in Trinidad and another in the United States. However, we anticipate delays due to the current environment. I can't speculate on how long those delays will be, but we expect completion to occur over the next few quarters. Regarding the start of G3, it's premature to discuss as we are currently experiencing a significant downturn in methanol supply. We have arranged a potential restart within the next 18 months if conditions improve, but we need to see a much better pricing outlook for methanol than what we currently observe. Right now, prices continue to decline, dropping below $200, while we have consistently believed that the long-term price of methanol should be around $350. Clearly, we're still a considerable distance from that price, and I cannot predict how long it will take for demand to recover to levels we saw in the fourth quarter of last year, nor can anyone else. It will depend on how economies start to reopen, the effects of additional COVID cases, and government responses. Overall, it's largely beyond our control.

Matthew Blair, Analyst

Great. And then I wanted to circle back to some previous comments. So John, you mentioned your hope that the higher-cost methanol producers would cut back. You also noted that Methanex has some take-or-pay contracts on gas supply. Are these take-or-pay contracts pretty standard in the industry and something that can limit run cuts and plant shutdowns going forward?

John Floren, CEO

Yes. Hope is not a strategy. So I don't think I used the word hope. Hopefully, I didn't. I think a lot of companies do have somewhat of take-or-pay contracts. But I'll remind you, a lot of these methanol producers, our competitors are state-owned or companies that are in geographies where they're kind of buying gas from a state-owned company or a national company. So we're talking to our suppliers about our take-or-pay obligations, and we have some flexibility. And I would say our competitors also have some flexibility. So I think in this kind of environment, everything is up for negotiation. If you can't sell it, you can't store it, then you can't produce it. So I'm not privy to our competitors' conversations, but I know we're talking to our suppliers about some flexibility in these unprecedented times.

Laurence Alexander, Analyst

On the storage question, can you slip around and maybe give a thought or two on what this means for inventory levels in the chain relative to normal? That is if even if demand picks up, i.e., how long it will take to work down some of that excess that might be stored in ships or in other unusual areas? And secondly, could you give a quick update on some of the nontraditional applications, the M100 taxi trials, the industrial boilers, how demand levels are on that side?

John Floren, CEO

Yes. So again, I can't predict the future. Demand will be the driver to how quickly we work through the overhang in inventories. We took very, very quick proactive measures to take production out of our system to allow us maximum flexibility in our inventory. And I'm glad we did that, although it was criticized at the time because that gives us a lot of flexibility. And we have a lot of flexibility in our current supply chain to weather significant demand downside, and we're looking at creating more flexibility. So again, if you can tell me what your outlook for demand for methanol is, I can tell you how long it will take to work through excess inventory. And I don't think either of us knows that. So I'll move to your second question, which is around the kilns, boilers and M100. Well, obviously, M100 taxi trials continue, but if nobody is driving anywhere or going anywhere, then fuel is not being consumed. I know myself, I don't think I filled up my car here in the last eight weeks. So if that's any indication of fuel consumption around the world, then we're going to continue to see things like MTBE and biodiesel and M100 be under pressure from a demand perspective. Fortunately, kilns and bottlers is different. Those are needed for heating and creating electricity and mainly heat, sorry, for blocks of buildings in China. So we continue to see nice growth there. But when you look at the demand destruction we've seen elsewhere, it's just a drop in the bucket compared to what we've seen on the demand destruction side.

Jason Crawshaw, Analyst

John, just a couple of questions here. In terms of what you think needs in terms of supply coming on the market and balance of the market, I guess, on a percentage basis, I mean, how much supply do you think needs to come out to get the market balanced? Would be the first question.

John Floren, CEO

It depends on where the demand ends up, Jason. So it's really early to tell. Is it going to be 20%, 30%, 40%? I don't know. And how long? I think that's the other issue. So this market has always been balanced. It's just at what price. And at the current spot prices in China, there's probably 50 million tonnes underwater on a cash basis out of an 80 trillion tonne market. So a lot needs to come out if you have significant demand destruction. But I can't predict what that demand destruction could look like over the coming quarters.

Jason Crawshaw, Analyst

Got it. But it sounds like it's not 10%, it sounds like 20%, so at least, I mean, a meaningful.

John Floren, CEO

Yes. It's not 10%. Yes, it's not 10%. Yes, pretty flexible. We've kept all our people. People cost for us is not a very significant cost. We only have 1,500 people in the whole organization. They're very skilled and technical, and we need them to restart these plants. When we take them down, we take them down in such a way that we preserve them very well. So if we made the call tomorrow that we're going to start these plants up, you're talking weeks, not months. So our plan is to keep our teams in place and to be ready to restart when the conditions are right. But I can't see that happening in the immediate future. So we'll be ready. And I hope I'm wrong that things will improve a lot quicker than I'm anticipating, but I really don't know. But we will continue to keep those plants ready to restart and our people in place to be able to run those plants if and when the time is right.

John Roberts, Analyst

I'm glad to hear you're doing well, and I apologize for the challenges you're facing. John, do you have any thoughts on which market might recover first? Do you think fuel applications will lead the way? It seems like there are signs of recovery, particularly in the formaldehyde market for construction, which often picks up when interest rates decline and government activity increases.

John Floren, CEO

Predicting the future is quite difficult in this current environment. However, I expect that automobile driving will increase relatively quickly. I'm uncertain whether people will feel comfortable using public transit, for instance. It’s possible we could see a surge in new car purchases and usage. Many individuals have been at home for an extended period, and perhaps construction activity will rise as people undertake renovations. As a board member of West Fraser, the largest lumber producer in North America, I've observed considerable activity in the rental home market, even amidst current challenges, as more people have stayed home. This is another sector that could see a fast recovery. To me, it really revolves around economic activity driven by people resuming their everyday routines and feeling free to move around as they did before COVID-19. Personally, I believe there is still a significant amount of fear. Even when things reopen, I anticipate a gradual return to whatever the new normal will be. This is just my opinion and ultimately a guess. Nevertheless, I think certain sectors, as you pointed out, might recover more quickly than others. No. I think I'm more concerned about further production exploration. Most of the gas we get for the second plant, all of the gas we get for the second plant comes from Argentina. That gas, if we wanted to start up tomorrow, is there. But what happens to Argentina and its situation in this environment and how do the E&P companies in the south there continue to develop gas reserves. So those are unknowns to me. But today, there's lots of gas in that cone, but 5 years from now, who knows? I mean, it depends on how all of this pans out and where we go from here. So a bit of a guess, John. Again, I don't know what's going to happen next week, never mind a few years from now. Okay. Well, thank you. I wanted to reiterate that our top priority is keeping our team members safe and healthy. We will continue to operate our plants safely and reliably, deliver secure and reliable supply to our customers and protect our balance sheet. We have a strong financial position, and we believe that we are well positioned to weather the methanol demand destruction and other challenges resulting from COVID-19. Thanks for joining us today. Stay safe and look forward to connecting with you in July. Thank you for the interest in our company.

Operator, Operator

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