Methanex Case Notes

John Floren

CEO, recently appointed president

Methanex

worlds largest methanol producer

30%, 60%

before the 2008 global economic crisis, senior management team developed strategy that increased annual revenues by more than ___ and earnings by almost ___

Sustainability

despite success, floren had concerns regarding ___ of corporate strategy’s focused scope

Cost leadership and reliable delivery

Methanex success due to

Methanex Production Facilities

multi-million dollar production facilities in remote, natural gas rich regions of the world

supported own distribution and logistics system

Diversified

unlike many competitors, methanex not

believed lack of allowed their org to focus singularly and clearly on strategy

Poor infrastructure and political instability

emerging in market economies, could result in inconsistent gas supply

could cripple production and impact supply chain

Management at Methanex

undertook quarterly risk review process

included systematic review of corporate strategy and competitive landscape of methanol industry

2/3

market valuation of methanex only ___ of the replacement value of its assets

Global recession

threatened production facilities in Egypt and Chile

Egypt

Unpredictable and unpredicted social unrest threatened production from brand new $870 million facility

Chile

one of firms major production centers sat idle because of govs ban on natural resource exports

China

opportunity to expand into

China

became significant player in global supply and demand

DME and MTO

China made discoveries for alternative methanol use of

sub for propane as household fuel and olefins to make plastic

Risk of entering China

no significant investments in new applications

Potential rewards high, also entry risks

2.5 billion

Methanex worth

Methanol

widely traded chemical commodity consumed in all major regions of world

occurs naturally in environment in minute quantities

Process of making methanol

heating natural gas with steam

cooling and condensing gas

distilling product

Methanol in pure form

limited number of direct applications

used as base ingredient in production of more stable chemicals

Formaldehyde and Acetic acid

used in traditional applications

2/3 of global supply

Energy sector

used for gasoline blending

production of DME, MBTE, MTOs

Demand for formaldehyde

remaining high

growing public health concerned surrounded health risks associated with occupational exposure to chemical

US National Cancer Institute

In May 2009 published report on health effects of occupational exposure to formaldehyde and possible link to leukemia, etc.

Acetic acid

13% of global methanol demand

Energy sector

demand for methanol increasing

MTBE and DME

MTBE

used to reduce harmful automobile emissions

but presence in water supplies led to public concerns

passing of US energy policy act

Effected demand of MTBE

European and Latin American countries imposing taxes on fossil fuels to encourage use of alternative fuels such as biofuel

global demand remained relatively constant: clean energy component in Europe

DME

methanol-blended fuel increasing in popularity as alternative to gasoline

used for residential heating and cooking

attractive alternative fuel: non-toxic and harmless to ozone layer

became attractive alternative for domestic heating

China

largest market for residential DME

introduced standards for use of M85 and M100, M15 in coming years

North American Market

demanded only 14% of global supply

due to regulations and restrictions around uses of formaldehyde and MTBE and rapid tech advancements in alternative energy

China

single largest consumer of methanol

Natural gas

subject to fluctuating prices, interruptions to supply lines and international policies, regulations governing imports and exports

Methanol output supply

greatly affected by planned and unplanned outages of methanol plants

Methanol plants

most operated at 85% of total capacity to allow for output increases when economically beneficial

Most methanol producers

attempted to closely match production output and customer demand

Cost effective substitutes

Methanol had few

Methanol Market

CAGR high - projected to rise to 7.3% based on rising oil costs and increasing global demand for alternative fuel sources

traded above energy value consistenty for past 15 years

Long-term supply and pricing agreements

when high reserves of natural gas identified but local industry had limited use for resources, methanex able to negotiate

based on monthly volumes with major multinational manufactorers

Methanex production operations

in Trinidad, New Zealand, Chile

Methanex marketing offices

Asia-pacific region, north america, south america, and europe

Trinidad

JV with BP and Methanex in

initiated pilot program to introduce methanol fuel blending in

New Zealand

3 methanol plants

due to economics and resource extraction capabilities, local supply of natural gas largely dependent on short-term contracts

unfavorable economic conditions led Methanex to idle 2 larger plants

reopened one plant

Chile

expansion into risky: percieved political instability and high capital investments costs

delivered benefits as result of low production costs and genrally stable supplies

Government halted all exports of natural resources: cut off supply of methane to Methanex’s production facilities

operated only one production facility in

aggressively backing natural gas exploration and acquisition in

Egypt

JV between Methanex and gov

coincided with anti-gov protests and civil unrest

Methanex temporarily closed plants to protect workforce

brought back online for brief period in spring 2011

social unrest again, plant idled few months later

Canada

originally had short-term contracts: more sensitive to fluctuations in supply

due to price volitility and high production costs orgingial production facility closed, retained as stroage facility

reopened facility in response to rapidly declining prices in north american natural gas market

Methanex vision

to achieve the lowest cost delivered in each region it served

Long-term contracts

partially mitigated Methanex’s risks from fluctuations in supply and prices

Methanex Outbound Logistics

Fleet of tankers

barges

trucks

trains

developed own ocean-going vessel company

Waterfront Shipping Company

stand-along business created to manage fleet of ocean-going vessels

offered transportation services on contract basis to other companies on “backhauls”: return trips to Methanex’s storage and distribution terminals

Distribution and Logistics Network

methanex had own

resulted from recognition that methanol planrs had life expenctancies of more than 30 years

Storing Inventory

methanex attempted to reduce vulnerability to market fluctuations in both price and supply by

had own storage and terminal facilities in Canada, Korea, China, Netherlands, US

Methanex Inventory

supplemented own production with purchased methanol from other producers when prices favorable

helped mitigate market risks and ensure company’s avaliability to serve clients consistently

Logisitics Network

ability to deliver to all major methanol markets in the world

preferred supplier for many of world’s major chemical customers

Methanex Competitors

had different objectives, cost structures, access to financial resources

most competitors did not have methanol as core business

MHTL

Trinidad

Second largest producer of methanol

Consolidation of shareholding and management of 3 smaller companies

Subsidiary companies in financial services, property and real estate development

Owned 5 production plants

largely responsible for making Trinidad world’s leading exporter of methanol

Strategic diversification out of methanol

Sabic

3rd largest global methanol producer

6 strategic busieness units (basic chemicals, intermediates, etc.)

Joint Venture between Saudi Arabian goc and Gulf cooperation counsil

MGC

Japan

4th largest supplier of methanol globally

JVs in Saudi Arabia, Venezuela, Bruenei

Produced methanol, ammonia, related derivatives

followed Methanex’s lead and opened 2 methanol storage facilities in US

MSK

held equity positions and marketing rights in production facilities in Saudi Arabia and Venezuela

off take positions in several locations globally

Petronas

Oil and gas producer

owned by malaysian gov

One of Fortune 500’s largest companies in the world

small petrochemical division produced about 2 million tonnes of methanol

Contract price of methanol

posted monthly by trade newsletters

driven by commodity spot prices unofficial prices approximated using average contract prices from several global suppliers

Market leader position

allowed methanex to influence price fluctuations, but not price trends

prices regarded in industry as standard for contract price rates

MNDRP

Methanex non-discounted price

quickly adopted by news outlets and industy reporting firms as general benchmark price for methanol contract prices

developed MEPCO and MAPCP

2009

Methanex revenues fell to half of its 2007 numbers

company barely broke even

decreased production in many of Methanex’s downstream methanol producers

2010

Methanex remained single largest methanol producer in world for 10th year in a row

Methanex employees

just over 1000 globally

200 in corporate offices

hired and trained local employees to work in plants

Technology

only small number of employees required at each production facility

competitors required hundreds

due to company’s continual investments in technology and high level of computerization and mechanization of its plants