Methanex Corporation

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Methanex Corporation

1800 Waterfront Centre
200 Burrard Street
Vancouver, British Columbia V6C 3M1
Canada
Telephone: (604) 661-2600
Fax: (604) 661-2676
Web site: http://www.methanex.com

Public Company
Incorporated: 1991
Employees: 846
Sales: $1.06 billion (2000)
Stock Exchanges: NASDAQ Toronto
Ticker Symbols: MEOH; MX
NAIC: 325191 Gum and Wood Chemical Manufacturing

Based in Vancouver, Canada, Methanex Corporation is the world leader in the production and marketing of methanol. Produced from natural gas, methanol is used in the production of formaldehyde, MTBE (methyl teniary butyl ether), acetic acid, and in wood adhesives, plastics, paints, building products, foams, explosives, herbicides, pesticides, and poultry feed additives. End uses of methanol include acting as a substitute for chlorofluoro-carbons in aerosol products and as a deicer and windshield washer fluid. MTBE’s use as a gasoline additive to reduce carbon monoxide emissions has not only spurred industry growth, but has created a degree of controversy, leading to Methanex filing a claim under the North America Free Trade Agreement (NAFTA) against the government of the United States.

Roots of Methanex: 1968

Much of the assets of Methanex were originally part of Ocelot Industries, an oil and natural gas company that was formed in 1968 to exploit resources in Canada’s Alberta Province. The company enjoyed some success, but by 1985 it was saddled with high debt and crippled by weak oil prices, resulting in a $40.4 million loss for the year. After a write-down of assets, the company reported a further loss of $167.2 million in 1986. As foreign firms began to take over poor-performing Canadian energy companies in 1987, Ocelot, with its own losses continuing to mount, worked with bankers and institutional investors to create a refinancing pact. It also promoted a 33-year-old executive, Brooke Wade, to the post of president in a management reorganization. In 1988 Ocelot began to sell off some of its major oil and gas producing properties to help reduce its debt of $770 million, but by the following year the company retained a Toronto securities dealer to help it consider acquisition, merger, or other investment proposals in order to maximize shareholder value in the company.

Ocelot’s chemical division took advantage of the company’s natural gas holdings by producing methanol in its Kitimat, British Columbia, plant. In the late 1980s methanol emerged as a possible alternative to gasoline as an automotive fuel, prompting oil companies to develop cleaner, reformulated gasolines. Nevertheless, methanol was a primary raw material in methyl teniary butyl ether (MTBE), an additive that made up approximately 15 percent of reformulated gasoline. With passage in the United States of the 1990 Clean Air Act amendments (as well as separate regulations in California) mandating the use of reformulated gasoline in much of the country by 1996, the manufacture of methanol appeared to have a tremendous upside. The chemical was considered a mature commodity, enjoying a steady but generally modest increase in demand each year. Only once in the 1980s did methanol see a sharp rise in price, and that was caused by the unexpected outage of a major plant. Because of the future need for MTBE in reformulated gasoline, however, the potential for the methanol industry was greatly enhanced. Plants that had been shut down were now being brought back into production and new facilities were being built.

In 1991 Ocelot spun off its Kitimat methanol plant, as well as its ammonia business, to create a separate, publicly traded company called Methanex, with Wade serving as president and chief executive officer. As part of the spinoff, the German conglomerate Metallgesellschaft AG (MG) merged its North American and Caribbean methanol assets with the Ocelot interests in exchange for a 28 percent equity stake in Methanex. The Methanex board would later be expanded from six to eight to accommodate MG, whose chairman and CEO, Heinz Schimmelbusch, would also serve as chairman for Methanex.

With the clear intent of becoming the world’s leading producer of methanol, Methanex was quick to make deals to bolster its production capacity. It acquired MG’s interest in a joint venture with American Cyanamid Co. for $11.7 million in cash and 2.9 million shares of Methanex stock, thereby increasing MG’s interest in the company to 35 percent. The Cyanamid venture would convert an idle ammonia plant near New Orleans into a methanol facility. Methanex also entered into a joint venture with Dallas-based Hoechst Celanese Chemical to restart methanol production in a Clear Lake, Texas, plant. With both new plants expected to be operational by the end of 1992, Methanex expected to double its annual production of methanol.

Majority Shareholders, Changing Twice: 1993

Impressive as these transactions may have been at the moment, they were soon overshadowed early in 1993 when Methanex agreed to acquire the assets of the world’s leading methanol producer, New Zealand’s Fletcher Challenge Ltd., a diversified forestry company with interests in energy, construction, and agricultural-services. After acquiring a wide range of businesses in the mid-1980s, Fletcher was now looking to sell off assets to pay down debt. For Fletcher’s methanol interests Methanex paid $250 million in cash and nearly 74 million common shares of stock for a total consideration in excess of $700 million. Fletcher, with a 43 percent equity stake, now became the largest shareholder of Methanex, as MG’s position dropped to 10 percent. As part of the deal, the head of Fletcher’s methanol unit, Dr. Brian Hannan, became Methanex’s chief executive officer, with Wade now serving in a secondary position. From Fletcher, Methanex acquired two methanol plants in New Zealand as well as a plant in Chile. With additional production capacity in hand, Methanex then canceled the deal it had earlier negotiated with Hoechst Celanese.

Fletcher, however, would be the controlling shareholder of Methanex for just a brief interlude. By the end of 1993, Canada’s Nova Corp., a chemical and pipeline concern, would agree to merge its methanol interests with Methanex in exchange for common shares worth $145.9 million and the right to purchase additional shares for $139.8 million in cash. Because it would have to spend $166.5 million to retain a controlling interest and was uninterested in holding a minority stake, Fletcher opted to sell 15.5 million of its Methanex shares to Nova, with the remainder offered for resale to the public. MG further agreed to sell stock to Nova, thus reducing its Methanex holdings from 10 percent to 6 percent. Hannan continued to serve as president and CEO, but less than a year later he would return to his native New Zealand to run Methanex’s Southern Hemisphere and Asian operations. He was replaced by Pierre Choquette, the president and chief operating officer of the parent corporation’s Novacorp International unit. Wade left Methanex to start up an investment firm, but he would continue to serve on the company’s board as a strategic adviser.

Although the use of reformulated gasoline did not increase as much as anticipated, a shortage in methanol in 1994 led to an unprecedented spike in the commodity’s price and, in turn, resulted in massive profits for Methanex. Priced around 30 cents a gallon in 1993, methanol reached $1.55 per gallon on contract sales and as high as $1.80 on the spot market. For the year, Methanex posted a net income of $442.7 million on sales of $1.5 billion, compared to $10.7 million in net income on sales of $533 million the year before. A number of chemical companies now began making plans to reopen shuttered methanol plants or to build new facilities, prompting fears that the market would eventually become glutted as these new sources of the commodity became available.

Taking advantage of its leading position in the industry, Methanex was able to build a war chest in excess of $400 million in order to ride out the inevitable downturn in methanol pricing. Aside from the cyclical nature of the business, methanol faced more serious political and marketing challenges from a rival alternative fuel: ethanol, which was derived from corn and backed by powerful agribusinesses. In the midst of methanol’s price run-up in 1994, the safety of MTBE was called into question by U.S. ethanol lobbying groups, who alleged that MTBE could cause headaches and dizziness when drivers filled up at the pump in cold weather. The price of Methanex stock suffered a downturn but quickly recovered.

Methanol prices in early 1995 fell as quickly as they had risen the year before. The increase in the cost to manufacture MTBE due to high methanol prices had put a damper on the sale of reformulated gasoline, and states successfully petitioned the Environmental Protection Agency for leeway on meeting the goals of the reformulated gasoline program. Furthermore, foreign countries were not converting to reformulated gasoline as much as had been expected. Decrease in demand coupled with new production capacity led to a fall in the price of methanol as well as Methanex stock. The formaldehyde business remained strong, however, and the government mandate for cleaner fuels appeared to insure a continuing need for MTBE, making the drop in price more a correction than a crisis for a company like Methanex. Nevertheless, it agreed to sell off a jointly owned ammonia plant for $84 million to Mitsui & Co. in order to focus on its core business. Although not as successful as it had been in 1995, Methanex still realized a net income of $191.7 million on revenues of $1.25 billion.

Company Perspectives:

Since the early 1990s, Methanex has expanded its global methanol production and marketing reach and has carried out a strategy designed to enable us to become a low-cost producer and preferred supplier in the methanol industry.

Methanol Prices Recover in 1996

After bottoming out in 1995, the price of methanol began to rise again in 1996. Methanex began implementing a strategy to build on its competitive edge in the industry. It reduced its cost structure, primarily by replacing high-cost facilities, such as those located in New Zealand and North America, in favor of new low-cost plants in Chile. Furthermore, Methanex improved operating efficiencies and lowered shipping costs. It also signed long-term charter agreements on a fleet of dedicated methanol tankers as well as invested in terminal facilities. In all, Methanex was positioning itself to be able to prosper in any part of the methanol price cycle. In 1996 the company saw its sales drop to $945.7 million. After taking a write-down of $93 million in order to close high-cost facilities, it reported a net loss of $7.9 million.

The methanol industry was consolidating in 1997, divided up among three primary players: Methanex, producers in Saudi Arabia, and producers in Trinidad and Tobago. Methanex tried to strengthen its position by acquiring the Trinidad Tobago Methanol Company, but was thwarted by the German petrochemical company, Helm AG, which had first-refusal rights to the 69 percent stake controlled by the government of Trinidad and Tobago. Methanex made other plans to expand low-cost production capacity by building a new plant in Asia that would begin operations in 2002. The company also formed a joint venture with Qatar General Petroleum Corp. to build a methanol plant in Umm Said, giving Methanex a presence in the Middle East. With its size and liquidity, Methanex was also able to buy methanol on the spot market in order to prop up the price in 1997. The company would produce what it designated as the second best year in its history. Net earnings of $202 million were realized on sales of almost $1.3 billion.

The following year, however, would see Methanex and the industry as a whole suffer through one of its worst years. The price of methanol plunged to its lowest level in a decade, caused in part by weak demand for MTBE and a financial crisis in Asia, but mostly attributed to an overabundance of supply. New production capacity far outstripped the world’s need for methanol. Methanex reported a net loss of $68 million on sales of just $721 million. With a new low-cost plant in Chile ready to come onstream in 1999, Methanex decided to shut down high-cost facilities in North America, but with two other large plants of competitors scheduled to begin production the oversupply of methanol would continue to hurt the industry.

Demand for methanol derivatives was actually quite strong in both the United States and worldwide. The robust U.S. economy was expanding rapidly and the demand for both acetic acid and formaldehyde used in building supplies and consumer goods had a positive effect on methanol sales. Methanex, as it lowered its production costs, was in a better position than its competitors to take advantage of the increasing need for methanol when the oversupply of methanol invariably corrected itself. More and more the sore spot was MTBE. Its potential to spur methanol sales had been a major factor in the creation of Methanex and had caused chemical companies to add production capacity that had resulted in a glutted market. Increasingly MTBE came under fire from environmentalists and the producers of ethanol.

The methanol industry suffered a blow with potentially devastating effects when in March 1999 California Governor Gray Davis signed an order to phase out the use of MTBE by 2002 because of concerns that the additive was contaminating groundwater. Because California alone accounted for 6 percent of the company’s sales, Methanex replied aggressively. It argued that the real environmental problem was leaking underground gasoline storage tanks that the state had failed to properly monitor, pointing out that MTBE was just one of a number of chemicals in reformulated gasoline that was leaking into the groundwater. The company further argued that stronger emission standards on boat engines would also protect drinking water, and that by banning MTBE the state, in addition to raising the price of gasoline, was more likely to add to air pollution than it was to alleviating water pollution.

Methanex then turned to the investor rights provisions of NAFTA to file a claim against the U.S. government for $970 million in damages for business lost due to California’s MTBE ban. In the ten days following the governor’s decision, Methanex stock lost $150 million in value, and the company contended that its stock had also declined in the two years since the MTBE safety issue was first raised in California. The company was more likely interested in reaching a compromise with California on environmental issues than actually receiving monetary damages. As the State Department determined who would negotiate on behalf of California, as provided by NAFTA, Methanex filed another NAFTA-based complaint. It charged that California violated U.S. treaty obligations by not enforcing state and federal environmental laws, namely California’s failure to make property owners meet a December 1998 deadline to upgrade some 16,000 underground gasoline tanks. The spokesperson for California’s Environmental Protection Agency dismissed the claim, saying that“the allegation has nothing to do with the enforcement of environmental laws and everything to do with Methanex desperately trying to hold on to the California market for MTBE.”

As its claims against California slowly proceeded through the legal system, Methanex announced results in 1999 that were even poorer than the previous year. On sales of $695 million the company posted a net loss of $150 million. Demand for methanol, including MTBE, was high, but oversupply remained a source of trouble. With its cash reserves Methanex remained healthy and began efforts to consolidate industry-wide production in order to stabilize the price of methanol. As part of this effort, Methanex acquired Houston-based Saturn Methanol for $28 million in April 2000. The company also looked to develop new uses for methanol by joining automakers and other companies in developing cars that run on fuel cells using methanol.

Key Dates:

1968:: Ocelot Industries is incorporated.
1991:: Ocelot spins off Methanex Corporation, with Metallgesellschaft as major shareholder.
1993:: Merger leads to Fletcher Challenge becoming company’s major shareholder; Nova Corp. gains control by the end of the year.
1994:: A sharp increase in methanol prices leads to record profits.
1999:: Company files NAFTA claim in response to California ban on MTBE, a gasoline additive.

Methanex rebounded in 2000, posting net earnings of $145 million on sales of $1.06 billion. Because of high natural gas prices in North America, methanol production essentially shut down in the continent, allowing Methanex with worldwide facilities to take advantage of the resulting rise in the price of methanol. Going forward in 2001, the company’s fight with California over MTBE continued to linger. It heated up in March 2001 when Methanex charged, in an amendment to its NAFTA claim, that Governor Davis was improperly influenced by political contributions from Archer-Daniels-Midland Co., a maker of ethanol. Although Governor Davis acknowledged that his campaign received about $200,000 from Archer-Daniels, he denied that his decision to ban MTBE was influenced by the contributions.

Whatever the outcome of the company’s claims against California, Methanex with its cash reserves was well positioned for the future. Aside from MTBE, methanol would continue to be needed by a variety of industries. Furthermore, if Methanex’s efforts at diversification were successful, the company could expect continued growth.

Principal Subsidiaries

Methanex Fortier Inc; Methanex Methanol Company; Waterfront Shipping Company Limited (Barbados); Methanex New Zealand Limited; Methanex Chile Limited; Methanex Europe NV (Belgium).