1. Raw Image Consulting LLC
Aaron Katzman
Andrea Keo
Bridget Stokes
Jackie Ling
Jenna Boroozad
Philip Lee
Image
Consulting
1

2. Key Issues
 New Trade Regulations in Chile & Political Instability
in Egypt
 Plant capacity set idle (2.9 M tons in 2012)
 Majority of Plants are Producing Under Maximum
Capacity
 Producing at 43% capacity in 2012
 Growing Health Concerns of Formaldehyde & MTBE
 Account for 45% of global methanol demand
 Not Diversified
 Could not hedge costs associated with idle plants
~$1.3 billion dollars in lost revenues
2

3. SWOT Analysis
• World’s largest producer of Methanol
• Cost-Leadership / Focused Strategy
• Owns distribution channels
• Owns storage facilities
• Low labor costs
• Globally diversified
• Long-term contracts with Natural Gas
Suppliers
Internal
Positive Negative
External
STRENGTHS S W WEAKNESSES
OPPORTUNITIES O T THREATS
• Growing demand for alternative fuel
• Increase in environmentalism
• New findings for uses of methanol
• Production facilities not utilized
• No product diversification
• High operating expenses
• High Supplier power
• Political instability
• Inconsistent natural gas prices/supply
• Global recession
• Revised trade regulation in Chile
• Growing concern on health effects of
Formaldehyde
3

4. Methanol Production & Distribution Value Chain
4

5. Alternative Strategy #1
 Advantages:
 Decrease reliance on suppliers
 Decrease operating expenses
 Disadvantages
 Highly competitive industry
 Requires large initial capital investment
 Requires high level of expertise
Move into Natural Gas Industry
5

6. Alternative Strategy #2
 Advantages:
 Growing demand for these alternatives
 Diversification could counteract periods of instability in
current industry
 Disadvantages
 Does not currently possess the know-how in these fields
 Requires large initial capital investment
 Risk associated with entering new markets
Diversify into high growth potential markets:
6
Fuel Blending, dimethyl-ether (DME), & Methanol to
Olefin (MTO)

7. Proposed Strategy
 Step 1: Expand Into China & Asia-Pacific
 Step 2: Relocate Chilean facilities to United States
 Step 3: Produce at maximum capacity
Expand into Emerging Markets &
Strengthen Cost-leadership Structure
7
Simultaneous

8. Step 1: Expand Into China & Asia-Pacific
Global Demand by 2016:
Asia: >70%
N. America: <20%
Latin America: <10%
Europe: <20%
8

9. Step 1: Expand Into China & Asia-Pacific
Methanol
Dimethyl Ether (DME)
Olefins
Gasoline/Fuel
[Shift in Global Demand
2007  2016]
3% to 10%
0% to 10%
14% to 19%
9

10. Step 1: Expand Into China & Asia-Pacific
 Expand Into China & Asia-Pacific
[Demand in 2007] [Demand in 2016]
Dimethyl Ether (DME)
Dimethyl Ether (DME)
Gasoline/Fuel Gasoline/Fuel
Olefins
10

11. Step 1: Expand Into China & Asia-Pacific
 Establish long-term contracts with Chinese companies
that are involved in Methanol to Olefins (MTO) process
 Practice equity sharing with MTO & DME companies in
China
Methanol Olefins
0% to 10%
[Shift in Global Demand
2007  2016]
11

12. Step 1: Expand Into China & Asia-Pacific
Number of MTO
Plants Under
Construction: 5
Number of MTO
Plants Running: 1
12

13. Step 2: Relocate Chilean Facilities to U.S
13
 Annual Capacity of Chile I, II, III, IV: 3.8 Million Tons
 2012 Current Production: 313,000 Tons = 8% capacity
 See “slide 31” for potential buyers
 Global Demand of Methanol:
 Latin America: ~4%
 Asia: ~59%
 Keep Office and Storage Facilities
 Continue to supply Latin America through Trinidad plants

14. Step 2: Relocate Chilean Facilities to U.S
Impact of Shale
Gas:
56% increase in total
gas production from
2012 to 2040
14

15. Step 2: Relocate Chilean Facilities to U.S
2012 2040
Natural gas production
growth: 1.6%/yr
Consumption growth:
0.8%/yr
15

16. Step 2: Relocate Chilean Facilities to U.S
[Natural Gas Prices]
16
US: Price
Germany
UK
Japan

17. U.S. Site Locations:
17
 U.S. Site Locations:
 3 on the west coast
 For distribution to
China (~6000 mi)
 1 on the east coast
 For distribution to
Europe (~4000
mi)

18. Step 3: Produce at Maximum Capacity
18
2012 financial info:
Production Output =
66%
Max Production :
Increase revenue
~$855 Million
5660 3758
Annual Report (2012)

19. Step 3: Produce at Maximum Capacity
 Set up Long-Term Non-Equity Contracts with Natural Gas
Suppliers
 Easy to initiate/ terminate
 Locate Suppliers in Proximity to Existing Plants
 New Zealand: Australian pipeline
 Trinidad: purchase more from current suppliers
 Canada: U.S suppliers
 Egypt: continue negotiations with government
19

20. Qualitative Reasoning for Proposed Strategy
This Strategy is Imperative Because:
 Current disruption in distribution will hurt customer loyalty
 The inflexible business structure will result in lost
opportunities
 Losing the position as the cost-leader will cause
Methanex to forfeit its ability to influence short-term prices
of methanol
20

21. Cost / Benefit Analysis
 Cost
 Could lose money in sale of facilities
 High transportation costs for relocation
 Switching costs for new suppliers in U.S.
 Benefit
 Increase sales volume due to new facilities & producing at
max capacity
 $1.8B + $855 M= Total of $2.66 Billion in additional revenue
21

22. Financing the Project
22
Relocation:
 Cost to Relocate:
 ~$500M per production facility (Methanex estimate)
 Plan of Action:
 Export all useable production equipment to U.S. plants
 Use proceeds from the sale of land and buildings in Chile to
help expand our operations in North America and Asia.

23. Financing the Project
23
 NPV of the Relocation Project (10-year time horizon):
 ~$2.1 billion – See Capital Budgeting Analysis: “Slides 30-31”
 North American Plants Will Produce at Maximum
Capacity:
 Revenues increased to $450 million per plant
 Cash savings from operational efficiencies plant

24. Financing the Project
24
 Relocation Project
 Issue $500 million in 10yr corporate unsecured debt at a rate
of 5.25%.
 Utilize the $750 million in excess cash
 Effect on Financials:
 Increasing long-term debt balance to $1.745 billion
 Increasing Debt/Capitalization ratio to 64%.
 Increasing Debt/Equity ratio to .58%

25. Implementation Plan / Timeline
• Relocate two
Chilean plants to
west coast
• Negotiate an
equity sharing
strategy with MTO &
DME plants in
China
• Establish Long Term
contracts with
natural gas
suppliers
• End Construction
of last two plants
• New and current
plants producing
at maximum
capacity
• Pay down debt
utilized for
relocation
Year 1-2 Year 3-4 Year 5-7 Year 8-10
• Relocate one
more facility to
west coast and
last facility to
east coast
25

26. Limitation / Contingencies of Proposed Strategy
 Expand Into China & Asia-Pacific
 Unexpected changes in regulations
 Risks involved with cultural differences
 Relocate Production Facilities to N. America
 Highly specialized facility and equipment may be a
sunk-cost
 High costs associated with new region
 Produce at Maximum Capacity
 Difficulty in establishing trust with new suppliers
26

27. Questions?
27

28. 28
Capital Budgeting Analysis

29. Capital Budgeting Analysis cont..
29

30. Other Financing information:
 Current Ratio – measures the ability to pay short term
obligations
 Current ratio = current assets/current liabilities = 3.30
 Quick Ratio – measures a company’s ability to meet its
short-term obligations with its most liquid assets.
 Quick ratio = cash + accounts receivable/current liabilities = 2.67
 Interest Coverage Ratio - a measure of a company's
ability to meet its interest payments.
 ICR = EBIT/interest expense = 3.62
30

31. Who will Purchase Facilities in Chile?
 MGC (Mitsubishi Gas Chemical) owns methanol joint
venture in Venezuela
 MSK- Holds methanol equity positions in Venezuela
 Petrobras- Brazilian oil & natural gas exploration &
production
 ENAP- exploration & production activities for natural gas
(Santiago, Chile)
31

32. References
32
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http://www.impca.du/en/about_methanol/
Gurney, Judith. "Review: BP Statistical Review of World Energy." Journal of Policy Analysis and Management 4.2 (1985): 283. Web.
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