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Leading methanol producer Methanex Corporation (MEOH - Analyst Report) has forged a 10-year supply pact with Oklahoma-based Chesapeake Energy Corporation (CHK - Analyst Report), the second largest natural gas producer in the U.S.

Under the agreement, Chesapeake will supply natural gas for Methanex's methanol plant in Geismar, La. The supply will begin with the startup of the 1-million ton plant, which is expected in late 2014.

The contract is uniquely structured so that the price of natural gas is linked with methanol price. Both the entities will share the risks and benefits arising from the methanol price changes over the tenure of the agreement.

Methanex, in Nov 2012, received the necessary air permits from the State of Louisiana and the Environmental Protection Agency (EPA) to build and operate its Geismar methanol project.

The project is expected to complete in less time and will involve significantly less capital compared with a similar greenfield methanol plant. Methanex expects that the project will also create significant value for shareholders. The agreement with Chesapeake lowers Methanex’s exposure to short-term methanol price changes.

Methanex feels that the methanol industry and its pricing environment appear attractive in the longer term as global demand is expected to surpass new capacity additions. The company, however, sees upward pressure on methanol prices in the fourth quarter of 2012 stemming from steady demand and industry outages.

Nevertheless, the company believes that its healthy financial position, strong global supply network and competitive-cost position will strengthen its position as the global leader in the methanol industry and enable it to continue to deliver incremental returns to shareholders. Methanex will report its fourth quarter results on Jan 30.

Methanex currently holds a short-term Zacks Rank #5 (Strong Sell).

Other companies in the chemical industry with a favorable Zacks Rank are Arkema S.A. (ARKAY) with Zacks Rank #1 (Strong Buy) and L'Air Liquide SA (AIQUY) with Zacks Rank #2 (Buy).

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