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On May 21, we upgraded our recommendation on leading methanol producer Methanex Corporation (MEOH - Analyst Report) to Outperform factoring in the strong methanol demand environment. While the company remains exposed to natural gas curtailment issues, it is poised to gain from capacity expansion and its Geismar methanol project.

Why the Upgrade?

Methanex’s profit soared more than two-and-a-half fold year over year in first-quarter 2013, reported on Apr 24, helped by lower costs and higher pricing. The company benefited from growing demand for methanol in the energy industry. However, both revenues and earnings fell short of the Zacks Consensus Estimates.

Methanex, which carries a short-term Zacks Rank #1 (Strong Buy), is the world’s largest supplier of methanol. The company 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.

Despite the global economic weakness, demand for methanol remains healthy driven by energy-related applications in Asia, particularly in China. The wide disparity between the price of crude oil and that of natural gas and coal has resulted in higer use of methanol in energy applications, which now accounts for roughly a third of global methanol demand.

Methanex’s healthy financial position, strong global supply network and competitive-cost position is expected to strengthen its position as the global leader in the methanol industry and enable it to continue to deliver incremental returns to shareholders. The company’s Board, in Apr 2013, approved an 8% hike in its quarterly dividend to 20 cents per share.

Methanex has taken up a number of steps to boost capacity. The company is progressing well with the relocation of the first Chilean plant to Geismar, La., and recently announced the relocation of the second Chile plant. We are optimistic about the Geismar project which is expected to create significant value for its shareholders.

With the continued initiatives to increase production in New Zealand and progress in the Louisiana project, the company has the potential to increase its operating capacity and pursue other strategic growth opportunities over the next few years, which in turn, will contribute to cash generation and increased supply to customers.

Other Stocks to Consider

Other companies in the chemical space that are worth considering include Shin-Etsu Chemical Co., Ltd. (SHECY), Celanese Corporation (CE - Analyst Report) and FMC Corp. (FMC - Analyst Report). While both Shin-Etsu Chemical and Celanese retain a Zacks Rank #1 (Strong Buy), FMC holds a Zacks Rank #2 (Buy).

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