Methanex downgraded after plant shutdown in Egypt

Civil unrest in Egypt is clouding the outlook for Vancouver-based Methanex Corp. (MEOH-Q23.810.230.98%), the world’s largest maker of methanol that counts on the country for a good chunk of its production.

On Monday, the company announced it temporarily shut down its 1.3-million-tonne-per-year methanol plant in Damietta, Egypt, following recent skirmishes that have affected various industries in the area. Media reports suggest protests began over the weekend in response to Agrium’s (AGU-T78.27-0.79-1.00%) decision to build two new fertilizer plants, later escalating into violent clashes with army units. Several deaths were reported.

“While none of this anger has reportedly been steered at Methanex, and the unrest appears unrelated to the popular uprising earlier this year, management felt the unrest threatened employee safety, prompting the temporary shutdown,” commented Raymond James Ltd. analyst Steve Hansen in a research note today.

Mr. Hansen notes that Egypt accounts for about 18 per cent of the company’s production and roughly a quarter of its earnings. He calls the suspended plant Methanex’s “crown jewel,” thanks to its low costs and enviable gas contracts and geography.

The lost production will “undoubtedly” impact fourth-quarter results, he said. “The challenge, however, is predicting the duration—possibly days, possibly weeks.”

For now, he’s taking a cautious approach, downgrading Methanex to “outperform” from “strong buy.”

But he remains upbeat on the industry overall: “We continue to believe that after several years of large capacity additions, very little new low-cost supply is expected over the next five years. Underlying demand, meanwhile, is expected to remain healthy,” Mr. Hansen said.