INSIGHT: US industry can beat challenges

31 March 2008 00:13  [Source: ICIS news]

By Joe Kamalick

 

SAN ANTONIO, Texas (ICIS news)--Despite a raft of challenges ranging from high energy and feedstock costs to ever-increasing environmental and security regulation, the US chemicals industry will prosper and even triumph, veteran industry officials say.

 

“This has always been a very dynamic industry, and its people have always been able to find ways to make things work,” said Urvan Sternfels, former president of the National Petrochemical & Refiners Association (NPRA).

 

US petrochemical producers are perhaps most concerned that continuing increases in the cost of natural gas - a key feedstock for US chemical manufacturers - will narrow their margins and drive capacity and jobs overseas.

 

North American natgas prices held steady at around $2/m Btu in the decade leading up to 1999 but amid growing demand - especially from the electric power sector - prices began a steady climb to about $9/m Btu this year.

 

“I think those pricing pressures are surmountable,” Sternfels said.  “There have been worldwide feedstock cost increases,” he noted, citing oil at above $100/bbl, “and that helps us stay competitive relative to others.”

 

Sternfels, who served as NPRA president for 21 years before retiring in 2002, said that increasing energy and feedstock costs for US producers will perhaps influence a drift from basic commodity chemicals to specialties.  “There is more profitability in value-added products, and the industry will always find ways to innovate and add value in ways that maintain profit margins,” he said. 

 

“That’s how you keep ahead of the game, finding ways to do things better,” he added, noting that “we can’t do much more in commodities, in terms of adding value, except to reduce processing costs.”

 

Bob Slaughter, who succeeded Sternfels as NPRA president in 2002 and served in that job until he retired in 2006, also concedes that rising natgas costs pose a challenge to industry, but it is one the sector has met before.

 

“Clearly, natural gas input costs are significantly different than the industry is accustomed to,” Slaughter said, but he recalled that US natgas prices were as low as 50 cents/m Btu in the 1950s and 1960s before escalating - in part due to government intervention in the market - to around $3 or $4 in the late 1970s.

 

“Some deep gas was even selling for $7/m Btu for a while then, which would be more than $20/m Btu today,” he said.

 

“It amazes me that there is so much transition and people have so little memory,” he added.

 

“Now we again see big shifts in gas prices, and the use of gas for power generation is a cause for alarm as a new demand source that chemical producers have to compete with, and this makes it difficult for industrial consumers who have to compete in international markets and in some cases against foreign firms where host governments keep feedstock costs artificially low.”

 

“The point is that in every decade things look significantly different for those making or planning capital investments,” Slaughter said.

 

“I think the story is how well American companies have adapted to that international competition,” he said, “although you do run up against some economic realities that make it difficult to compete in certain products in certain regions.”

 

Both former NPRA presidents cited the US capitalist economic system as underlying industry’s ability to meet and overcome obstacles.

 

“It is the nature of capitalism,” Sternfels said.  “Our industry has been one that has demonstrated the kind of aggressive behaviour in pursuing ways to keep ahead of the competition.  History speaks loudly to this.”

 

“We still manage to do it because we have a form of economic system that promotes and supports that kind of competition,” Sternfels said.  “We don’t have to get government permission to innovate.”

 

“The US capitalist system gives us maximum flexibility to adapt to market competitiveness,” Slaughter said, adding: “Significant changes will continue to occur, and the industry will adapt and get ahead of the curve as it always has.”

 

Still, both Slaughter and Sternfels expressed concern about a rapid growth in government regulations, both domestically and globally, especially the EU programme for registration, evaluation and authorisation of chemicals (Reach) and pending legislation in the US to impose a cap and trade carbon emissions mandate.

 

“We keep trying to do it to ourselves,” Sternfels said of the US political environment where legislative efforts to impose “one or another form of command and control” on industry continue to resurface from time to time.

 

Citing pending US Senate legislation that would impose a cap and trade emissions mandate on US industry, Sternfels said:  “Trading the right to emit doesn’t accomplish emissions reductions, it just spreads it around from state to state or nation to nation.”

 

“We can’t stop emissions without losing the standard of living we have, and we can’t control developing nations who will go forward with industrialization and related emissions without concern,” he said.

 

Slaughter cautioned that chemical companies and their trade groups “need to make sure that legislators - especially in areas of the country where the industry has a major presence - are made aware of the impact that cap and trade would have on business and their constituents”.

 

He said that while imposition of a cap and trade system would likely teach its own lesson - with the loss of jobs - industry can ill afford to let that happen.  “People will of course respond [politically] to economic conditions such as job losses, but that process could take years to unfold, and the relationship of those employment losses to a cap and trade system might not be seen by the general population, so it is up to industry to make those facts known ahead of time.”

 

That said, Slaughter holds that the broad US chemicals sector will meet its challenges, adapt and advance.

 

“I believe the industry can triumph,” Slaughter said.  “Change and the rapidity of change is faster now than before, but I believe the industry can triumph.”

 

“We will always find ways to do it better, cheaper, more efficiently than our competition and act on it, pursuing process and product technologies that produce results,” Sternfels said.

By: Joe Kamalick
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