Market Intelligence: US chemicals has resilience to conquer challenges

US will overcome obstacles

07 April 2008 00:00  [Source: ICB]

Joe Kamalick/Washington DC

DESPITE A raft of challenges ranging from high energy and feedstock costs to ever-increasing environmental and security regulations, the US chemical sector will prosper and even triumph, say veteran industry officials.

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

US petrochemical producers are perhaps most concerned that continuing increases in the cost of natural gas, which is a key feedstock for US chemical manufacturers, will narrow their margins and drive capacity and jobs overseas. North American natural gas 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 says. "There have been worldwide feedstock cost increases," he notes, 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, says 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 says.

"That's how you keep ahead of the game, finding ways to do things better," he adds, 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 natural gas costs pose a challenge, but one the sector has met before.

"Natural gas input costs are significantly different than the industry is accustomed to," Slaughter says, but he recals that US natural gas 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 $4m Btu in the late 1970s.

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

"We are again seeing big shifts in gas prices, and the use of gas for power generation is a new demand source that chemical producers have to compete with. 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," he says.

"I think the story is how well American companies have adapted to that international competition," Slaughter concludes.

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

"It is the nature of capitalism," Sternfels says. "We have an economic system that promotes and supports [aggressive] competition. We don't have to get government permission to innovate."

Slaughter is in agreement, saying: "The US capitalist system gives us maximum flexibility to adapt to market competitiveness. 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 express concern about a rapid growth in government regulations, both domestically and globally, especially the EU Reach program and pending legislation in the US.

Citing pending US Senate legislation that would impose a cap-and-trade emissions mandate on US industry, Sternfels says: "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 that will go forward with industrialization and related emissions without concern," he says.

Slaughter cautions 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 says that while imposition of a cap-and-trade system is likely to teach its own lesson - with the loss of jobs - industry can ill afford to let that happen.

"People will 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. "Change and the rapidity of change is faster now than before, but I believe the industry can triumph," he says.

Says Sternfels: "We will always find ways to do it better, cheaper and more efficiently than our competition, pursuing process and product technologies that produce results."

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