INSIGHT: Low-cost ethane raises US commodities vs specialties debate

04 January 2012 16:19  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--US mid-stream energy firm Enterprise Products Partners has confirmed that it plans to bring ethane from the Marcellus and Utica shale deposits to the US Gulf Coast through a pipeline that will stretch for 1,230 miles (1,979km).

A possible 190,000 bbls/day of the feedstock will be pumped into a market which currently consumes 955,000 bbls/day. The new volumes would be sufficient to support the production of an additional 3m tonnes/year of ethylene.

The magnitude of shale gas ambitions in the US oil, gas and chemicals sectors should never be underestimated.

In chemicals, an abundance of low-cost feedstock will prove to be a game changer. In some eyes it even changes the very nature of the business.

Low-cost ethane puts US commodity petrochemical and polymer producers on a strong competitive footing, second only to certain players in the Middle East.

Lower costs of production will make more US volumes more competitive on global export markets.

Recent analysis has also suggested, however, that commodity producers with such a low cost feedstock position will become more attractive to investors.

Players’ margins will be stronger, less cyclical and far superior to cost disadvantaged commodity chemical producers, US-headquartered Alembic Global Advisors co-founder and lead analyst Hassan Ahmed said in a research note released early last month.

The margin profile for the newly-energised players cracking ethane would also be comparable to companies producing specialties, he suggested.

“We believe the earnings profile and cost curve position of US ethane-based producers in the current low US natural gas cost environment is far more comparable to mixed feed MENA [Middle East, North Africa] producers,” Ahmed said.

“With that said if this cost advantage continues we should expect to see US commodity producer margins to outperform specialty margins with comparable volatility.”

Stronger margins are known to translate directly into a stronger share price performance and better earnings multiples.

Ahmed makes a compelling argument that opens up the debate about the attractiveness to chemicals players of commodities and specialties.

The industry trend in the developed western and Japanese markets for years has been towards higher added-value specialties with a stronger intellectual property (IP) component.

But the battles in this business space have been fierce and are likely only to intensify as new players enter the fray.

IP advantage is more difficult to defend than straightforward commodity feedstock and energy costs. And the race to keep ahead in terms of new product development has become increasingly tough and increasingly costly.

Chemicals demand patterns are changing too with the sheer size of the US and western European markets overshadowed by an expanding China and the low-cost position of most players in the Middle East.

Globally, the petrochemical industry faces a fascinating period as the feedstock position develops in the US and as China and other emerging market demand booms. China is adding significant additional olefins, petrochemical and chemicals capacities and global supply/demand patterns are changing.

Demographic shifts in the US, Europe and Japan and the shift of the developed world economies away from manufacturing towards services are having a deep impact on demand growth for both commodities and specialties.

The US and other developed world chemical industries have become “decoupled” from the general economy with increasing reliance for growth put on global and emerging markets.

Putting additional volumes from the cost-advantaged US Gulf Coast producers into this heady mix raises numerous questions and not simply for home grown producers.

“We further contend that in a cost advantaged hydrocarbon pricing environment the further you move away from the barrel of oil or stream of gas the greater the margin deterioration,” Ahmed said in the Alembic report. “Said differently you make superior margins by converting ethane to ethylene than [by] moving further downstream be it on the commodity side or the specialty side.”

Having sought a stronger competitive position by moving downstream, some players are focusing now on making bigger, positive competitive moves at the cracker.

The commodity player will gain ground in this expected low-cost feedstock environment. But the integrated producer, and perhaps especially those few who are fully integrated downstream into higher added value specialties, will reap the greatest rewards.

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By: Nigel Davis
+44 20 8652 3214

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