FocusUS shale-based 'platinum age' to shake up global markets

06 March 2012 17:00  [Source: ICIS news]

LONDON (ICIS)--A “platinum age” for the shale-gas based US chemical industry will have far-reaching consequences for the global industry, including a major assault on European polymer markets and disruption to current material use down the supply chain, senior consultants said on Tuesday.

Cheap ethane has made the US industry far more competitive than European competitors, which will suffer a flood of exports from the US as well as naphtha-based cracker closures. Meanwhile, the domestic US supply chain will go through massive upheaval as materials based on ethane derivatives replace oil-based products, according to consultants from global advisors Booz & Co. 

Projections from Booz suggest that North American ethylene production will grow from 29m–30m tonnes in 2012 to 43m–45m tonnes over the next 10 years just on the basis of announced plans. Even if there are project cancellations and only 50–60% are built, there will still be a significant amount of excess capacity available for export.

Booz partner Dennis Cassidy said: “This is the platinum age of the rebirth of the chemical industry in North America. The industry will become a leading exporter to Europe because local demand will be filled up pretty quickly. That’s a bold step out for an industry that has been, frankly, shy to make capital investments because of the cyclicality of the industry.”

Booz figures show just how much of a game-changer shale gas has been for polyethylene (PE) producers in the US. Over the past 3–4 years they have moved from the far right of the cost curve – representing high feedstock costs and low competitiveness – to arrive almost on a par with the Middle East. European producers, meanwhile, have become much less competitive.

Their analysis also shows how in 2007, 50% of US ethylene was produced from ethane and close to 30% from naphtha. Last year the share from naphtha had dropped to 14–15%, while 65–70% was produced from ethane.

Jayant Gotpagar, principal at Booz, said: “There has been a huge swing and we believe this will continue because of the fundamental drivers of oil and gas prices. Companies are also investing to make a significant amount of capacity flexible. Around 85–90% is already flexible and can respond to these price signals.”

European cracker operators will be hit hard by an influx of US ethylene-based derivatives. Even though European crackers benefit from producing high-value naphtha-based derivatives, they will still be less competitive, according to Booz.

Cassidy said: “In Europe crackers will run at reduced rates and then close. Despite the downstream effect, European crackers will be moving further to the right of the supply curve. If demand dips they’ll be the first to be marginalised. The US went through this period in the 1990s and 2000s and now we’ve handed the baton back to Europe.”

Shale is also going to drive changes along the supply chain from resin producers through to specialty chemical companies and downstream convertors. Gas-derived molecules will be much cheaper than their oil-derived competitors, leading to product substitution, Booz said.

“The shale gas revolution has been a huge upset for specialty chemical producers," Cassidy said. "If you’re linked largely to the oil chain you have to be conscious of the fact that although you may have superior qualities in your molecule, the substitution effect is being revisited by the commodity players.”

Along the supply chain, specialty chemical producers and convertors are examining their product portfolios and production strategies, he said. “The price versus value question is being revisited by all the material buyers. In blends and compounds there can be product substitution. Do I need to have 100% of the oil-based commodity or could I blend in some other products to give the same if not better properties?

“It’s quite early days for the application development guys," he added. "A lot of products have a reasonable testing and certification process to go through. We’ll see it in the next couple of years. It’s on the minds of the specialty producers – the whole value chain including the resin manufacturers.”

According to Booz analysis, companies that were planning to invest in biochemical production are now asking if this will be economically viable, because gas feedstocks are so cheap.

“Initially people were thinking in terms of biofuels and biochemicals," said Cassidy. "Cheap natural gas – using the Sasol GTL [gas-to-liquids] route for example – has now leapfrogged some of the specialty chemical niche biofuel approaches which some companies were heading down. It’s caused some to revisit their niche strategies in some of these boutique markets they were planning to attack."

By: Will Beacham
+44 20 8652 3214

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