INSIGHT: Shale gas boosts US chems, trickles down to steel, tyres

31 May 2012 17:00  [Source: ICIS news]

By Al Greenwood

Shale gas boost US chems, trickles down to steel, tyres HOUSTON (ICIS)--The US shale-gas boom, already boosting the chemical industry, is now making its way down the manufacturing chain, cutting costs for steel and tyre producers.

In fact, the nation's oil and gas boom is one of the main topics of the first industry conference being held by the National Association for Business Economics (NABE), a group made up of business economists.

Among the speakers are Robert Fry, senior economist at DuPont; Marianne Kah, chief economist for ConocoPhillips; and Kevin Swift, chief economist for the American Chemistry Council (ACC).

Shale gas has already cut energy and raw-material costs for US chemical producers. Earlier this year, the American Fuel & Petrochemical Manufacturers (AFPM) said shale gas has the potential to cut costs all the way down the manufacturing chain to finished goods, providing the impetus for a resurgence in manufacturing.

Lower costs could free up money, allowing manufacturers to invest in plants and increase production. It could make US goods more competitive against foreign products. And it could encourage offshore plants to move to the US, a process called reshoring.

Already, sectors close to the energy boom are benefitting from the influx of natural gas.

The Baker Hughes rig-count statistics for the US and Canada reached 2,299 in 2011, the highest in the series, which started in 1987.

Rising energy production has increased demand for steel, said Kevin Dempsey, senior vice president for public policy at the American Iron and Steel Institute (AISI).

"One of the real bright spots in the market for steel is the increased demand for steel pipe for the shale gas plays, for all of the horizontal drilling," Dempsey said. "We've got companies making new investments to expand."

New facilities are being built in Ohio, which lies in one of the major shale-gas plays in the northeast US, he said.

Shale gas is also lowering production costs for steel producers, which uses hydrocarbons both as a fuel and a reducing agent to produce iron, Dempsey said.

Companies are even choosing a different route to produce steel, called direct reduction iron (DRI), Dempsey said. In the past, producers did not adopt DRI because the US did not have enough low-priced natural gas.

That has changed, and producer Nucor is building a DRI facility in Louisiana, with plans to expand to a second facility.

Nucor could also build an integrated steel mill, something that no producer has done in the US since the 1950s, said Swift, the ACC's chief economist.

For chemicals, Dow Chemical, Chevron Phillips Chemical and Formosa Plastics plan to build plants that could add 775 chemical jobs.

Those chemical jobs could create another 4,263 jobs, according to the ACC's multiplier effect of 5.5.

Several other companies are considering plans to build chemical plants, such as Shell, LyondellBasell and Sasol. If the companies go through with those plans, the total number of new chemical jobs could easily double to 1,550, assuming those projects follow hiring patterns similar to those of Dow, Chevron Phillips and Formosa.

Those chemical jobs, in turn, could create 8,525 indirect jobs.

There could be even more jobs in the future if chemical companies build derivative plants. Dow expects to do just that to consume the ethylene it will produce from its expanded capacity.

In all, the US has the potential to create 17,000 chemical jobs if the country increases ethane production by 25%, according to a 2011 shale-gas report by the ACC. The report considered both new plants and plant expansions.

In addition, a further 165,000 jobs could be created outside of the chemical industry as well as 230,000 jobs for construction companies and firms that will make the vessels and other equipment for the new chemical plants.

The ACC's forecast, though, was limited to ethylene derivatives. Dow and Formosa plan to build three on-purpose propylene plants, and Eastman is talking with an unnamed producer that plans to build a fourth.

These propane dehydrogenation (PDH) plants could lift sector employment even further, Swift said.

Plus, the industry could get another boost from methane-based chemicals.

Already, Methanex plans to move an idled methanol plant from the southern tip of Chile to Louisiana.

The plant was idled ­– along with two others in Chile ­– because Methanex could not secure enough natural gas in South America.

Downstream in the tyre industry, Bridgestone, Continental and Michelin have all announced expansion plans in the US.

"Five years ago, the consensus wisdom was you were not going to be making tyres here any more," Swift said. "They would be made in China."

Plastic processors could also expand, but this would be harder to measure, since many of these firms are small companies, Swift said.

During a natural-gas meeting in early May, ACC president Cal Dooley said shale gas would have a gradual effect on manufacturing, like a rising tide, and it would play out in the next decade or so.

But whether shale gas will attract manufacturers back to the US will depend in part on the nature of the individual industrial sector, said Harry Moser, president of the Reshoring Initiative. The group intends to attract manufacturing jobs back to the US.

"It will be most significant where energy costs and energy that can be produced with natural gas is a significant portion of the cost of the end product," Moser said.

Moser's group keeps track of the reasons that manufacturers cite for returning to the US. Among the top include wages, currency changes, quality, delivery, travel costs and freight costs.

Total cost was also common, although it was not broken down into raw-material or energy costs.

Plus, for downstream customers to benefit from falling upstream costs, prices would also have to drop, Moser said. Upstream producers could choose to maintain price levels and expand margins.

On the other hand, prices could drop if upstream producers continue to expand capacity and increase supplies.

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By: Al Greenwood
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