INSIGHT: Making plans for the US derivatives wave

02 July 2012 15:29  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--While the focus has been largely on the upstream, the shale gas revolution in the US will only be realised if investment is sustained along multiple value chains.

The opportunities are significant yet they rest squarely on continued growth in US manufacturing and on many firms making successful inroads into emerging markets.

There is no doubt that the US chemicals sector is being transformed by shale gas. An industry that was once in the doldrums has been revitalised.

But as business advisors KPMG said late last month, the growth prospects for chemical makers are almost entirely dependent on their ability to extend businesses effectively into high growth markets. “Failing that, the US [chemicals] market is destined to fall back into the historic cycle of oversupply followed by rationalisation.”

The near-term challenge is one of oversupply in important building block chemicals – first ethylene but potentially propylene and C4 olefins. That oversupply might reach a peak over the next four to five years if current planned projects materialise.

Some $25bn (€20bn) is being invested in about 30 expanded or new chemicals production facilities, the American Chemistry Council (ACC) says. Given that the major olefins intermediates help provide the raw materials for industry, the lift given to chemicals is expected to play a key part in a resurgence of US manufacturing.

That can only work if the cost advantage gained by olefins makers is passed down the value chain (which might happen in an over-supplied market), at least to some extent.

Lower costs could free up money, allowing manufacturers to invest in plants and increase production.

As we said in Insight last month, US goods could become more competitive against foreign products and certain offshore plants could be moved back to the US in a process called reshoring.

But manufacturers will only benefit initially if they are significant consumers of energy. Other costs to industry make the US a relatively high-cost operating environment.

“The US remains a mature market which will be unable to absorb all the announced [chemicals] capacity likely to flow from shale gas investments,” KPMG said.

“The discovery and commercialisation of shale gas has already provided a lift to the overall US economy through job expansion, the availability of lower-cost products and cheaper fuel bills.

“US consumer spending is expected to pick up speed, growing by approximately $2,000bn between 2012 and 2016,” it added, citing Economist Intelligence Unit data from late April this year.

But as US domestic production volumes of olefins derivatives rise so more companies will have to export those to faster-growing international markets.

“This will require a significant transformation of operating models for US chemical companies who have traditionally been focused on the US marketplace,” KPMG said.

“Success in the emerging markets will also require a very sophisticated understanding of the pros and cons of each individual market. This must include considerations such as growth prospects, business environment, infrastructure maturity and tax implications, as well as a slew of regulatory and legal considerations such as investor protection, contract enforcement and ease of doing business.”

There are a few ways to do this, including establishing joint ventures with local partners who understand the foreign market, its legal and physical structure.

But, clearly, partners are not necessarily easy to find or joint ventures easy to establish. As with all things to do with shale, companies will have to move fast to make the most of the new found abundance of gas if they have not already done so.

According to KPMG: “US chemical companies need to take actions today that should guarantee markets for products to be produced in four or five years time.”

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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