Commentary: Calling the macros while US crackers race to completion

07 December 2012 10:31  [Source: ICB]

PICTURE CAPTION:

Global economic growth to slow

QUOTE:

Firms must take a tough look at how they operate. Hoping for a rebound is not a strategy

Dow's CEO sees multiple years of slow global economic growth. In the meantime, companies are racing ahead with new crackers in the US. Can the economy grow out of its funk by then?

Dow Chemical CEO Andrew Liveris is making a call on the global economy - one of multi-year slow growth - and adjusting the company's approach to maximise competitiveness in this environment. But with six world-scale crackers scheduled to come on line in the US in the 2016-2017 timeframe, the economy better grow out of its funk by then.

It is still years away, but the prospect of massive amounts of US ethylene and derivatives capacity coming on in a slow-growth global environment is not something to be relished. Much of that derivatives production will be targeted for exports.

On 3 December, South Africa-based Sasol defined the capacity of its planned $5bn-$7bn (€3.8bn-€5.4bn) ethane cracker in Lake Charles, Louisiana, at 1.5m tonnes/year, at the very high end of cracker sizes. This brings the total planned ethylene expansions in the US - including new crackers, restarts and expansions - to 10.1m tonnes/year, or 38% of existing capacity. But not all the new crackers will come on between 2016-2017. Shell's cracker project in Pennsylvania appears to have a timeline pointing towards completion in 2018-2019, in our analysis.

Taking the Shell cracker out of the equation for 2016-2017, that leaves about 7.3m tonnes/year of additional ethylene capacity added by that timeframe - still 27% of existing capacity.

But as we are still years away from the big wave of capacity additions, the key question is: What happens in between?

In a slow-growth world, companies must take a tough look at how they operate. Hoping for a rebound is not a strategy. "We didn't call the macros two years ago. We are calling them now - a slow-growth world," said Liveris at Dow's investor day in New York last week. "Man up, get used to it, and act like it is that. If you have a tailwind, then it's all bonus upside."

While Dow is among the throng with heavy investments in the US, it is also shutting down 29 plants worldwide - many in Europe - and cutting 8% of its workforce. Dow is taking the lead in rebalancing its footprint. Others are likely to follow.

Do you agree? Email: joseph.chang@icis.com or go to the commentary blog at icis.com/blogs/editorscommentary


By: Joseph Chang
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