INSIGHT: US cracker projects move ahead in slow-growth economy

11 December 2012 16:40  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS)--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.

Liveris expects global GDP growth of around 2.5% in 2013, with China growing at a 6-7% clip and the US at about 2.2%. All figures are below historical norms.

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.

It is now entering the front end engineering and design (FEED) stage of the process and the cracker is expected to start operating in 2017.

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, based on our analysis of the timeline on its website.

Taking the Shell cracker out of the equation for 2016-2017, 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 on 3 December.

“Man up, get used to it, and act like it is that. If you have a tailwind, then it’s all bonus upside.”

Speaking of that tailwind, Dow does expect the chemical cycle to peak in 2015-2016, before the new US crackers come on line.

For Dow’s performance polymers business, Liveris expects earnings before interest, tax, depreciation and amortisation (EBITDA) to rise from around $2.5bn today, to $5bn in what Dow calls the “near term”, solely based on the up-cycle.

The company says that its US Gulf Coast competitiveness – the integration in ethylene and propylene, coupled with “favourable shale gas dynamics” – is expected to deliver $2bn of additional EBITDA in 2017.

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.

"We are proactively and aggressively implementing the tough decisions required to deliver consistent value growth in this new slow growth world," Liveris told investors. "Dow is fully prepared to play defense and offense with both interventions and key growth catalysts that will enable us to deliver on our cash and earnings targets."

Dow is taking the lead in rebalancing its footprint. Others are likely to follow.

($1 = €0.77)

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By: Joseph Chang
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