INSIGHT: US chems and manufacturing powers ahead on shale

28 December 2012 18:05  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Defensive investments make some sense but it is so much easier to take a big decision in a growing market or, as far as petrochemicals are concerned, where feedstock or technology opportunities present themselves.

Most of the buzz in this business currently has to do with feedstock availability and costs. In other words, it is related in some way or another to shale gas or shale oil, and particularly to the volumes of cheap ethane and other natural gas liquids (NGLs) that have become available in the US.

Cracker operators in the US and Canada have switched more towards ethane feed and are investing to lift ethylene production capacities. Taking a view on the longer term, some are prepared to invest heavily in new grassroots facilities to tap into what they expect to be a sustained period of low-cost ethane availability.

At current natural gas and ethane prices, the US is the second most competitive ethylene producing region in the world. But the increased availability of shale gas and oil is having a much more widespread and profound impact on US energy intensive and manufacturing industries. Resurgence in US manufacturing, even a degree of ‘on-shoring’ – the opposite of off-shoring, or when manufacturing facilities are brought back to the country from locations that were more cost-attractive earlier – is expected.

To a great extent, that ‘on-shoring’ will be needed if the greater than 35% increase in US ethylene capacity that could theoretically be built based on announced expansions is brought on-line.

US producers cracking ethane or using cheap natural gas for power generation already have derivatives cost advantage in international markets. The shale gas boom will continue to drive US chemical exports.

Beyond that the US economy needs to grow more strongly to absorb new olefins and derivatives capacities. And while producers expect further tightening in the ethylene market over the next few years, the era post-2016 (when the first new large-scale crackers are due on-stream) is as yet relatively uncharted territory.

The new capacities, the unannounced derivatives units also, will produce a spike in US chemicals production that will have a marked effect on supply/demand balances and probably on profitability.

But the positive take on the capacity additions is that of companies grasping opportunities to capitalise on a new-found low-cost position and of upgrading production facilities and supply networks. The rules of the game have changed.

Putting some numbers to the potential for growth, the American Chemistry Council (ACC) said earlier this month that taking into account just the announced projects, US chemicals production growth could average 4.6% a year through 2017. That is growth excluding pharmaceuticals and compares with a baseline forecast of 2.2% average annual growth from 2012.

The shale gas boom has pushed up US chemicals capital spending which is likely to have risen by 15.5% this year to $38.1bn (€28.6bn); it surged by 19.8% in 2011. Increased spending, more jobs, and a greater dynamism across the sector could mean that the sector-wide profits upswing which started in 2010 could last longer, the ACC says.

Double-digit gains in capital spending are expected through 2015 with only a slight slowdown after that. Capital spending across the industry is expected to reach $64.5bn in 2017, more than twice the amount spent by the industry in 2007.

ACC research has indicated that shale gas could boost US manufacturing and economic output across eight industries analysed by $121bn.

It has built shale-related scenarios for chemicals and for other sectors of the economy.

In the background notes to the work it says that the manufacturing renaissance has begun. It cites work from the Boston Consulting Group which suggests a “tipping point” in cost-risk among seven industries. As these industries “re-shore” the US will gain between $80bn and $120bn in annual output and two to three million jobs.

The Council’s list of projects related to the shale oil and gas boom is meant to be impressive and it is. A considerable number of plastics and chemicals projects have been identified to sit alongside energy, iron and steel and other developments.

As the US energy and manufacturing industries power ahead, then, of course, chemicals follow. Producers in other regions will be hard pressed to play catch me if you can.

($1 = €0.75)

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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