Market intelligence: US shale gas dynamics drive petrochemical prospects

11 January 2013 11:33  [Source: ICB]

US natural gas dynamics become more favourable in early 2013. Now it pays to watch actual manufacturing investments across all sectors

Positive shale gas dynamics are accelerating in the US

Copyright: RexFeatures

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 of 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.

NGL dynamics continue to improve for US commodity chemical producers, noted Laurence Alexander, analyst with global investment bank Jefferies. For 2013, he lowered his US ethane price forecast by $0.10/gal to $0.33/gal, and his propane estimate by $0.19/gal, to $0.95/gal.

"We believe US petrochemicals will enjoy a 2013 similar to 2012 - record ethylene profitability underpinned by cheap NGL feedstocks," said Deutsche Bank analyst David Begleiter. "These trends were firmly in place in December with feedstocks under pressure (ethane and propane -18% and -13%, respectively) and ethylene margins elevated.

"With ethane supply/demand going long in 2013 amid a wave of pipeline and fractionation capacity and US ethane-based ethylene producers poised to maintain their 70%-plus cost advantage versus naptha-based international producers, we believe US ethylene cash margins will be sustained in the mid-high 20 cents/lb range in 2013," he added.

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, and 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 previously more cost-attractive - is expected.

To a great extent, that on-shoring will be needed if the increase of more than 38% 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, as well as the unannounced derivatives units, 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 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), having previously 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 that 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 analysed industries 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 2m-3m 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".

Additional reporting by Joseph Chang in New York

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