are greatly exaggerated" wrote Mark Twain who twice had the misfortune (or perhaps good fortune, given that he was still breathing!) to read his obituary in newspapers.
The same could be said of the US commodity chemicals industry. Until very recently, just about everyone was predicting that the States would fairly soon shift from a net export to a net import position due to higher gas prices, the build-up of very competitive capacity elsewhere and the constant drift of manufacturing overseas. The country's chemicals industry has lost 120,000 jobs with 3 million jobs lost in manufacturing over the last five years.
But what's changed over the last few months is gas prices which have become relatively cheap compared with crude and the weak dollar. This has created what consultants predict will be the "last hurrah" for the US styrene industry ahead of the big slew of new Middle East capacity due on stream soon.
From a carbon footprint point of view, it does seem ridiculous that oil is shipped from the Middle East to make benzene in South Korea and the C8s are then shipped to the US. The US combines the benzene with its competitive gas-based ethylene to make styrene which is then shipped to Europe - already a net importer of commodity chemicals.
But the carbon footprint argument, along with rising freight costs, could offer a lifeline to the US chemicals industry in general. There has been much talk of "reverse globalisation" recently. This might lead to the economic justification for building new commodity chemicals capacity in the US and elsewhere in the West.
The other new competitive advantage being enjoyed by the US industry is the fall in gasoline demand (although this the result of the rather larger problem of a weak domestic economy!), resulting in greater availability of petrochemical feedstock.
Allen Kirkley, Vice President Strategy and Portfolio at Shell Chemicals, believes that petrochemical feedstock from refineries might be more plentiful in the longer term as second-generation biofuels replace gasoline.
He sees an opportunity for making increased use of light ends no longer needed in the gasoline pool.
Revamping catalytic cracking towards olefins production will also become increasingly attractive, particularly in Europe, but also in North America at a later date, adds Kirkley. Read this blog next week for a full interview with the senior executive.
A US industry source says: "Consultants have been predicting that the US would shift into a net export position for a long time, but their predictions have always been five years away. The forecasts are still five years away thanks to these recent factors."
A well-integrated refinery/petrochemical complex in the US might never be able to compete with a gas-based complex in the Middle East.
This is not be the point. If the US refinery/petrochemical majors can stay significantly further to the left of the cost curve than poorly integrated producers, this might be enough to not only survive; perhaps even new investments might be justified.
The Middle East is also no longer as cheap a place to build petrochemicals because of rising feedstock and construction costs. Crackers coming on stream in 2005-15 are mainly mixed feed - liquefied petroleum gas and ethane - because of a long term ethane shortage in the Gulf Co-operation Council region. Ethane is more plentiful elsewhere but it can be a little tricky investing in countries such as Libya, Algeria and Kazakhstan.
Environmental concerns could still scupper growth in US petrochemical capacity, and might even hinder minor revamping work.
The other big issue is, of course, the long term cost of crude.
Renewed drilling in the outer-continental shelf would help, but to what extent would this ease global crude prices?
Coal gasification - making better use of the abundant coal reserves in the US - might make more sense. Again, though, environmental lobbyists could get in the way.
Commercialisation of carbon capture and storage technologies could help win the environmental argument in favour of both oil and coal-based petrochemicals.
It's early days to predict a long term resurgence of the US petrochemicals industry.
But the obituary writers should at the very least display a little more caution.
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Comments (6)
Horrified but not surprised by the length of Wiki list - guess it says a lot about the frequently 'excited' nature of reporting!
Agree that the death of chemicals in the developed areas of the world vs. new arrivals in advantaged feedstock areas is an exaggerated claim. Restructuring and selective closures/divestments will be the order of the day when cash flows get squeezed. Might even get to see a spectacular failure or two if the going gets to like the 1970's slump. However, in the absence of game changing technological steps, there will always be a survival place for much of the incumbent kit and most of the players. It may not make riches for its owners and it certainly wouldn't be built like it is if it did not already exist, but it should make it through most reasonable storms.
Posted by Paul Ray | August 29, 2008 11:06 AM
Posted on August 29, 2008 11:06
Just goes to show how valuable good content is and how misleading wiki can be.
Posted by wiki makes me icky | August 29, 2008 3:26 PM
Posted on August 29, 2008 15:26
The key to all of this is delivered cost, not production cost. It is this that keeps small not-very-well-integrated plants in China in the market when there are titanic plants in the Middle East producing identical chemicals at a fraction of the unit cost.
When commodities are cheap (fuel prices or capital) then people make bad decisions (shipping stuff around the world to deliver it next door for example).
Posted by Simon Robinson | August 29, 2008 4:47 PM
Posted on August 29, 2008 16:47
Thanks Simon - yep, agree. It all depends on your view on energy prices, of course, and of the prospects for a global carbon trading or tax system. Persistently high costs of energy alone, though, could be enough to result in once marginal plants moving to the left of the cost curve by enough to survive. I can't see freight ever undermining the Middle East advantage, though (or perhaps if crude was at above $300 a barrel?)
Posted by John
|
September 1, 2008 4:50 AM
Posted on September 1, 2008 04:50
Hi Wiki makes me icky
Would have agreed a couple of years ago, but Wikipedia is no worse, or better, than paid-for edited encyclopedias - http://news.bbc.co.uk/2/hi/technology/4530930.stm.
The wider question over whether the "democratisation" of media through the blogosphere is a good or a bad thing is too complicated (and it's too soon) to justify a straightforward yes or a no answer.
Posted by John
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September 1, 2008 5:01 AM
Posted on September 1, 2008 05:01
Thanks, Paul
It's very early days to start planning new capacity in the developed world (especially as we need to spend the next few years absorbing the overbuilding!).
But if freight costs stay high on strong crude - and there is effective global carbon tax and/or cap and trade legislation - there might be a long term shift in economics.
Posted by John
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September 1, 2008 5:12 AM
Posted on September 1, 2008 05:12