By John Richardson
A management consultancy has gone on the record to warn about what the blog has been warning about for months: That the US petrochemicals industry is in danger of pushing itself into oversupply.
KPMG, in a report released late last month, said that the success of planned US expansions, including as much as a 33 percent addition to existing ethylene capacity by 2017-2018, was almost entirely dependent on the ability to export.
"Failing that, the US [chemicals] market is destined to fall back into the historic cycle of oversupply followed by rationalisation," said KMPG.
"This (need to focus on exports) will require a significant transformation of operating models for US chemical companies who have traditionally been focused on the US marketplace," it continued.
"Success in the emerging markets will also require a very sophisticated understanding of the pros and cons of each individual market. This must include considerations such as growth prospects, business environment, infrastructure maturity and tax implications, as well as a slew of regulatory and legal considerations such as investor protection, contract enforcement and ease of doing business."
As we discussed last week, successfully navigating the China market requires an intimate understanding of the needs and objectives of customers.
One senior business manager we know has built-up this understanding over more than 20 years.
He has stayed close to customers who he has watched, and helped, grow from small businessmen struggling to survive to multi-millionaires, and even billionaires. Such relationships matter as much, if not more, than technical service and the ability to compete on price with the lowest-cost producers.
Sure, many US producers have vast experience in selling into markets such as China.
But will they have enough of the right people in place to deal with the large volume of ethylene derivatives that will likely have to be exported?
In addition, building capacity on the assumption that demand will always eventually catch up is no longer the right approach, given all the macro-economic uncertainties, as the senior business we referred to above told us in a recent discussion.
He said: "China's economy could go either way. Contradictions in the system could tip it the wrong way - including the local authorities that don't want the system to be reformed because they make money from land sales, and the state-owned enterprises that get preferential loans.
"For petrochemicals, this means that all the projects being planned in the US should and hopefully will not go ahead.
"There are too many uncertainties over China for every company to take the risk, and if they do all commit to their planned investments, by 2016-17 we are going to see a big oversupply problem.
"The US will not be able to export all the volumes that are being planned. They are already facing tougher competition in Latin America from displaced Middle East and South Korean volumes from China, and this is going to get worse."