US Petchems Risk Getting Only One Cookie

MarginsApril2014

By John Richardson

WALTER Mischel, the psychologist, carried out an experiment on four-year-old children in the late 1960s.

“They were given a choice between a small reward (one Oreo cookie), which they could have at any time, or a larger reward (two cookies) for which they had to wait for 15 minutes under difficult conditions,” writes Daniel Kahneman in his truly brilliant book, Thinking Fast and Slow.

About half the children managed to wait 15 minutes. Ten or fifteen years later, a large gap had opened up between those who had resisted temptation and those who had not. The patient ones were more successful because of higher measures of executive control, whilst the children who had seized the one cookie were struggling, the author adds.

US petrochemicals executives are in danger of seizing that first metaphorical cookie because of excessive ethylene and derivatives expansions.

To be fair, they are under enormous pressure to build as it is what financial markets want to hear. You must have major expansion projects on your books these days, otherwise the financial sector would think, “surely, you must be crazy?” and your share price would struggle.

Why would you seem crazy? The reason is fantastic charts, such as the one above, which show the marvellous margins being enjoyed by ethane-based ethylene producers in the US.

But the ones who will end up getting the two cookies might be those who concentrate not just on all the euphoria around current margins, but on answering this question: “How and where are we going to sell this stuff over the next 10-15 years?”

The route to long-term gain could be pausing to think more about scenarios for China’s long-term growth,for instance, – and how China and other countries might end up protecting their home markets for local economic reasons.

Ironically, though, a previous grab for that first cookie might end up saving the industry: Years of cut backs, efficiency drives and early redundancies which have left the US petrochemicals industry desperately short of the labour supply they need to execute their projects on schedule.

This could mean that ethylene and derivatives expansions are introduced into the market in a very staggered fashion, thanks to lots of project delays, resulting from both labour shortages and cost overruns.

There is a big difference, though, between then and now. Some ten years ago, nobody saw shale gas coming. No-one can be blamed for this, given that the “unknown unknown” of the necessary fracking technology breakthroughs had yet to happen.

Now, though, the evidence of a complex new economic environment with lots of uncertain outcomes is all too plain to see.

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