What A “Low Growth World” Really Looks Like

UScrackersJuly2014

By John Richardson

ONLY six new  US crackers would be built over the next five years because of rising construction and labour costs, said Dow Chemical’s CEO, Andrew Liveris, in an earnings conference call last week. This would be out of the 12 crackers that have been announced (see the above table).

Demand would therefore be sufficient to comfortably absorb this new supply, Liveris added, even in what he conceded would be a “low-growth world”.

And he argued that, because Dow had secured engineering, procurement and construction services before the recent surge in costs, its investments were advanced-enough to be able to seize advantage of the next ethylene up-cycle. The up-cycle is forecast to arrive  by 2017/2018.

In the US, Dow has started to build its new ethane cracker at Freeport, Texas. It is also building a 750,000 tonnes/year propane dehydrogenation (PDH) unit at Freeport to cover its downstream needs for propylene.

The PDH plant will be up and running in 2015, followed by greater ethane flexibility at its plants in Louisiana and the start-up of ethylene and polyethylene capacities at its giant Sadara joint venture project in Saudi Arabia.

The second and third stages of the Sadara complex will start-up in 2016 with the giant new ethane cracker in Texas due for commissioning in 2017. That plant will be able to produce 1.5m tonnes/year of ethylene.

But Liveris, in an interview with CNBC last week, conceded  that the pre-2008 global economy was a bubble.

Absolutely right, of course, but what he didn’t discuss was that we are in the midst of another bubble,  resulting from commodities fraud in China connected with its real-estate sector.

Dow’s “low growth world” assumes global GDP growth of 2.5-3.5% over the next few years. But will even this modest expectation be realised if the China bubble bursts? Quite possibly not.

“America will increasingly resemble the ageing slow-growth economies on which it used to look down,” The Economist also warns.

“To improve potential growth policymakers can take various steps, such as raising the age at which the elderly receive government benefits, lowering the top corporate-tax rate and reforming support for the disabled.” Immigration reform is, we think, also essential.

To those who think such reforms are likely in the near term we, sadly, have only one thing to say: Good luck with that.

Further, as China builds more coal-to-olefins capacity, some forecasters are warning that there will be no incremental growth in its demand for ethylene and propylene equivalent imports over the next decade.

Only six out of 11 announced crackers in US might, thus, end up being too many.

The way forward? An unrelenting focus on demographics and what this means for your business.

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