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As you look over the impressive list of planned projects for North American liquefied natural gas (LNG) exports, you can see a parallel in the heavy project slate for planned new world scale crackers in the US. Both are being driven by the US shale gas boom. Yet there is the potential for one to threaten the other.

Unlimited US LNG exports could create volatility in natural gas and natural gas liquids (NGLs) prices, contends US-based Dow Chemical.

While LNG exports for fuel would consist primarily of dry gas where, in the process, NGLs are stripped out, LNG containing ethane and propane could be shipped out as well, according to the company.

"It is not a given that NGLs will always be stripped out prior to shipping," says Kevin Kolevar, vice president of government affairs and public policy at Dow.

"For example, Japan has specs for wet gas concentrate in LNG. And to what extent would other countries look to use wet gas? We have not heard assurances from the oil and gas community that they would strip out the NGLs."

This is an important aspect for the chemical sector - one that will continue to be explored. There's an argument that LNG exports could actually increase NGL supplies, precisely because the NGLs are stripped out.

Dow contends that it supports LNG exports but is concerned that an unchecked level of exports could drive up prices and volatility in gas and NGLs. "The fact that so much capacity is being planned to come on in a compressed timeframe causes concern," said Kolevar.

"It is all about predictability. In the late 1990s, we saw tremendous volatility in natural gas prices, which deterred investment in the chemical sector," he added.

Dow estimates that over a 10-year timeframe, the US could export up to 5-6bn cubic feet/day (bcf) of natural gas through LNG without disrupting the market if that capacity comes on in a linear fashion.

That would amount to 38-46m tonnes/year of LNG. Yet, there is a total of 199.5m tonnes/year of LNG export capacity being planned in the US, according to an ICIS analysis. And of that amount, 128.6m tonnes/year of capacity are associated with projects with defined completion dates between 2015 and 2018.

There is virtually no chance this comes on in a disciplined, linear fashion - neither will the wave of new world scale ethane crackers. It's simply not the nature of capital intensive businesses.

Of course not all of the planned capacity will be built. And even for those projects that do start up, LNG shipments will not always be at full capacity. This will all depend on market conditions and competitive dynamics at home and abroad.

But US chemical companies are concerned. Already four companies have joined the advocacy group America's Energy Advantage, which is against unfettered LNG exports.

It's important to remember that the chemical industry is not the only group seeking to take advantage of cheap US natural gas prices.

Along with LNG projects, other major draws on natural gas will come from utilities in the form of gas-fired power plants, as well as fertilizer projects.

Meanwhile, the US petrochemical sector is planning seven new world-scale crackers and expansions of existing facilities for a total of 10.2m tonnes/year of additional ethylene capacity. This represents a whopping 38% of existing US capacity.

And speaking of parallels between the rash of planned US crackers and LNG export facilities, one LNG export project website struck a common theme - "thousands of jobs and billions of dollars invested".

The spotlight on petrochemical investment in the Americas has shone on the US shale gas boom and the resulting rash of planned new ethane crackers that could increase US ethylene capacity by about 32% by 2017-2018. But Latin America's game-changer could be Brazil's pre-salt oil and gas bounty, as well as shale gas formations in Argentina.

Naphtha crackers today are not competitive with their ethane counterparts - a fact acknowleged by Isabel Figueiredo, director of Brazil-based petrochemical producer Braskem, who spoke at the 6th EBDQUIM conference in Praia do Forte, Brazil, hosted by Brazilian association of chemical and petrochemical distributors Associquim in mid-March.

Braskem is already preparing to build a 1.05m tonne/year ethane cracker in Mexico through Braskem Idesa, its 60:40 joint venture with Mexico's Grupo Idesa. The project, with associated polyethylene (PE) units, is expected to be complete by mid-2015.

Its next big undertaking will be Comperj - the long-anticipated project with state oil firm Petrobras, which is expected to be the largest ever in Latin America. Braskem will define the scope of Comperj in 2012.

The ultimate success of Comperj will be tied to Petrobras's development of its giant offshore oil and gas reserves, which lie underneath a massive layer of salt. This could contain up to 10bn barrels of oil equivalent.

Petrobras plans to invest a total of $225bn (€171bn) during the 2011-2015 period. This could significantly boost natural gas production, providing cheap ethane feedstock for petrochemicals.

Meanwhile, Argentina will start to develop its large shale gas reserves. In February, its largest energy company, YPF, raised its estimate for shale oil and gas reserves from less than 1bn bbl to 22.8bn bbl.

YPF, majority-owned by Spain's Repsol, is under heavy government pressure to develop its oil and gas reserves, as falling production has led to greater imports. Natural gas shortages in 2010 resulting from a cold winter led to severely curtailed production at petrochemical operations in Bahia Blanca. In neighboring Chile, where Methanex has four methanol units, the Canada-based producer is relocating a unit to Louisiana, US, because a lack of natural gas supply has meant only one plant is in operation.

However, development of shale gas in Argentina and the pre-salt oil and gas reserves off the coast of Brazil could go a long way to making Latin America more competitive in petrochemicals.

Wild swings in global stock markets are emblematic of chaos in the collective mindset. Confusion reigns, and who can blame the participants?

Wednesday's 520 point, or 4.6% decline in the US Dow Jones industrial Average marked a third day of heightened volatility. The market was up 4.0% on Tuesday, after a 5.6% crash on Monday.

Caught in the overall market downdraft was crude oil prices, which fell to about $80/bbl on the New York Mercantile Exchange (NYMEX) as of Wednesday - a far cry from $100/bbl as recently as late July. Oil prices tanked as players adjusted their economic growth expectations lower.

Petrochemical and polymers prices are poised to fall on the back of lower crude and diminished economic growth expectations. And the dire economic outlook is being reflected in chemical stock prices - few sectors have been hit harder than the industrial group.

For the month of August thus far, US bellwether Dow Chemical's stock is down almost 19% while US-based Huntsman has lost a staggering 35% of its value. Germany's BASF, the world's largest chemical company, is down 22%, and Netherlands-based petrochemical and polymers giant LyondellBasell is off 21%.

The greatest threat to the global economy today is the loss of confidence - confidence that the US can get its fiscal house in order and reinvigorate its stalling economy, confidence that Europe can halt the spread of its growing sovereign debt crisis, confidence that China can get a handle on inflation without stamping out growth.

The S&P downgrade of US debt from AAA to AA+ did not cause interest rates to rise - not yet. In fact, US bonds rallied, driving down yields even further as the market shifted its focus to the growing likelihood of a recession. Indeed, the US Fed made an explicit statement to keep interest rates low for years to come to support the economy.

The bigger blow of the downgrade is to consumer and business confidence. US government debt - as close to a "sure thing" than anything - is that no longer.

You can indeed talk your way into a recession. Negative sentiment can trigger behavior that leads to a double-dip downturn. Watching stocks dive and sovereign credit ratings cut with no coherent policy response from governments and central banks might make you think twice about eating out for dinner, buying that new car, or building that cracker.

Leadership is needed in times of crisis. The European Central Bank (ECB) must act as the buyer of last resort for the sovereign debt of its members. Indeed, it swept in to buy Spanish and Italian bonds on Tuesday. The US must come up with a plan to boost its economy.

Much has been made of the point that policy-makers are "running out of bullets," or "running out of rabbits to pull from the hat" to make things better. The US has already cut interest rates to near zero, and completed its second round of quantitative easing (QE2) featuring the purchase of $600bn (€420bn) in debt securities, in June.

But it's time to reload the gun. There is no reason the ECB can't reverse its tightening bias and lower interest rates. It has raised rates twice this year even in the face of severe fiscal austerity for some of its members. There is room to ease from its current stated level of 1.5%. The US has a stated interest rate target (Fed Funds rate) of 0-0.25%. The ECB can also embark on a round of QE, an increasingly likely scenario.

The US needs a plan to revive the economy, and this will require investment. So far, the world is waiting.

The unimaginable tragedy that struck Japan in the form of the record-magnitude earthquake and tsunami, compounded by the ongoing nuclear crisis, presents one of the greatest challenges ever for the nation. The images of the destruction and impact it is having on the people are heartbreaking, and we hope the country will recover soon and strongly.

The massive hit to the world's third-largest economy and chemical producer has two major near-term impacts: one on demand and the other on production.

DEMAND-SIDE IMPACT
All of Japan's automakers halted most production lines in the country and there have been numerous disruptions to manufacturing, from automotive to energy. This is already sapping demand. Crude oil prices plunged early last week, along with naphtha - a critical feedstock to Japan's petrochemical sector.

Confidence in the local economy was not at a high point before the tragedy, and this will only ebb further in the near term as caution reigns.

The demand destruction will have a far-reaching impact worldwide. Laurence Alexander, chemicals analyst at global investment bank Jefferies & Co., notes that in the near term, "a shock to Asian demand could also undercut North American [chemical] exports and, indirectly, margins." Companies and analysts will be assessing the Japan impact for weeks to come.

At an investor conference hosted by global financial institution Susquehanna International Group in Boston, Massachusetts, US on March 15, "high oil prices and Japan failed to dent chemical company economic and earnings outlooks," according to Susquehanna chemical analyst Don Carson. "While equity and commodity markets have traded off with the natural disaster in Japan and volatile oil prices due to political turmoil in the Middle East, managements continued to be cautiously optimistic on the economic outlook."

However, this could quickly change, depending on the nuclear situation.

SUPPLY-SIDE IMPACT
The impact on the chemical supply-side is more obvious. A number of crackers are down or operating at reduced rates, causing supply disruptions down the chain. The near-term impact has been spiking prices.

Asia paraxylene (PX) prices hit a record high following a force majeure by JX Nippon Oil, Japan's largest exporter of PX. Asia caprolactam prices have also spiked on panic buying from Taiwan's nylon producers.

But the forces of supply shortages and demand destruction will collide - and it remains to be seen how it will all play out. In the short term, styrene butadiene rubber (SBR) prices are expected to fall as Japan's auto production is stymied.

Much on the overall supply and demand situation will depend on how and if the nuclear situation can be controlled. A major nuclear catastrophe on top of the existing devastation would have dire consequences worldwide, not the least on sentiment.

RECONSTRUCTION PHASE
But once this plays out, Japan can proceed on to the next phase - reconstruction. The resilience of the Japanese people in the face of this tragedy is admirable. There is no doubt that the nation has the full capability to recover, given the proper support and resources.

Japan may one day emerge from this with a revived economy, jump-started by looser monetary policy and huge reconstruction efforts. Its central bank has already injected 28 trillion yen ($350bn, €253bn) into the financial system in several steps.

In reconstructing the energy and chemical sectors, tough decisions will have to be made. In a likely move away from nuclear power, Japan will need much more oil, natural gas and coal for its energy needs, along with any alternative energy solutions.

In the chemical sector, Japan's naphtha crackers have become increasingly uncompetitive in the global context with their relatively small size and lack of advantaged feedstock.

Consolidation of certain crackers has been planned for years and some progress was being made, but it has been painfully slow. Here the industry will have a chance to reevaluate its long-term position.

The International Year of Chemistry (IYC) US kickoff event in Philadelphia, Pennsylvania featured an impressive panel - two major chemical company CEOs, the founder of a pharmaceutical firm and several distinguished members of academia and research institutions.

The discussion on the world's major challenges such as population growth and the growing need for food, water and energy, and chemistry's role in solving these problems, was interesting. Partnering with other countries and organizations came out as an imperative to achieve tangible results.

Clearly one of the goals of the IYC is to move the public discussion away from the usual concerns about pollution and toxicity, and towards how chemistry can actively solve some of the world's toughest challenges.

The United Nations has given the global chemical industry a big stage with the IYC, and the sector must "seize the year," as US-based Dow Chemical CEO Andrew Liveris said, to be advocates of change for the good of humanity.

Ultimately, a broader shift in public perception about the industry could lead to less restrictive regulations that hinder chemical manufacturing, as well as more policies that benefit the sector.

While not an expressly stated goal of the IYC, this would be a welcome long-term development, enabling the ultimate enabler industry to better meet the world's challenges.

It's great to have this discussion on how chemistry can solve the world's most pressing problems - among executives, academia and nongovernmental organizations (NGOs).

But there is one important element missing thus far - and that has been broad media coverage.

To reach a broader audience, coverage must go beyond the trade and local press. Liveris said the industry must "insert itself into the public discourse."

That's going to take courage. The best way to do that is to get involved in controversial debates that will catch the attention of the public.

In the past, the sector has been on the defensive and largely avoided these debates. But if the industry can generate or get involved in some provocative programming that will reach the broader public, it will go much further than if the discussion is kept within business and academic circles.

Would executives be willing to participate in a public forum - for example, a TV program called "Chemicals - Threat or Savior?" At the risk of over-quoting Liveris, let's take a "glass-half-full view."

Photo credit: www.chemistry2011.org

One of the historic ICIS Top 40 Power Players, Joe Acker, former president of the Society of Chemical Manufacturers & Affiliates (SOCMA), passed away on December 6, 2010.

Joe died on the night of the SOCMA's 89th Annual Dinner in New York, following a courageous battle against pancreatic cancer.

He retired from SOCMA last December, after 16 years of service to the US trade organization, where he raised its profile in Washington, D.C., grew membership and encouraged members to be more active in lobbying.

We are very fortunate to have met and worked with Joe over the years. He has always been gracious and generous with his thoughts and words.

Last December, he said: "Our industry must embrace the changes ahead with optimism, continue reaching out to the decision-makers in Washington and commit to working with them, while also being true to the ideals that define our industry: ingenuity, innovation and integrity."

Joe fought hard to further and protect the interests of small and medium-sized batch chemical businesses.

On December 7, US President Barack Obama announced a deal with the Republicans that would extend tax breaks, including tax credits for small businesses that hire new workers.

Joe would have approved.

Photo credit: SOCMA

Nothing lasts forever. You never know what's going to derail a fantastic bull run - at least temporarily.

After unimpeded optimism over several months fueled by the continuing global economic recovery, some serious concerns are coming out of the woodwork.

Expectations for an interest rate hike in China to tame growing inflation threw cold water on world stock markets last Monday. Meanwhile, fears about Ireland's debt crisis and an impending bailout by the EU and the International Monetary Fund (IMF) continued to build.

The crisis in Ireland is also fueling fears about credit problems in other European countries such as Portugal and Spain - a stark reminder that the credit problems in the Eurozone are far from over.

And in the US, the Federal Reserve is facing a growing backlash over its $600bn (€444bn) quantitative easing policy, known as QE2 - both home and abroad. The program is meant to pump money into the economy and lower interest rates further.

But in the early going, the bond market is just not cooperating. US government debt prices are falling, pushing up yields, rather than the other way around.

While the US Federal Reserve is buying Treasuries, investors are selling. It could just be a case of "selling on the news" as prices had already run up substantially in anticipation of the QE2 announcement, but if yields keep rising unchecked for a prolonged period, the Fed will lose credibility.

Critics complain that QE2 could lead to rampant inflation, while other nations also slammed the easy money policy, pointing out that the US is unfairly devaluing the dollar to boost exports. That makes US goods more competitive at the expense of its neighbors.

But thus far, inflation remains contained in the US. The core Consumer Price Index (CPI), which excludes the volatile food and energy components, was unchanged in October for the third month in a row. Price increases in basic materials have not yet translated into higher consumer prices in the US.

In the global chemical markets, producers are riding the wave of rising prices - from the Americas to Europe to Asia.

Voracious Chinese demand and the US QE2 program are boosting petrochemical and polymer prices in Asia, reports Felicia Loo, one of our ICIS pricing editors in Singapore.

"It is a bullish market. The feel is bullish and everything is bullish," said one Chinese polymers trader.

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As they say in US NASCAR racing - gentlemen, start your engines!

After a blip down in world stock markets on Tuesday, October 19, sparked by China's quarter-point hike of a key interest rate as well as continuing fears in the US about the consequences of an ongoing investigation into improper foreclosures, bourses were back in the black on Wednesday.

Industrial stocks, including chemicals of course, were pounded on Tuesday but led the rally on Wednesday.

The widespread rally in the chemical sector was bolstered by the announcement by Germany's BASF, the world's largest chemical company, that it expects strong third-quarter earnings and record overall 2010 results.

And looking to the fourth quarter, the company expects the favorable business conditions to continue. For all of 2010, it anticipates sales of €63bn ($88bn) and underlying earnings before interest and tax (EBIT) of over €8bn.

Hassan Ahmed, analyst at US-based investment advisory firm Alembic Global Advisors, found it "particularly noteworthy" that BASF's underlying Q3 earnings EBIT guidance of €2.2bn is ahead of its reported Q2 EBIT of €2.1bn, signaling sequential earnings improvement.

This bodes well for US-based Dow Chemical and Westlake Chemical, as well as Netherlands-based LyondellBasell, said the analyst.

"Current consensus estimates for all three companies are looking for sequential earnings declines in Q3, contrary to BASF's guidance. We are above consensus on all three names for Q3 as well as 2010." said Hassan.

Indeed, Wall Street consensus estimates indicate a significant decline in sequential earnings per share (EPS) for Dow (-24%) and Westlake (-26%). The Street also sees sequential EPS declines for Hunstman (-9%), Celanese (-35%), Methanex (-23%) and Georgia Gulf (-10%).

DuPont's sequential numbers are skewed by seasonality in its ag business, while newly-listed LyondellBasell has no comparable consensus Q3 to Q2 EPS figures available.

But all signs point to an overall strong Q3 for the chemical industry. Analysts will likely boost profit estimates, or companies will surprise to the upside, or both.

Many commodity chemical and polymer markets have remained tight or have tightened further during Q3 - a trend that remains in effect today. During the financial and economic crisis of 2008-2009, companies cut back on capital expenditures and shut down marginal production facilities, leading to some of the tight markets we see today.

And for all US Treasury Secretary Tim Geithner's talk of not devaluing the US dollar, it is not this office that controls monetary policy. That's the domain of the US Federal Reserve, whose chief Ben Bernanke is poised to unleash an estimated $1 trillion of funds into the economy with purchases of debt securities - otherwise known as quantitative easing (QE).

This will hand US chemical producers two gifts - greater pricing power as money creation puts upward pressure on commodity prices, and a weaker US dollar, providing an earnings tailwind for those with significant exports and foreign operations.

While the threat of a potential slowdown in the Chinese economic expansion, another potential US mortgage crisis and European austerity measures are not to be dismissed, the overall balance of forces tilts towards a continuing global economic recovery.

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As central banks around the world open the money spigots, prepare for a major reflation (or inflation) of asset prices. The impact is poised to hit commodities of all kinds - oil, fuel, metals and chemicals.

Last week, the Bank of Japan announced it will pump $60bn into its economy by buying government bonds, corporate debt and other securities. The central bank is aiming to boost the economy and halt the rise of the yen, which is hitting exports.

This is the "quantitative easing" (QE) move governments around the world are talking about. It essentially pumps cash into the system as central banks buy securities.

World bourses jumped on the announcement. Japan's Nikkei average rose 1.5% on Tuesday, October 5 and another 1.8% on Wednesday to reach a two-month high. On Tuesday, the UK's FTSE index rose 1.4%, while in the US, the Dow Jones Industrial Average jumped over 200 points, or 1.8%, to 10,945.

In the US, industrial materials stocks outpaced the broader market. There were strong gains in the chemical sector with Dow Chemical up 3.6%, DuPont 3.0%, Eastman Chemical 2.8%, Celanese 4.3% and Methanex 3.6% and Westlake Chemical 4.0%.

This was no accident. It is the industrial materials companies that stand to gain the most from asset inflation and a potential revival of the staggering economic recovery. These companies have tremendous operating leverage to higher demand. And with that much more money floating around, there is little doubt pricing power will increase.

Wall Street analysts are also ratcheting up profit estimates for chemical companies for the third quarter and beyond on stronger-than-expected performance.

In the August 16 issue, we called for the US Federal Reserve to crank up the printing press to give a boost to the anemic economic recovery. It looks like that could be imminent. Observers are anticipating a program that could entail the purchase of $1 trillion in government and other debt securities.

The Bank of England is also now pointing to QE after suspending purchases in February. It actually has a nifty 10-page pamphlet downloadable on its website called "Quantitative easing explained: putting more money into our economy to boost spending" - complete with a flow chart.

The European Central Bank has spent €63.5bn (86.9bn) to buy up government bonds.

QE is the last resort, or "nuclear option" when all the other levers to trigger economic expansion have been pulled.

And that's what many global economies face. The US, UK and Japan have all cut key interest rates towards zero. While this has offered economic relief and likely has spared further pain through the recession, it has not led to a solid recovery complete with job growth. Unemployment, especially in the US, remains stubbornly high. Last week's jobs report showed the US private sector shed another 39,000 positions.

The expectation that central banks around the world will turn on the money spigots is reflected in the surging prices of gold and crude oil. These commodities will continue to gain value as the global monetary base is devalued through QE.

It is no coincidence that gold has once again hit an all-time high of almost $1,350/ounce.

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