AFPM '14: INSIGHT: US chemicals - building a sustained advantage

30 March 2014 22:02 Source:ICIS News

By Nigel Davis

SAN ANTONIO, Texas (ICIS)--The focus at this year’s AFPM International Petrochemical Conference (IPC) will be very much on production capacities and feedstocks. A manufacturing renaissance is taking hold in the US, based on shale gas and oil. The country’s petrochemical industry is a major beneficiary.

But companies want to understand the way feedstock costs and supply will play out over time and how they are going to benefit from shale. Plans for new ethylene and other gas-based chemicals capacities are advancing. The industry is on the crest of the shale wave.

But what happens when that wave comes crashing to earth and the planned expansions are brought on-stream?

Commentators have begun to question the ‘build and we’ll find a market for our cost-advantaged products’ mentality. Clearly, it would be reckless not to take full advantage of abundant ethane on the US Gulf Coast. It may even make sense to do that in other parts of the country, although the advantage cannot be as significant.

But it may also prove reckless to build too soon. New polyethylene, glycols and other downstream products cheaply made from shale gas liquids will be sold into an only modestly growing domestic market. It is becoming clear that volumes will be pushed out to export to help maintain operating rates in the US.

Potentially, the US expansions will force plant closures, first, probably, for the international players, in higher-cost parts of the world, although the longer-term cost effectiveness of that sort of strategy has been questioned. Some US facilities will be shut.

The multi-million dollar question is how demand growth globally will play out to help absorb the new capacities. And, also, how trade flows potentially will shift as the capacities come on-stream. The US shale boom’s impact will be felt globally.

In terms of supply, it can only fuel further growth in chemicals trade which has expanded from the equivalent of about 5% of global production capacity 10 years ago to around 10% today. By 2020 that proportion will approach 20%, president of ExxonMobil Chemical, Stephen Pryor, pointed out this week in Houston.

“Increasingly, supply growth is coming from wherever the advantaged feedstock is, and right now that is North America, thanks to shale gas,” Pryor said.

That shift will have a profound impact on the industry as the Middle East finds its dominant position for chemicals trade challenged by the US and producers in other parts of the world face increasing competition in their domestic markets.

ExxonMobil believes that by 2025, exports of polyethylene, polypropylene and paraxylene from North America could double. The current wave of capacity additions announced is valued at more than $100bn.

This will prove to be a “recapitalisation” of the US chemical industry, even if all the announced projects do not go ahead as planned.

And it is further proof that the industry is driven as much by waves of capacity additions, as it is by demand related primarily to economic growth.

Chemical producers tend to build in droves if they see a clear cost advantage. This has been the basis of petrochemicals story in the US for the past three years.

However, producers are coming to realise that cost-advantaged shale gas might be available for much longer than previously thought and be more sustainable. Fracking for tight oil and gas is a proven technology.

If that is the case, then producers planning new capacities have longer to think and can introduce new plants to the market in a more measured way. (There doesn’t have to be a 51% increase in US ethylene capacity, the potential increase suggested by capacity announcements by sector players, in a relatively short period.)

The tonnes could be added over a number of years and the recapitalisation of US chemicals could deliver an industry with a sustained competitive advantage.

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By Nigel Davis