Think tank: US cost advantage from shale could lead to better planning

04 April 2014 09:33 Source:ICIS Chemical Business

The focus at this year’s AFPM International Petrochemical Conference (IPC) was on production capacities and feedstocks.

But chemical companies want to understand the way feedstock costs and supply will play out over time and how they are going to benefit. Plans for new capacities are advancing.

 

 US exports of certain chemicals and polymers could double by 2025

Copyright: Rex Features

The industry is on the crest of the shale wave but what happens when it comes crashing to earth and 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.

But it may also prove reckless to build too soon. New polyethylene (PE), glycols and other downstream products will be sold into an only modestly growing domestic market. It is becoming clear that volumes will be pushed out for export.

Potentially, the US expansions will force plant closures – first, probably, for higher cost international players. Some US facilities will be shut.

The billion dollar question is how demand growth globally will play out to help absorb the new capacities. And, also, how trade flows potentially will shift.

Chemicals trade has expanded from about 5% of global production capacity 10 years ago to around 10% today. By 2020 this will approach 20%, president of ExxonMobil Chemical, Stephen Pryor, pointed out earlier in Houston, Texas, US.

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

ExxonMobil believes that by 2025, exports of PE, polypropylene (PP) and paraxylene (PX) 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 industry.

Producers tend to build in droves if they see a clear cost advantage. This has been the basis of the story in the US for the past three years. However, they are coming to realise that cost-advantaged shale gas might be available for much longer than previously thought.

If that is the case, they have longer to plan and can build new plants in a more measured way. There doesn’t have to be an over 50% increase in US ethylene capacity, the potential suggested by capacity announcements, in a 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.

By Nigel Davis