“Reports of my death……

China, Company Strategy, Economics, Environment, Middle East, Technology, US

twain1.jpg

are greatly exaggerated” wrote Mark Twain who twice had the misfortune (or perhaps good fortune, given that he was still breathing!) to read his obituary in newspapers.

A full list of all those whose deaths were reported prematurely is included here in this A-Z of journalistic blunders from Wikipedia.

The same could be said of the US commodity chemicals industry. Until very recently, just about everyone was predicting that the States would fairly soon shift from a net export to a net import position due to higher gas prices, the build-up of very competitive capacity elsewhere and the constant drift of manufacturing overseas. The country’s chemicals industry has lost 120,000 jobs with 3 million jobs lost in manufacturing over the last five years.

But what’s changed over the last few months is gas prices which have become relatively cheap compared with crude and the weak dollar. This has created what consultants predict will be the “last hurrah” for the US styrene industry ahead of the big slew of new Middle East capacity due on stream soon.

Further consolidation is expected once the Middle East wipes out the advantage US styrene producers currently enjoy over competitors supplied by naphtha-based C2s.

From a carbon footprint point of view, it does seem ridiculous that oil is shipped from the Middle East to make benzene in South Korea and the C8s are then shipped to the US. The US combines the benzene with its competitive gas-based ethylene to make styrene which is then shipped to Europe – already a net importer of commodity chemicals.

But the carbon footprint argument, along with rising freight costs, could offer a lifeline to the US chemicals industry in general. There has been much talk of “reverse globalisation” recently. This might lead to the economic justification for building new commodity chemicals capacity in the US and elsewhere in the West.

The other new competitive advantage being enjoyed by the US industryis the fall in gasoline demand (although this the result of the ratherlarger problem of a weak domestic economy!), resulting in greateravailability of petrochemical feedstock.

Allen Kirkley, Vice President Strategy and Portfolio at Shell Chemicals,believes that petrochemical feedstock from refineries might be moreplentiful in the longer term as second-generation biofuels replacegasoline.

He sees an opportunity for making increased use of light ends no longer needed in the gasoline pool.

Revamping catalytic cracking towards olefins production will alsobecome increasingly attractive, particularly in Europe, but also inNorth America at a later date, adds Kirkley. Read this blog next weekfor a full interview with the senior executive.

A US industry source says: “Consultants have been predicting thatthe US would shift into a net export position for a long time, buttheir predictions have always been five years away. The forecasts arestill five years away thanks to these recent factors.”

A well-integrated refinery/petrochemical complex in the US mightnever be able to compete with a gas-based complex in the Middle East.

This is not be the point. If the US refinery/petrochemical majorscan stay significantly further to the left of the cost curve thanpoorly integrated producers, this might be enough to not only survive;perhaps even new investments might be justified.

The Middle East is also no longer as cheap a place to buildpetrochemicals because of rising feedstock and construction costs.Crackers coming on stream in 2005-15 are mainly mixed feed – liquefiedpetroleum gas and ethane – because of a long term ethane shortage inthe Gulf Co-operation Council region. Ethane is more plentifulelsewhere but it can be a little tricky investing in countries such asLibya, Algeria and Kazakhstan.

Environmental concerns could still scupper growth in US petrochemical capacity, and might even hinder minor revamping work.

The other big issue is, of course, the long term cost of crude.

Renewed drilling in the outer-continental shelf would help, but to what extent would this ease global crude prices?

Coal gasification – making better use of the abundant coal reserves in the US – might make more sense. Again, though, environmental lobbyists could get in the way.

Commercialisation of carbon capture and storage technologies couldhelp win the environmental argument in favour of both oil andcoal-based petrochemicals.

It’s early days to predict a long term resurgence of the US petrochemicals industry.

But the obituary writers should at the very least display a little more caution.

*

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