By John Richardson
THE US petrochemicals industry might be in danger of being lured into old thinking about the future direction of the global economy as a result of abundant shale gas.
Despite the short-term markets gloom which we described yesterday, several industry executives and observers who we spoke to on the sidelines of last week’s Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai were sticking to the belief that a SuperCycle was still possible.
“Once we get the Eurozone crisis out of the way, and it will be resolved I believe, there is not enough new ethylene capacity being planned over the next few years. As a result, there is room for all these new US capacity additions,” said one industry observer.
But even with cheap feedstock, the export–focused model for petrochemicals may now be flawed, because:
1.) There is no firm evidence that the Eurozone crisis will be resolved. Think of China alone and the implications for its economy if the Eurozone does collapse. Its 2009-2010 stimulus programme cannot be repeated for reasons we have already discussed. Without another huge round of government stimulus, Chinese growth remains very vulnerable to the collapse of exports to its biggest export destination – Europe. As much as 45 percent of all polymers imported into China end up being re-exported as finished goods, says a chemicals analyst. Others estimate that the re-export trade only accounts for 20 percent when end-use applications are analysed, he told us. But neither of these estimates can possibly take into account the overall effect on the economy, and therefore petrochemicals consumption, of a sharp decline in exports to Europe. The reason is that nobody has a clue about the final impact.
2.) The outcome of a collapse of the Euro could be a global trade war, making markets more regional.
3.) China is aggressively moving towards greater self-sufficiency in petrochemicals. This is a government strategy and is not driven entirely by economics. New domestic plants might therefore still be constructed even if, on paper, they do not make much economic sense.
4.) These are global markets and so if China cannot absorb export surpluses, producers in every region, assuming there are no major trade barriers due to a trade war, will seek to find new homes for their product. Even though South America is on the doorstep of the US with the obvious logistics advantages, it might become a ‘battle ground” for these displaced volumes.
5.) And finally, of course, the future health of the US economy is hardly assured. Even if these plants are based on the assumption that a substantial portion of output will be exported, a reasonably strong local market is still important.
Four grassroots cracker projects have now been announced in the US – by Chevron Phillips Chemical, Dow Chemical, Sasol and Shell Chemicals.
SABIC has also expressed interest in a shale-gas based investment in the States.
The betting at GPCA was that there would be further announcements of both green field investments and expansions of existing facilities.
But the $64,000 questions remain the timing of all these projects, and how many will ultimately go ahead.