The US: Worrying About What Really Matters

Business, China, Company Strategy, Economics, US

USethylene21June2015

By John Richardson

I WAS involved in a debate recently over how a glut of propane in storage in the US had led to propane prices in the States being so low that propane-fed crackers in the US had become more competitive than those in the Middle East. This was just about the first time that anybody can remember this happening.

The conclusion from this discussion was that this might be a pointer towards a long term shift in petrochemicals competitiveness, thanks to a continuing US natural gas glut in general versus more limited new supplies of gas in the Middle East.

But then as someone else pointed out: “Will US petrochemical projects still be cash-flow positive in a world of $65 a barrel crude?”

The assumption here was the same as with natural gas: That today’s oil price, which of course is some 40% lower than the oil price in H1 2014, is here to stay, resulting in a permanent erosion of some of the competitive advantage that ethane, propane and butane cracking had enjoyed over naphtha cracking.

You can argue until you are blue in the face over the above two assumptions and people will  do exactly that, as this is what they find it easy to argue about in the petrochemicals business. The reason is that they grew up during a period of history where all you had to worry about was feedstock advantage.

But this debate will by itself get you nowhere. The reason is that demand assessment and management matter more today than the cost and availability of the raw materials needed to make petrochemicals.

What again brought this point home to me was this article in last week’s New York Times, which included the following critically important observations about the US:

Over the last 40 years, the American economy has grown at an average of 2.8% per year. That’s slower than the 3.7% average from 1948 to 1975, but the future looks even gloomier because that 2.8 figure relied on two favourable trends that are now over: women entering the work force, and baby boomers reaching their prime earning years.

After 2020, with the percentage of the American population that is of prime working age shrinking, the Congressional Budget Office expects growth to stabilise at 2.2%.

This provides further support for the arguments that Paul Hodges and I have put forward in our book, Boom, Gloom & The New Normal.

So how on earth do we go about improving the US economy? It is by first of all recognising that you can counterbalance the loss of demand from the retirement of all these white, rich middle class people by doing more to tackle income inequality.

Here, as a reminder, are some quite shocking statistics on this subject:

  • If it were a separate country America’s black population, which is mainly poor, would have a worse life expectancy than Mexico, a worse homicide rate than Ivory Coast and a higher proportion of its citizens behind bars than anywhere on earth. One-third of black men in their thirties have been in prison.
  • The median black family had net assets of only $11,000 in 2013. This compared with $142,000 for the median white family.

Income inequality is a problem that crosses ethnic divides, according to Senator Bernie Sanders, a Democratic Party Presidential nominee, who quotes the following data in this Boston Globe article:

Today, millions of Americans are working longer hours for lower wages and median family income is almost $5,000 less than it was in 1999.

Meanwhile, the wealthiest people and the largest corporations are doing phenomenally well. Today, 99% of all new income is going to the top 1%, while the top one-tenth of 1% own almost as much wealth as the bottom 90%. In the last two years, the wealthiest 14 people in this country increased their wealth by $157 billion. That increase is more than is owned by the bottom 130 million Americans – combined.

I again need to repeat that this is not an advert for socialism, but is instead an advert for common sense solutions. Solutions to these problems will come from both Republicans and Democrats.

What should US petrochemicals companies do then in order to improve local demand as, of course, they are not running for Congress?

A good start would be to enter into the political debate through some suggestions about how to deal with income inequality.

They should also look hard at the viability of capacity expansions, as demand growth for ethylene has flat-lined since 2000 (see the above chart).

And they must also look at how realistic it will be for them to export surplus future production.

One major difficulty here is that growth in emerging markets is slowing down as China also moves towards self-sufficiency, as I have already discussed.

And in my post tomorrow, I will raise another problem for US exports: The growing consensus that climate change is man-made.

Again, regardless of your politics, what this new consensus will mean for your business must become a key part of strategic planning.

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