Update 2: Reliance Betting On US Competitiveness

He’s not bad at making money

warrenbuffettlongtermcapital.jpgSource of picture: www.dealbreaker.com


SOME of the logic behind Reliance Industries’ bid for LyondellBasell could be a recognition that the globalisation of petrochemicals markets may have gone into partial reverse.

A climate bill passed by the House of Representatives has a provision for taxing imports from countries where emissions standards are more lax than the US.

This defensive measure, no doubt the result of pressure from heavily polluting industries such as refining and chemicals, recognises that the business-as-usual scenario outlined by the International Energy Agency in its World Energy Report 2009 won’t come true.

The scenario involves no significant improvements in energy conservation and no great shift to renewables, leading to a rise in global temperatures of 6 C.

Even if an international carbon tax and/or cap-and-trade system isn’t established, individual countries seem likely to step up their efforts to lower hydrocarbons consumption.

Whether or not global warming is man-made, energy security is by itself a big enough reason to boost energy efficiency and develop green technologies.

Then there is what Nubuo Tanaka, Executive Director of the IEA, calls “the silent revolution” since 2007 of increasing US gas supply.

Breakthroughs in shale-gas technology and very long global liquefied natural gas (LNG) supply are contributing to what the IEA describes as a worldwide supply glut that could have “far-reaching consequences for the structure of gas markets”.

This will put LyondellBasell’s US polyethylene (PE) assets in a strong position in the medium and possibly even the long term.

It has long been assumed that when the US polyolefin market is eventually in deficit, the shortfalls will be supplied by the Middle East and Latin America – notwithstanding extra logistics costs that amount to effective trade barriers.

But a sufficiently high price on carbon would undermine this assumption, along with cheap US natural gas.

This is still the world’s biggest economy and therefore the world’s biggest chemicals and polymer market when all the hot air about China has been expelled.  

What was right for Warren Buffett could prove to be right for Reliance.

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