The US petrochemical sector is booming. This year’s International Petrochemical Conference (IPC) hosted by the American Fuel & Petrochemical Manufacturers (AFPM) saw more optimism and excitement from a positive macroeconomic environment, along with new US projects and updates from INEOS, NOVA Chemicals, TPC Group, EQUATE and Formosa Petrochemicals, among others.
But in these heady times, there are also major risks to the rosy scenarios. Delegates expressed concerns about the escalating tariffs and a potential US trade war with China and rising capital costs to build new projects, along with higher interest rates. Companies making big investments must contend with a volatile US government and a cloudy global trade picture.
Peter Huntsman, CEO of Huntsman Corp, gave some uninhibited insights at the company’s annual breakfast meeting at this year’s IPC. Overall, the global chemical markets are set on a long-term tightening trend amid a positive macroeconomic backdrop, he noted.
“Aside from all the ethylene capacity being built in the US, we’re going to see a great deal of tightness in this industry, and not just in single product lines. Key trends are having a cumulative effect,” said Huntsman.
Increasing capital costs to build world-scale facilities, longer lead times to bring capacity to the market, shareholder expectations for short-term returns and global uncertainty are all pointing to less capacity being built over the long run, he said.
A world-scale MDI (methyl di-p-phenylene isocyanate) plant costs $1.3bn-1.5bn and takes a minimum of seven years to build, including permitting and site selection, Huntsman noted.
And a greater percentage of a company’s public shareholders today are comprised of hedge funds and “hedge fund-like” entities that have shorter investment time horizons. “Do you think these funds want to see $1.5bn in capital tied up for seven years?” said Huntsman.
On macroeconomic trends, predictions of disaster just a year ago on the impacts of Brexit, Trump’s election and later Hurricane Harvey, have simply not materialised, he pointed out.
“After Brexit, the UK stock market dropped sharply and some headlines said it was the end of the world. Then over the next year, the UK market was the best performer in Europe. Yes, negotiations are slow and the outcome is uncertain but I think the UK will still be around in the next 12 months,” said Huntsman.
And while Huntsman makes clear he is no fan of Trump as a person, he said the President’s pro-business growth policies are having an impact. The big gamble is for US economic growth to rise enough that even lower tax rates can generate more revenue.
“My prediction is that two years from now, Democrats won’t have much to run on,” said Huntsman. And then there is tightness also extending to the US labour market.
With the ageing of the population, some people having been out of the workforce for too long, others staying in school longer, some immigrants going back to their home countries and not returning to the US, increased use of opiod medication and declining overall health, labour will continue to be in short supply, said Huntsman.
On global trade, where some are “hyperventilating” about the growing US trade deficit, Huntsman points out it is not necessarily a negative development.
“I cannot figure out how trade deficits are bad… [When you look at where the US has deficits and where it has surpluses], the US is in a pretty good negotiating position,” said Huntsman.
And trade agreements should be adjusted over time to reflect new realities and priorities, he said. “NAFTA is a 30-year old agreement with nothing on drug and human trafficking, or safety and environmental awareness. We update contracts all the time in our business and both parties often wind up happy afterwards,” he added.
Overall, Huntsman sees a positive backdrop for the global economy going forward.
“For the next 12-18 months, I’m very optimistic about what we see. It’s not all peaches and cream but it feels good on a global basis,” said Huntsman.
Photo credit: Joseph Chang