Commentary: Buzz tempers at AFPM

Joseph Chang
Peter Huntsman signals warning on growing US debt

It’s happening. The US cracker project wave is amplifying with Dow Chemical on 28 March announcing the completion of its 1.5m tonne/year project – the second after Occidental Chemical/Mexichem’s start-up in Q1 2017.

A day earlier, Total/Borealis and NOVA Chemicals announced their 1.0m tonne/year cracker project to be completed by the end of 2020 in Port Arthur, Texas, which comes with a new 625,000 tonne/year Borstar polyethylene (PE) unit at nearby Bayport.

Executives were relatively optimistic about the global market being able to absorb the new volumes sans a major downturn, citing construction delays.

Not everyone was bullish. “The ethylene bubble has got to burst. To put billions and billions of pounds into the market and not see a disruption, is unrealistic,” Huntsman Corp CEO Peter Huntsman warned.

Bob Bauman, president of Polymer Consulting International, sees a plunge in PE prices as three new crackers with downstream PE units likely start up within six months of each other in 2017-2018. Despite producers’ stated export focus, “no doubt they will have to place product in the domestic market”.

POLITICAL UNCERTAINTY

All this comes amid the most uncertain and volatile political climate in decades. After the “Trump Bump”, palpable caution has been injected into the collective consciousness, much revolving around US tax reform.

While optimistic on the administration’s willingness to engage with the industry on regulatory reform, the failure of the Republican-led healthcare overhaul “is a concern”, noted AFPM president Chet Thompson.

The US chemical sector (ex pharma) generated $121bn in exports in 2016 and a trade surplus of $28.2bn, according to the American Chemistry Council.

The product from the US cracker wave is primarily targeted for export, in the form of PE pellets. The US aims to use its huge shale gas resource to supply the growing polymer demands of the world.

“We have some concerns about any border adjustment tax’s (BAT) impact on trade as it could be interpreted by countries as protectionist,” said Peter Cella, CEO of Chevron Phillips Chemical, who also noted US chemical exports are expected to grow by 7%/year over the next five years.

“We hope they don’t rush it. It needs time and a comprehensive look,” said Neil Chapman, president of ExxonMobil Chemical, on tax reform. “At the end of the day, Congress will find ways to make tax reform revenue neutral – you can’t rely on just [economic] growth. So there will be winners and losers. We have to get comfortable as a country that someone’s going to lose.”

PETER HUNTSMAN LETS IT RIP

But higher US growth, if it does come, won’t be enough to climb out of the mountain of federal debt, said Peter Huntsman in his 28 March breakfast meeting talk at the IPC called “A view of the North American Chemical Industry (and other sundry views)”. He relishes this forum to let rip on a slew of topics.

Huntsman points out the US budget deficit is growing at around $700bn/year. Even if the US can get to 4% GDP growth, this would only generate $130bn in additional tax revenue – “nowhere close to being balanced”. By 2027, interest on US federal debt will account for 19% of the entire budget versus 7% today, he warned.

Huntsman is unabashedly bearish on oil. “We will continue to underestimate the impact of innovation on oil supply.” Fracking technology has led to once declining fields such as the Permian Basin in Texas being prolific once more and on a larger scale. “The Permian was the epitome of peak oil. Now there are billions more barrels of recoverable oil from this 100-year old field. There is nothing like it in the world,” said Huntsman. He called $20-30/bbl not necessarily the floor, and $50/bbl “the new ceiling”.

But this is certainly not the consensus view. If it was, companies would not be gearing up for a 2nd wave of new US crackers. Look for potential new cracker announcements in the coming year from ExxonMobil and SABIC (JV) and Chevron Phillips.

Plus, how about an aromatics project in the US? “For the same reasons US shale catalysed opportunities in the olefins market, that set-up could be there for aromatics as well,” said Chevron Phillips’ Cella. The company’s proprietary aromatics process uses light paraffins and naphthenes – abundant in US shale.