US chemical industry sees second growth wave

US chemical industry sees second growth wave

10:00 AM, 6th November 2017
This boom relies on gas remaining relatively cheap, but also on continued economic growth worldwide. © Shell
This boom relies on gas remaining relatively cheap, but also on continued economic growth worldwide. © Shell

NEW YORK, US: A decade ago, chemicals were just another fading US manufacturing business. Companies were reluctant to invest in new factories because of soaring prices for the oil and natural gas that serve as both raw materials and power sources. Dow Chemical Company and others were closing plants and moving production to the Middle East to save money.

“The conventional wisdom was we are not going to produce a lot of petrochemicals here,” said Kevin Swift, chief economist at the American Chemistry Council, an industry group.

Today, Dow, ExxonMobil Corp, and Chevron Phillips Chemical Co are putting the finishing touches on multibillion-dollar factories along the Texas Gulf Coast. The plants are part of $185 billion in proposed and recently completed investments, according to the chemistry council.

“The US is punching above its weight at the moment,” said Kevin McCarthy, a chemical industry analyst at Vertical Research Partners. Credit the rise of fracking. A torrent of cheap US natural gas has made the country among the most profitable places to produce chemicals, beating out the Middle East in attracting projects.

US exports of polyethylene plastic to Asia will rise more than fivefold by 2020, with China as the primary destination, according to research company IHS Markit Ltd.

“The cost advantage is durable enough that people are going to put money in the ground for a second wave”

Almost 20 factories are being built or expanded to convert gas liquids such as ethane and propane into ethylene, the most used petrochemical and the main ingredient in polyethylene plastic. The largest is an $11 billion complex being built near Lake Charles, by South Africa’s Sasol Ltd. It’s scheduled to begin producing polyethylene next year. Much of the investment is coming from abroad. Along with Sasol, foreign companies putting money into US facilities include France’s Total SA, South Korea’s Lotte Chemical, and Taiwan’s Formosa Plastics.

The largest plants are going up in Texas and Louisiana, where chemical makers can tie into existing infrastructure. “Houston has always been the hemispheric centre of the plastics business, but this just cements it for decades to come,” said Bill Gilmer, director of the University of Houston’s Bauer Institute for Regional Forecasting.

For oil-driven Houston, the spending splurge on chemical plants has softened the blow from job cuts in the energy sector. Most of the new jobs aren’t permanent: Construction on a typical ethylene plant peaks with about 2,500 workers on-site. A completed plant requires only about 80 employees to operate, Gilmer added.

The anticipated strain on the Houston area’s export infrastructure has some producers gearing up to send plastic pellets by rail to ports in Long Beach, California and Charleston, South Carolina. Meanwhile, companies that convert raw plastics to finished products are expanding to take advantage of the abundant material.

More investment is coming across the country.

“The cost advantage is strong enough and durable enough that people are going to put money in the ground for a second wave,” said John Roberts, a chemical industry analyst with UBS Securities.

Royal Dutch Shell Plc, the UK oil and chemicals conglomerate, has started building an ethylene complex outside Pittsburgh that will begin production in the early 2020s. Shell sees an advantage in being closer to Appalachian shale gas deposits as well as to the customers who turn plastic pellets into products such as packaging, trash bags, and bottles.

Even Saudi Arabia wants a piece of the action. State-owned Saudi Basic Industries Corp  (Sabic) formed a joint venture with ExxonMobil to build an ethylene plant in Corpus Christi, Texas, by early in the next decade. Fertilizers are another major target of capital investment: More than 20 US plants are being built or expanded to convert gas into ammonia, a key ingredient.

This boom relies on gas remaining relatively cheap, but also on continued economic growth worldwide. In India and China, an expanding middle class increasingly buys goods wrapped in plastic and appliances produced with chemicals. “If for some reason the world slows, that will be trouble,” Roberts concluded.

© Bloomberg

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