channelchek

COMPANY Data

Companies by Sector

More than 6000 listed

My FAVORITES

Company

Price $

+/- %

Movers and SHAKERS

The Long Story Short

How Long Will U.S. Petrochemical Producers Maintain Their Global Advantage?

(Note: companies that could be impacted by the content of this article are listed at the base of the story [desktop version]. This article uses third-party references to provide a bullish, bearish, and balanced point of view; sources are listed after the Balanced section.)

In the 1967 film The Graduate, family friend Mr. McGuire summoned a newly graduated Benjamin Braddock for some career advice. “There’s a great future in plastics. Think about it. Will you think about it?” Fifty-two years later, a building boom is occurring on the US Gulf Coast and elsewhere in the United States to construct petrochemical facilities to produce ethylene and other products that are used to make plastics for water bottles, bags, and packaging. According to the American Chemistry Council, approximately 90% of US olefins production uses natural gas liquids, while 70% of European and Asian petrochemical production uses naphtha, which is a crude-oil-derived feedstock. US petrochemicals producers have a competitive advantage when natural gas prices are low relative to oil prices. With low-cost feedstocks such as ethane available from growth in shale production, the US has among the lowest cost feedstocks in the world. With billions being invested in new manufacturing, storage, and export facilities, some investors are wondering how long the advantage can last and what risks may exist.

Global Demand for Plastics. According to the IEA, demand for plastics has outpaced that of all other bulk materials and has nearly doubled since 2000. Demand is expected to rise based on increased per capita use among developing countries. For example, advanced economies currently use up to 20 times as much plastic as developing economies on a per capita basis.

U.S. Feedstock Advantage. Based on forecasts from the US Energy Information Agency, natural gas plant liquids growth is expected to average 2.6% between 2018 and 2030, while consumption of ethane, propane, and butane used as a bulk chemical feedstock increases at an average rate of 1.5% per year between 2018 and 2050 in the EIA’s reference case. Based on the EIA’s commodity price forecasts, it appears US natural gas liquid feedstocks will maintain a cost advantage to crude-oil-based feedstocks for the foreseeable future.

Infrastructure Advantages. According to the American Chemistry Council, 334 new chemical industry projects have been completed, announced, or started since 2010, representing $204 billion of investment. Areas of the US, particularly along the US Gulf Coast, are ideally situated for downstream manufacturing facilities with proximity to export outlets. Additionally, the US has well-developed and interconnected upstream, midstream, and downstream facilities that may provide long-lived competitive advantages for the US chemical industry.

Export Growth. According to the American Chemistry Council, US industrial chemical exports are expected to expand on average 5.2% per year through 2024. The three largest markets for US chemical exports in 2018 were Mexico ($23 billion), Canada ($23 billion), and China ($12 billion).

Demand Could be Dented by Slowing Economic Growth. Lower domestic and global economic growth could negatively impact the demand for plastics and commodities in general, which would have an impact on pricing for petrochemicals such as ethylene.

Crude Prices Fall. The spread between lower cost natural-gas-based feedstocks and petroleum-based feedstocks influences the margin improvement from using ethane. Additionally, ethylene prices generally track crude prices. If crude prices fall, margins earned by ethylene producers using ethane will fall.

Overbuilt Capacity. When times are good, industry participants generally overbuild. If ethylene cracking capacity is overbuilt, the market could get oversupplied, thus depressing prices.

Regulations and permitting. New regulations relating to the environment and/or permitting could become more stringent, making it more difficult to build or expand manufacturing capacity. Additionally, increased recycling of plastics could reduce demand for new product.

The outlook for chemical producers appears to be more bullish than bearish. Based on expected growth in shale production of natural gas, crude oil, and natural gas liquids, it appears that US petrochemical producers will maintain their global competitive advantage for the foreseeable future. While margins may ebb and flow with changing costs of feedstocks relative to the price of products such ethylene, US chemical producers seem well positioned to benefit from growing global demand, including in developing countries. However, risks to the global and domestic economic outlook and the potential for lower crude oil prices are a concern. Because it is such an important part of the US economy, improves the trade balance with other countries, and provides well-paying jobs, the chemical industry may continue to enjoy support from government and regulatory agencies.

COMPANY Data

My FAVORITES

Movers and SHAKERS

The Long Story Short

How Long Will U.S. Petrochemical Producers Maintain Their Global Advantage?

NEWS Channel

RESEARCH Reports

ChannelCast VIDEOS