Chemical industry split about the case for more US plants

The surge in investment into the US petrochemicals industry over the past seven years has been one of the biggest spending booms in a developed country this century.

A series of giant new plants that will make chemicals used to produce plastics, from companies including Dow Chemical and ExxonMobil, are about to come online.

A second wave of projects is now being proposed, as some chemicals producers become increasingly confident that the cheap gas feedstock that makes their spending possible will last for a long time. But the industry is split, with some companies questioning whether the market is strong enough to justify a fresh investment surge.

A decade ago, the US petrochemicals industry seemed doomed to long-term decline, eclipsed by rivals in the Middle East, which had cheap oil and gas for feedstock, and in Asia, where the market growth was strongest.

The US shale revolution transformed that outlook, unleashing a flood of cheap natural gas liquids such as ethane and propane, which are key chemical feedstocks.

Since 2010 $85bn worth of petrochemicals projects have been completed or started construction, with about a further $100bn proposed, according to the American Chemistry Council. Together, these plants would employ more than 60,000 people when in service, the industry group has estimated.

"This is the place to be," says Kevin Swift, the ACC's chief economist. "We are the low-cost producer."

The biggest new opportunity in the US has been for ethylene “crackers”: plants that take ethane and convert it into ethylene, a building block for plastics.

Dow, Exxon, Sasol of South Africa, and CP Chem, the joint venture of Chevron and Phillips 66, have built large crackers along the US Gulf of Mexico coast that will be starting up in 2017 and 2018. US ethylene production is set to rise from 25.8m tonnes last year to 34.2m tonnes next year, an increase of 33 per cent, says S&P Global Platts.

Most of the additional output will go for export, typically after being converted to polyethylene pellets. As emerging economies adopt the habits of developed countries, their demand for plastics is growing 1.5 to 2 times as fast as their gross domestic product.

"These expansions in the US are geared towards exports to Asia," says Bob Patel, chief executive of LyondellBasell, the US-Dutch petrochemicals group. "What drives demand for plastics is the growing middle class in China and India."

But with new US chemicals plants coming on stream, some analysts have raised concerns about a glut of production that would drive ethylene prices down. Others, and industry executives, argue that consumption growth is strong enough to absorb the increased supply. The convenience of plastic is compelling, and demand has been robust even during economic downturns.

For big oil companies, investing in chemicals is particularly appealing because the market is growing faster than for petrol or diesel, and is more resilient to governments’ policies to cut greenhouse gas emissions. The world may shift towards wind and solar power and electric vehicles, but plastics made from oil and gas will be difficult to replace.

Ben van Beurden, chief executive of Royal Dutch Shell, has identified chemicals as one of the Anglo-Dutch company’s priorities for growth.

Using low-cost feedstocks, such as those available in the US, can make chemicals operations highly profitable, he said. "Our chemicals business is [our] best-performing business," he added. "It is way too small in relation to the rest of the portfolio. That's why we said we want to double that business, for starters, by the early part of the next decade."

Last year Shell gave the go-ahead to a large new cracker in Pennsylvania, to take advantage of the cheap local ethane from the prolific Marcellus and Utica shales. In March, Total of France announced that it was leading a consortium looking at a new $1.7bn cracker in Port Arthur, Texas.

Last month Exxon said that along with its joint venture partner Sabic, the Saudi Arabian chemicals and materials group, it had picked a site near Corpus Christi in Texas for its new ethylene cracker, which would be the world’s largest. Exxon is aiming to make a final investment decision on that by the end of next year.

But while these companies press forward, others are hanging back. In the first wave of investment LyondellBasell added capacity at existing plants but did not build a new cracker, and Mr Patel suggests he is likely to stick with that cautious stance.

The economics of new ethylene plants do not look as compelling now compared to between 2010 and 2014, when there was a pronounced divergence between the prices of 

US gas and global crude oil.

US plants use ethane, which is broadly linked to gas prices, whereas their equivalents in Asia and Europe mostly use naphtha, which is coupled to oil. Since the oil slump of 2014, the spread between crude and gas prices has narrowed significantly.

"Even in this lower oil price environment, the US has advantage in our business,” says Mr Patel. “It’s just not so compelling that it would warrant another wave of investment. The pace will be much more modest."

In a presentation last month, Mr Patel told investors that plant maintenance, debt interest payments and dividends were LyondellBasell’s priorities for uses of cash.

Andrew Liveris, chief executive of Dow, which will become the world’s largest listed chemical company if the $150bn merger with DuPont goes ahead as planned, is in a similar situation.

On a call with analysts last month, Mr Liveris said he would soon give details of investments to “provide a springboard to drive the next chapter of Dow’s growth trajectory”, but suggested those would include only “incremental” increases in capacity.

Jonas Oxgaard, analyst at Bernstein, says shareholders are reluctant to see Dow take a big gamble on future markets in what has always been a cyclical industry.

"Investors want their money back," he says."Even if an investment makes sense on a 20-year horizon, that doesn’t mean it will make sense on a five-year horizon for shareholders."