Global Chemicals Manufacturing Shifts to the U.S. Due to the Shale Revolution“U.S. energy landscape is changing on the back of cheap natural gas from shale deposits, which is turning producers away from “offshoring” energy-intensive industries. The discovery of shale gas is perhaps the greatest development in the modern era. Shale gas is a huge – and potentially long-term – competitive advantage for U.S.-based companies” - DOW CEO
“The feedstock cost for new crackers in [Saudi Arabia] will be around $6/MBtu as there’s not enough ethane availability … this cost will be much higher than the US gas price, which is currently at $3.50-4.00/MBtu”
“The shale gas revolution initiated in the US… is now reshaping not only the energy industry, but global economy and geopolitics as well.” This could cause “a great deal of discomfort” to Asia’s petrochemical sector.
“The shale gas revolution in the US has turned the global petrochemical industry inside out…Basic petrochemicals can now be made in the United States for about half the cost as in Europe”
Global Chemical Industry
U.S. Land of Opportunity
• Highly profitable due to Shale Gas
• Unique multi decades cost advantage
• Low political risk
• Chemical industry acceptance
• High manufacturing productivity
• Growing labor pool
• Strong supplier base & competition
Shale Gas Conclusions
• The U.S. Shale Gas revolution has caused a Global
Chemical Industry revolution
• Chemicals and manufactured products can be
produced far cheaper in NA
NGL access, cost set to drive next ethylene plant decisionsAbundant and cheap supply of U.S. NGLs, a group of hydrocarbons that includes ethane, propane, butane, isobutane, and pentane, from shale formations drove the first wave of petrochemical investments and created one of the biggest spending booms in history.
Since 2010, $85 billion worth of petrochemical projects have been completed or started construction, with about a further $100 billion proposed.
The greatest opportunity for petrochemical investment continues to be in cracker production, which uses NGLs such as ethane as a feedstock to create ethylene and polyethylene (PE), products that are traded globally and priced off crude oil. Making these products using cheap natural gas feedstock, and selling at prices based off higher oil prices has been a great cost advantage for the U.S.
While some projects were postponed when oil prices crashed in 2014-2015, recent higher oil prices and stability and evidence of long-term demand is spurring a new wave of construction project announcements. Ethylene is a key raw material for the plastics industry which tends to grow at the same pace as US Gross Domestic Product (GDP). LyondellBasell has said in recent earnings calls that global demand grows at a pace where the world would still need about four to five new crackers every year to meet demand growth.
First Wave Projects begin operating in 2017
Four crackers totaling more than 5 million tonnes/year of ethylene capacity are slated to start operations this year along the U.S. Gulf Coast. These are the first in a wave of shale-driven projects. Some 10.3 million tonnes of ethylene capacity will enter the U.S. market before the end of 2019. These new facilities will use ethane produced from U.S. shale as feedstock, totaling approximately 675,000 barrels/day, otherwise known as a 60% growth in ethane demand.
US ethane to double by '19, squeezing marginsUS chemical producers will suffer from big increases in ethane prices as demand exceeds supply from the second half of 2018. As the current wave of new chemical production capacity comes onstream from 2017-19, demand will steadily outstrip supply, leading to hikes in ethane prices from current levels of around 20-25 cents /gal to reach as much as 55 cents/gal or more, according to Cowen's report, called "NGL Bubble Bursts: Chemical Earnings At Risk".
Cowen forecasts that a deficit of 200,000bbl/day of ethane by 2019, which could lead to ethane prices breaking their link to natural gas and becoming more aligned to naphtha. This could lead to significant earnings headwinds for US chemical producers in terms of volumes as well as export economics.
As the new wave of US production comes onstream, competing with capacity increases in the Middle East and China, earnings before interest, tax, depreciation and amortisation (EBITDA) margins for US polyethylene (PE) production could shrink to below 20 cents/lb ($441/tonne) from current levels of over 35 cents/lb. This margin compression will begin to take shape in early 2018 and reach its apex in the second half of 2019, the report said.
Companies most negatively affected would be Dow Chemical, LyondellBasell and Westlake. However, some upstream integrated oil, gas and chemical majors might stand to have chemicals losses offset by higher natural gas liquid (NGL) prices.
Cowen's anaylsis suggests the low price of oil over the last 12-18 months has slowed growth in drilling activity and has put NGL supply growth below its original trajectory. “Much of the focus of today's drilling activity is on oil, which is not as ethane rich. As a result, drilling is not adding as much NGLs to the pool,” adds the report. Cowen analysts also believe that lack of infrastructure development will stop recovery of much stranded ethane. “Because of the locations of the ethane, we find that there will not be enough pipeline capacity to get all of these rejected barrels to the US Gulf Coast, where they are needed.”
However, as the new wave of US ethylene and PE supply comes onstream, domestic overcapacity will force producers to export more, pushing global prices downwards. “At the same time costs will rise on the tightening supply/demand environment for the consumed feedstocks, leaving a situation where margin could compress sharply as ethylene capacity comes online.”
Polysilicon Market Survey2006 - Market observers reckon that profit margins for producers of high-purity polysilicon are now around 50 percent.
High margins attract new entrants
That‘s exactly why Tom Werner believes that capitalism will come into effect. High margins attract new entrants. No less than half a dozen new projects have been announced in China in the past few months, most with a capacity of 3,000 MT and more. The large, established silicon producers have now realised that the photovoltaic industry is growing into their most important customer. By 2007 at the latest, silicon consumption in the solar sector will exceed that of the semiconductor industry for the first time.
The Polysilicon Industry Is Witnessing Interesting Times2016 - Polysilicon companies saw amazing amount of profits during 2008-2011, as prices of polysilicon shot up to $400/kg resulting in profit margins of 90%. This led to capacity expansion as majority was lured by high profitability. However, by the end of 2011, there was an oversupply when compared to the demand for solar panels. This led to prices crashing to $20-25/kg, while cost for smaller companies remained at $40-50/kg, resulting in bankruptcies of a number of polysilicon companies. Bigger producers were still able to breakeven given their low cost of production. Currently, there is a situation where prices of polysilicon is close to the costs.
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