The global economy has reached a critical state. Last year represented the third year of the global economic recovery. However, the pace of improvement slowed as higher energy prices, the disasters in Japan, the Eurozone crisis and the influence of other negative factors spread. A global soft patch emerged and has been centered in manufacturing. Unfortunately for chemistry, the manufacturing sector represents its major end-use or customer base.
The consensus forecast is for continued but slow economic growth, well below trend growth through 2013. This is consistent with a recovery from a financial crisis, and it is likely that economic growth will not reach long-term trend levels until 2014. The recovery is fragile, however, and multiple risks remain. Sharply higher oil prices present the gravest risk. The European debt crisis (and recession) continues to weigh on the world economy; as does a potential hard landing in China and the uncertainty about US debt levels, policy and long-term economic prospects. The wrong trade, tax or other policy initiatives could derail activity. Economic prospects going forward represent a two-speed world in which the developed nations (constrained by debt and adverse demographic factors) grow slowly, while the emerging markets grow rapidly as a result of industrialization and rising consumer-driven economies.
Most major end-use markets for chemistry have recovered in the US, especially those tied to export markets and business investment. The manufacturing sector, which is the largest consumer of chemistry, strongly rebounded during the recovery, but growth slowed in 2011 as demand weakened. US manufacturing output still remains below its pre-recession peak. A two-speed manufacturing sector, with about one-half industries soft and others doing well, has emerged. The boom in oil and gas is creating both demand side (e.g., pipe mills, oilfield machinery) and supply-side (e.g., chemicals, fertilizers, direct iron reduction) opportunities. There is strength in light vehicles and aircraft; a recovery in construction materials and industries involved with business investment (iron and steel, foundries, computers, etc.) are still strong. Elsewhere, industry dynamism is sapped, with some structural issues remaining in a number of industries (textiles, paper, printing, etc.)
| Fig. 1. Trends in US GDP, total industrial production and |
petrochemicals production growth, % change in volume.
Forward momentum depends on demand for consumer goods, which ultimately drives factory output. But weakening foreign demand presents challenges for the manufacturing sectors. Unfortunately, petrochemicals are early on in supply chain, and exports to Europe have evaporated at present. Balance sheets are strong, and lower input costs have benefited manufacturers. Nonetheless, an uncertain business and regulatory environment is constraining business optimism (and hiring).
The softening of the manufacturing recovery will likely dampen chemical demand. Inventories can mean the difference between a slowdown and a recession. In general, lean inventories along the supply chain support future production gains. Chemical inventories in the US are relatively balanced, although some destocking emerged during the fourth quarter. With the exception of Europe, chemical exports continue to grow, driven by a favorable oil-to-gas price ratio.
The consensus is that US chemical output is expected to improve during 2012 and further gain through 2016. As a result, petrochemicals and derivatives, following the 6.9% gain in volumes during 2010 and essentially flat performance in 2011, are expected to have a 1% gain in 2012 before improving to 3.3% by mid-decade. Strong growth is expected in synthetic rubber and later in petrochemicals, organic derivatives and plastic resins as export markets revive. For the long term, domestic petrochemical growth is expected to expand at a pace exceeding that of the overall US economy.
Strong gains in capital spending by US chemistry are expected over the next several years, stemming from new investment in petrochemicals and derivatives arising from shale gas developments. The need to add capacity and to improve operating efficiencies will play a role as well. This emerging shale gas story is noteworthy.
Access to vast, new supplies of natural gas (NG) from previously untapped shale deposits is one of the most exciting domestic energy developments of the past 50 years. After years of high, volatile NG prices, the new economics of shale gas are a game changer. Low NG prices are creating a competitive advantage for US manufacturers, thus leading to greater investment and industry growth. US manufacturers use NG as fuel and power for a wide variety of chemical processing facilities to produce a vast variety of manufactured goods. The relatively low NG price provides US manufacturers an advantage over many competitors around the world. Growth in domestic shale gas production is helping to reduce US NG prices and is creating more stable NG supplies for fuel and power. As economic theory teaches and history shows, a reduction in the cost of a factor input, such as NG, leads to renewed competitiveness and a positive supply response. This, in turn, leads to new private-sector investment, which fosters job creation.
For the petrochemical industry, the stakes are even higher. In addition to using NG for fuel and power, this industry also uses NG as a raw material or feedstock. In the US, it is historically cheaper to crack ethane, propane and other NG liquids than to crack naphtha (from oil refining)the primary petrochemical feedstock in Western Europe and Northeast Asia. The steam-cracking process using ethane is simpler, and the hardware is less expensive. Nearly 90% of North American ethylene is now derived from NG liquids. Over eight years ago, the US Gulf Coast (USGC) petrochemicals were being written off by many industry observers. The industry was in a position near the top of the cost curve and it was in a worse position than Western Europe and Northeast Asia. A pending wave of capacity in the Middle East (ME) only added to dour sentiments. With the revolution in shale gas, however, this has changed radically (and for the better). By 2011, the USGC cost position had so improved that this region now follows the ME. Moreover, ethane supplies are tightening in the ME and are constrained. The era of low-cost feedstocks in the ME may end soon.
As a rough rule of thumb, when the ratio of the Brent oil price divided by the Henry Hub price for NG is above a band between 6:1 and 7:1, then the competitiveness of (US) Gulf Coast-based petrochemicals and derivatives such as plastic resins vs. other major producing regions is enhanced. Other factors such as co-product prices, exchange rates and capacity utilization have played a role in competitiveness as well. As a result of shale gas, this important ratio has been above 7:1 for several years. The ratio of oil prices to NG has recently been around 40:1, and it is very favorable for US competitiveness and exports of petrochemicals, plastics and other derivatives. This condition has fostered strong gains in US plastic exports. The only reason that thermoplastics exports have stabilized has been the crisis in Europe and weakness in that regions economy; all have dampened US exports. In addition, capacity constraints have occurred. Due to rising domestic demand for plastic resins in North America, some overseas customers need to source elsewhere, as the ability to export is hindered somewhat.
In the US, shale gas has been a game changer in the domestic NG markets and has improved the competitiveness of the US petrochemical sector, resulting in boosting exports. The benefits are being felt beyond petrochemicals and now include fertilizers and other downstream products. Capital investment in North America is being reconsidered, and a slew of projects have been announced. For petrochemicals alone, the new project investments could total $20 billion with an additional $23 billion likely for other downstream and specialty products. With an eventual recovery in Europes economy, along with the startup of some of these projects and sustained competitiveness, the medium- and long-term outlook for US production and exports of petrochemicals and plastic resins is quite good, with the US beginning to capture market share in global markets. In turn, this will generate new business and, importantly, jobs, and it will play a large role in the resurgence of US manufacturing. HP