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Game-changing opportunities for US chemical industry

12.11.2013  |  Billy Thinnes,  Hydrocarbon Processing, 

Keywords: [chemicals] [petrochemicals] [McKinsey]

NEW YORK -- The 2013 edition of the Chem Show is now well into its second day, and the networking, deal-making and information sharing at New York City’s Javits Center is in full swing.  A part of this year’s show is the day long AIChE Northeast Manufacturing Conference.  One of the standout presentations from the gathering was given by Sam Samdani from McKinsey and Co.  Dr. Samdani spoke about five ideas that could be game changers for the US economy as a whole and the US chemical industry specifically. 

Working with data from a recent McKinsey Global Institute report, Dr. Samdani told attendees that there are five ideas out there that are game changers.  These ideas were selected based up on their ability to substantially raise productivity, gross domestic product (GDP) and job growth by 2020, all the while having an impact across multiple sectors.  The game changers are

  • Shale energy
  • Knowledge intensive manufacturing (value-facturing as Dr. Samdani calls it)
  • Big data analytics
  • Infrastructure investment, productivity
  • Talent and workforce development via education and training


Projected numbers.
Dr. Samdani and his McKinsey cohorts see shale energy having a $380 to $690 billion impact on the US economy by 2020. This number would be 3.7% of projected 2020 US GDP. For knowledge intensive manufacturing, which includes automotive, aerospace and semiconductors the projected GDP impact was between $200 billion and $590 billion, a possible 3.1% of total US GDP. 

Moving on to big data analytics, the dollar spread looks like a $155 billion to $325 billion proposition (1.7% GDP impact).  Infrastructure investment (270 billion to $320 billion, 1.7% GDP impact) and workforce development ($165 billion to $265 billion, 1.4% GDP impact) rounded out the projections.  

Dr. Samdani noted that for workforce development to have its desired GDP impact, the US Congress would need to pass immigration reform.


Energy.
Shale gas production in North America has grown by 51% annually since 2007, lowering the price by two-thirds and causing US natural gas prices to be significantly below those in the UK and Japan. This means that downstream chemical and petrochemical companies can capitalize on cheaper feedstocks in the US, providing them competitive advantage. Dr. Samdani also pointed out that the US output of light tight oil (LTO) is growing even faster than shale gas output did in its early stages. He sadi that the US has the potential to be bigger than Saudi Arabia in oil production.  Bolstering things on the projected GDP side of the coin, Dr. Samdani said shale energy could provide up to 1.7 million new jobs by 2020. 


Knowledge and big data.
Interestingly, Dr. Samdani said that the US is one of the only advanced economies to run a trade deficit in knowledge intensive manufacturing. The US trade deficit in knowledge intensive -manufacturing has grown from approximately zero in the mid-1990s to$217 billion in 2012.  One possible solution to stemming this tide would be utilizing big data analytics to create value for companies in multiple ways, especially but raising productivity across sectors to US competitiveness. Examples include advanced labor scheduling, predictive customer sales models, design-to-value, predictive hiring models and fraud detection in payment systems. 

While various sectors differ in their ability to use and obtain value from big data analytics, Dr. Samdani said that manufacturing could see great benefits, as could government, retail, trade, finance and insurance.


Infrastructure and education.
The McKinsey report argues that he US must raise infrastructure spending by 1 percentage point of GDP to meet its future needs. Relative to other leading industrialized countries in the world, the US is not investing enough infrastructure. As one example, Australia and Japan are actually investing more than needed for infrastructure. Meanwhile, productivity improvements can reduce the cost of infrastructure projects by up to 29%, Dr. Samdani said. 

Another troubling statistic in the presentation was that the US no longer leads the world in tertiary education attainment.  The US is third in post-secondary education in world, behind Israel and Russia, in the 55 to 64 age group. The numbers look even worse in the 25-34 year olds age group, with the US in fifth place.  Further, the proportion of US degrees awarded in STEM is very low compared to other countries. Mexico, Taiwan, Korea and China all vastly exceed the US in STEM degrees. Another problem is that in primary and secondary schools, US student achievement in international tests falls below the OECD average. The US is currently 31st.  However, pushing against this trend is the information that some states are actually doing quite well, including Texas, Massachusetts, and New Jersey.



Implications.
 Our planet has had essentially the same number of atoms during the time of the abacus as today, but now we have many more exotic molecules in the form of advanced materials.

“The chemical industry at large is the custodian of the most comprehensive advanced materials portfolio enabling technological advances,” Dr. Samdani said.   

He went on to note that to understand impact of shale, you have to look at the hydrocarbon chain. For instance, the ethanol (C1) value chain is intriguing. 

“Think of methane vs. coal,” he said. “There is going to be some shifting going on as it relates to US shale gas. There will be an impact on the ethylene chain. China is looking at methanol to olefins (MTO) technology. That will have huge impact on different parts of the chain in different parts of the world. Now, MTO is very capital intensive, but China can do it because they have some CAPEX advantages.”

Dr. Samdani suggested that business leaders need to capture immediate opportunities. He said they need to create new capabilities via new technology and training. 

“They should explore partnership opportunities, across value chains or even horizontally,” he said. “Also, they should spearhead local initiatives for economic development that can be a pipeline of talent.” 

For policy makers, Dr. Samdani strongly suggested they need to prioritize game changers. 

“They should take a tailored approach to sector policy,” he said. 

The government should be a facilitator and establish ground rules to reduce uncertainty in regulatory environments. Legislators and regulators need to support innovation and experimentation.

“Shale gas opportunities offer strong benefits to US petrochemicals and some moderate upsides to US specialty chemicals,” Dr. Samdani said.


Photo caption
Joseph Kurian, W.L. Gore and Associates, and Sam Samdani, McKinsey and Co.
                           Dr. Kurian hosted the session where Dr. Samdani offered his remarks. 



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