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US shale spurs record foreign chemical investment

06.27.2014  | 

Foreign companies account for 62% of announced capital investments in the US chemical industry, the largest ever influx from other nations, according to the American Chemistry Council.

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By JACK KASKEY
Bloomberg

Chemical makers from Germany’s BASF to Brazil’s Braskem plan to invest as much as $72 billion in US plants, as they become increasingly convinced natural gas will remain cheap and abundant.

BASF is planning its most expensive plant ever, a propylene facility on the Gulf Coast that will take advantage of gas that costs about half what it does in Europe. Chemical makers get a double boost from cheap gas, which is both a raw material and a source of power for their factories.

Foreign companies account for 62% of announced capital investments in the US chemical industry, the largest ever influx from other nations, according to the American Chemistry Council. BASF, Braskem and Royal Dutch Shell said they’ve overcome initial reservations about US gas production and prices as they finalize spending decisions.

“We came to the conclusion this will be a sustainable advantage for the US,” said Hans-Ulrich Engel, BASF’s North American chief. “That is why we are comfortable making an investment.”

BASF, the world’s largest chemical maker, is confident its US facilities will benefit from cost advantages over plants in other regions as US gas reserves have surged to more than 100 years of supply, he said.

Prices, which peaked in 2005 at more than $15/MMBtu, are averaging about $4.65 this year. That compares with about $9 in Europe. While US prices may increase slightly, Engel expects them to remain among the lowest in the world and cheaper than naphtha, the oil-derived material that’s commonly used in Europe and Asia.

BASF Plants

In addition to the Gulf Coast propylene plant, BASF expanded a Texas ethylene facility it owns with France’s Total, and it’s considering an ammonia factory in Texas, a venture with Oslo-based Yara International.

The propylene plant will cost more than the 1 billion-euro ($1.4 billion) toluene diisocyanate factory BASF is building in Ludwigshafen, Germany, the company’s largest investment to date, Engel said. Propylene is used in used in paints and bottlecaps and toluene diisocyanate goes into seating cushions and mattresses.

The three BASF projects would add about 500 million euros to annual earnings before interest, taxes, depreciation and amortization, said Jeremy Redenius, a London-based analyst at Sanford C. Bernstein & Co., who recommends buying the shares. More than half of that will come from the propylene facility.

Trade Surplus

The foreign investments combined with new plants from US companies such as Dow Chemical and Westlake Chemical total $117 billion and will help turn a $3 billion trade deficit for chemicals into a $30 billion surplus in five years, said Cal Dooley, chief executive officer of the Washington-based American Chemistry Council.

Shell has signed 10 gas supply contracts, some for as long as 20 years, for proposed ethylene and polyethylene plastic plants in Monaca, Pennsylvania. While the company hasn’t made a final decision on whether it will build them, increased gas production in the nearby Marcellus and Utica shale formations is making a positive decision more likely, said Graham van’t Hoff, executive vice president of chemicals at the company.

“Our confidence level in those prospects is actually higher than it was a year ago,” van’t Hoff told reporters this month at the American Chemistry Council’s annual meeting in Colorado Springs, Colorado. “What’s made a huge seismic shift is the hydrocarbon differentials.”

Price Advantage

Abundant supplies have widened the price advantage from using gas as a raw material over plants in other regions that use naphtha, he said.

In addition to the lower cost of converting US gas into plastics, the plant’s location will save money because the gas won’t need to be piped to the Gulf Coast, where most US chemical plants are located. There will also be benefits in shipping costs for delivering plastics to fabricators in the Northeast, he said.

“We are absolutely clear that for this, we see advantages to being in Pennsylvania,” van’t Hoff said.

Shell has applied for state pollution permits, and started front-end engineering and design work and demolition at the western Pennsylvania site. The company also may build new chemical plants at its site in Geismar, Louisiana, and increase capacity at other US plants, he said.

Braskem Projects

Braskem is leading the pack in pursuing new plants that will benefit from cheap gas. It’s spending $4.5 billion with partner Grupo Idesa to build an ethylene plant and three polyethylene plants in Mexico that will start production next year, said Fernando Musa, who oversees the Sao Paulo-based company’s US operations.

Braskem signed an ethane-supply contract with Petroleos Mexicanos in 2009 at a price tied to the benchmark US price at Mont Belvieu, Texas, he said.

“We’ve been ahead of the wave for awhile,” Musa said. “The rationale is an America-centered strategy going after advantaged feedstock.”

Braskem in November announced plans for another ethylene-polyethylene complex to be built with Brazil’s Odebrecht in Parkersburg, West Virginia, not far from Shell’s proposed site. The company signed an ethane supply agreement with Antero Resources in March.

Plastics Demand

Plastics demand should improve as companies that make shopping bags and toys and other products realize that material and energy costs in the US are as cheap as anywhere, he said.

“With more competitive ethylene, you should see the reduction of offshoring of the plastics industry and maybe some onshoring,” Musa said.

Clariant, based in Muttenz, Switzerland, is doubling catalyst production in Louisville, Kentucky, to serve new and expanded US chemical plants, CEO Hariolf Kottmann said. He expects some of the announced US projects will be delayed or canceled because of obstacles such as rising costs, tightening labor markets and a lack of engineering expertise.

“It is a huge amount of money to build everything that is announced,” Kottmann said in an interview. “There are too many expectations.”

Not every chemical maker is ready to invest in the US. Bayer isn’t planning any major US chemical investments, even though the German company foresees a shortage of MDI, a chemical the company produces that’s used in insulation and foam cushions, said Jerry MacCleary, president of the North America region.

US shale gas until recently wasn’t even on the radar of most companies, which like Bayer instead invested in fast growing markets such as China, MacCleary said.

“Companies are doing the right thing by making sure shale gas is stable and sustainable,” MacCleary said. “We have all gained confidence that it is.”

The shale boom has Bayer and other chemical companies around the world taking a closer look at investing in US plants. “It all supports the reemergence of manufacturing in the United States that we didn’t think was possible five to seven years ago,” MacCleary said.



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