The international chemicals industry is undergoing its most profound upheaval for 75 years, according to Kevin Swift of the American Chemistry Council. Not since the years before the second world war, when there was a flood of discoveries including nylon, synthetic rubber, PVC plastic and polystyrene, has there been technological change with such far-reaching consequences.
This time, though, the change is not in the chemicals industry itself but in the oil and gas business. Advances in horizontal drilling and hydraulic fracturing have unlocked previously inaccessible shale reserves, creating a boom in US oil and gas production that has driven down the prices of the essential inputs for petrochemical manufacturing: the natural gas liquids used as feedstocks, particularly ethane.
Those cheap feedstocks are reshaping the global competitive landscape for petrochemicals. Anton Ticktin of the Valence Group, a specialist investment bank working in the chemical industry, says the US now has “a quite phenomenal advantage”.
Costs are already lower in the US than in Europe, Latin America or China. In the future, they are likely to be lower even than in the Middle East.
Only three years ago, it looked as though the US bulk chemicals business was in long-term decline. Companies such as Dow Chemical saw their future in investing in the Middle East and moving downstream into more specialised products.
The shale revolution has turned that round, encouraging dozens of companies to make plans to invest in new US chemicals production capacity.
As Mr Swift, the ACC’s chief economist, puts it: “This is the place to manufacture chemicals now.”
The ACC, an industry group, has counted 17 separate projects, either planned or under consideration, to increase capacity in just one process: “cracking” ethane to make ethylene, the building block for plastics such as polythene.
US companies including Dow, ExxonMobil and CPChem – a joint venture of Chevron and Phillips 66 – have been joined by international groups including Royal Dutch Shell and LyondellBasell, both based in the Netherlands, Formosa Plastics of Taiwan, Sasol of South Africa, PTT Global and Indorama of Thailand, and Braskem of Brazil in looking at investments in ethane cracking in the US, and several have already made commitments.
If all of those proposed projects go ahead, Mr Swift says, US ethane cracking capacity could rise by up to 40 per cent by 2018.
Ethylene, which accounts for 40 per cent of world trade in chemicals by volume, is a useful yardstick for the industry as a whole, according to Hassan Ahmed of Alembic, an investment research group.
About half the world’s production is based on naphtha, a light liquid hydrocarbon, with the remainder based on ethane and other gases.
Because naphtha is produced from oil, its price is tied to crude. It is today about $100 a barrel, and has risen slightly over the past year.
The price of ethane in the US, by contrast, has collapsed from about 80 cents per gallon a year ago to less than 23 cents today, as new processing capacity has come on stream and US gas producers have shifted the focus of their drilling towards natural gas liquids.
US chemicals companies generally accept that the price for their feedstock will have to rise.
“For this thing to work, everybody has to be able to make enough of a return to attract capital, from drilling wells to making products,” says Pete Cella, CPChem’s chief executive.
Andrew Liveris, chief executive of Dow, suggests ethane in the “high 30s” of cents per gallon would be a reasonable long-term price.
Still, even with ethane at 40-50 cents a gallon, ethylene will cost about $400-$500 a tonne to produce in the US, Mr Ahmed says, compared with $1,200 a tonne in Europe.
European chemicals companies have been sounding the alarm about the impact of the US cost advantage on their competitive position.