Issue Date: June 18, 2012
Chemical Executive Spirits Are Lifted By Natural Gas
At the closing dinner of the American Chemistry Council’s annual meeting earlier this month, Calvin M. Dooley, chief executive officer of the chemical industry trade association, raised a wineglass. “I’d like to propose a toast to shale gas,” he said.
The good fortune that natural gas extracted from shale deposits has brought to the U.S. chemical industry pervaded the meeting, held in Colorado Springs. The U.S. economy may be stagnant, growth may be slowing in China, and parts of Europe may be sliding back into recession, but thanks to cheap natural gas the U.S. chemical industry is going to do all right.
The most visible sign that executives believe in shale gas is the amount of money their companies are investing in the U.S. At a press conference, T. Kevin Swift, ACC’s chief economist, said he has tabulated more than $30 billion worth of announced chemical expansions in the U.S. over the past year or so. About two-thirds of them are ethylene cracker projects that will directly consume raw materials found in shale, he said.
Industry executives on ACC’s board hastened to add that the investments are being made based on the promise of favorable production economics rather than current demand. Customer orders for the plastics and other downstream products that are made from ethylene continue to be slack, they said.
“It’s not that there’s so much growth in the world,” said Craig O. Morrison, vice chairman of ACC’s board and CEO of Momentive Performance Materials. “But we can displace high-cost facilities elsewhere in the world.”
The displacement trend is already occurring. Swift pointed out that U.S. exports of the top five polymers by volume have doubled in the past five to six years. And in 2011 the U.S. chemical industry had a positive trade balance of $9.3 billion, down from 2010 but still higher than in any other year in the past decade.
At a separate briefing, experts from the consulting firm Accenture told C&EN that the country’s improved raw material position is dovetailing favorably with a general move by chemical industry customers such as auto and appliance makers to shorten supply chains and manufacture goods closer to where their customers are. Given today’s abrupt business cycle shifts, they said, supply pipelines that stretch halfway around the world can quickly become clogged with products no one wants.
“When you extend supply chains over the globe it’s challenging to make it work,” said Larry E. Oglesby, a management consulting executive with Accenture. By way of example, he pointed to the delays experienced by Boeing in the launch of its 787 Dreamliner aircraft in 2007 and 2008 because of stresses in a complex global network of parts suppliers.
Although each company’s situation is unique, the Accenture executives said their general advice to chemical makers considering investment in North America is to look beyond short-term economic uncertainty and at the long-term benefits that supply-chain shortening and cheap natural gas will provide. And act sooner rather than later, they advise, because the engineers, construction firms, and laborers needed to build and run a new plant are hungry and looking for work. In another year, they may not be.
Companies planning ethylene crackers clearly agree with that thinking, but others are having a hard time getting past the economic uncertainty, particularly in markets outside North America. “Our supply-chain people are going crazy,” said Pierre R. Brondeau, CEO of FMC Corp. and ACC’s treasurer. “They have no visibility on where things are going.”
Whereas almost the entire world suffered during the recessionary years of 2008 and 2009, now economies are out of sync, Momentive’s Morrison observed. “I was just in Austria at an auto parts factory. They are doing extremely well,” he said, serving firms such as BMW and Mercedes-Benz. On the basis of his firm’s sales in China, however, Morrison has trouble believing the official statistics that the Chinese economy is still enjoying 7–8% annual growth.
On balance, executives at the ACC meeting were fairly pessimistic about the second half of 2012. Swift gave reporters a sneak peak at the Chemical Activity Barometer, a new economic indicator from ACC. Based on production, inventory, price, and other measures, it reflects the U.S. chemical industry’s early position in the industrial supply chain. “We are a canary-in-the-coal-mine type of industry,” Swift explained.
Analyzing monthly data back to 1947, Swift’s team found that the chemical barometer tops out an average of eight months before an economic peak, as measured by the National Bureau of Economic Research, and bottoms out three months before an economic trough. Swift said the barometer is currently pointing to a slowing of economic growth in the coming months.
Morrison said sentiment among industry executives has likewise dipped. “Most of us earlier in the year would have said the first half is going to be kind of slow and the second half fairly strong,” he reported. “In our company and many of our peers I talk to, you don’t hear many people saying the second half will be strong.”
Yet executives at the event weren’t letting pessimism about near-term economic performance get them too down. All they needed to smile again was to think about the benefits to be had from low-cost shale gas.
“There’s a feeling that the U.S. will have a feedstock advantage versus the rest of the world that will last a long time,” said B. Chuck Anderson, president of Occidental Chemical and chairman of ACC’s board.
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