Petrochemicals: U.S. firms are making as much, and expanding as fast, as they can

In 2013, U.S. petrochemical producers once again racked up fantastic profits while their counterparts in Europe and Asia struggled. There’s little to indicate that 2014 will be much different.

Extraction of hydrocarbons from shale continued to keep U.S. natural gas cheap relative to oil in 2013. In fact, on an energy-content basis, oil is about four times more expensive than gas. Because U.S. chemical companies make the building block chemical ethylene predominantly by cracking natural-gas-derived ethane, this price disparity gives them an enormous advantage over European and Asian firms that rely primarily on naphtha, which is derived from crude oil.

Thus, U.S. chemical producers are running their plants as hard as they can. According to Stephen Lewandowski, director of olefins research at the consulting firm IHS Chemical, North American operating rates are currently about 93%, the practical maximum. Because U.S. petrochemical producers can’t push their plants any harder, they are meeting growing demand at home for ethylene derivatives such as polyethylene and polyvinyl chloride by exporting less.

In Europe, the situation is dire. The average integrated margin—the profit in the supply chain from naphtha all the way to polyethylene—is break-even, according to Lewandowski. There, producers are running plants at rates of less than 80%. “As long as crude stays where it is, it is going to be difficult for Europe,” he notes. “They just don’t have the competitive feedstocks and competitive assets.”

In the U.S., companies are planning an unprecedented amount of new capacity. The tenth announcement of a multi-billion-dollar petrochemical complex came last month from the chlor-alkali and PVC producer Axiall. The company and an unnamed partner are considering a $3 billion cracker in Louisiana.

But there are signs of an approaching limit to the number of projects North America can bear. For instance, last month, Nova Chemicals announced it will delay a new polyethylene plant.

The problem is not availability of ethane but rather access to muscle and steel. “There is an awful lot of construction proceeding on the U.S. Gulf Coast for a number of different types of projects, and in this industry we haven’t had that kind of build-out, really, ever,” says Chris Bezaire, Nova’s senior vice president of polyethylene. “So the industry is really constrained on engineering resources, pipe fitters, and electricians—all of these trades—as well as equipment manufacturing and even materials.”