The availability of cheap ethane (best ethylene feedstock) from shale gas and from new, light crude oils has resulted in boom times for the U.S. petrochemical industry. From a position of relative lack of competitiveness, U.S. olefin plants are now the low cost world producer with similar economics to Middle East plants that, however, must ship products to distant markets. Both U.S. and foreign companies are investing huge amounts of money in new plants here, with eventually far more capacity than can be absorbed by the U.S. market. But in the meantime, profits are incredibly high as domestic producers sell into a world market where prices are set by marginal producers in Europe, China and elsewhere. So, where do we go from here?
Accenture has just released an interesting report entitled “Exploiting Big Bang Disruption in the Chemical Industry”, partly based on a book by Larry Down and Paul Nunes on their “big bang disruption for industries” theory. For people familiar with the history of the ethylene/petrochemical industry the concept makes sense, though we favored a simpler model that roughly went (1) demand growth, (2) supply constraints/high profitability), (3) overinvestment and (4) unprofitable period (Example (1981-1986) (1987-1989) (1988-1991)(1991-1994). This type of cyclical behavior was the norm.
Accenture says that U.S. petrochemicals are now in the high profitability/overinvestment mode (see chart taken from Accenture’s article) and face a “bust” whose consequences can be mitigated with good forward planning and unusual customer relationship management. But, in addition to overinvestment, there will also be another factor, namely increasing availability of cheap shale gas and ethane in different parts of the world (e.g. Europe, Mexico, China) exacerbating the inevitable U.S. overcapacity situation, as ethylene producers in those countries match our economics. So, what should domestic companies do when the “sharkfin” bonanza is seen to end a few years hence? Accenture’s recommendations make a lot of sense. Firstly, with huge capacities( about 1.6 times the demand in the domestic market), companies must now focus much more on exports rather than traditionally seeing exports as incremental sales. They should form alliances with shipping companies and foreign customers to develop strong, permanent relationships while foreign competitors are still not a problem. This should go beyond normal sales agreements, and should, for example, include technical assistance, including application development with high value customers who will then depend on their U.S. supplier for more than product offtake. Permanent or semi-permanent linkages should be sought,
The “crunch” time for pricing collapse may come around 2020, so its a longer cycle than before. This should give the more forward-looking domestic firms time for some realistic long range planning.