June 2013

Our last blog, States can win the downstream game,  looked at how states can attract the coming tsunami of downstream manufacturing. That got us to thinking from the perspective of chemical companies. We have seen how they have responded to the once in decade opportunity, made possible by the shale gas revolution.  According to the American Chemistry Council “through the end of March 2013, nearly 100 chemical industry investments valued at $71.7 billion have been announced” and “In ethylene, for example, by 2020, the expansion of U.S. capacity is anticipated to approach 40% above the levels of 2010.” Considering that the U.S. chemical demand growth is typically GDP + 1% that is far more ethylene than the markets need.

So where does all this ethylene go? Chemical manufacturers could reduce operating rates. This is problematic as many facilities simply run more efficiently at name plate capacity and are difficult to effectively turndown. Plus these are new investments in globally among the most cost efficient plants. The reduced rate option is an option of last resort.

Some will be exported as ethylene derivatives (ethylene is difficult to effectively ship trans-ocean). This makes sense as we have seen the U.S. ethylene costs are far below European or Asian producers. For multi-national companies this will be straightforward via their overseas affiliates. But too often they have overseas ethylene derivative capacity that they will need to mothball or run at reduce rates. For companies who have historically marketed only in the U.S. it will take time to build inventories and overseas markets. Unfortunately the U.S. capacity increase timing closely matches a Middle-East capacity increase program, thus a fight for the international customer. Finally many of these chemical products cost are at or under a dollar a pound, trans-ocean shipping and increase in working capital will take their bite of any profits. Nevertheless, overseas sales could be part of the overcapacity solution.

A more creative solution is to leverage the low cost U.S. ethylene derivatives and increase the U.S. market size. We covered the options in Game Changing Scenarios and The Prize is Downstream. To increase the size of the U.S. market in a meaningful timeframe will, however, require the chemical companies to actively seek new customers and applications. For example, essentially all of the U.S. toothpaste tube manufacturing has moved off-shore to China. New companies need to be encouraged and nurtured to produce in the U.S.  TopLine Analytics researched innovative customer and application techniques and is ready to help.