The prize is downstream
Our blog on the Shell ethylene complex got us some interesting comments. Supporters for the ethylene complex in Ohio and West Virginia have not given up. They feel Shell may have issues with the location or that a second ethylene cracker could be built in their states. All of this is possible, we don’t know as we are not privy to Shell’s internal discussions and decision making.
We also believe that the real prize in investments, jobs and taxes is downstream. Sure the ethylene complex is sexy in terms of investment, jobs and taxes. The potential investment in hundreds or even thousands of new facilities consuming the ethylene derivatives is far more sexy. As we have seen in the chemical industry wave and the PwC white paper, ethylene and derivative prices will plunge following the decline of natural gas prices once sufficient capacity is installed. Take the case of Polyethylene the largest plastic by volume and value, the 4.2x reduction in natural gas cost results in a possible 2.4x reduction in Polyethylene prices. More importantly an almost four fold price advantage versus Asian Polyethylene producers.
That large of price reduction – advantage will encourage Polyethylene plastics processors to invest in new facilities in the U.S. We call this tsunami wave the U.S. manufacturing revival. We have already touched on the key elements in Game Changing Scenarios, but in summary the processors will compete with:
Complete substitution: replace not-in-kind materials in entire product sectors. This includes ubiquitous items such as the metal paint can, glass containers, wood decking and fencing – the list is almost endless.
Partial substitution: a typical automobile or refrigerator already has 20% chemical content. That will increase as more parts are engineered for these low cost chemicals.
Oil versus natural gas: certain chemicals, such as nylon, can only be technically produced via oil as a feedstock. Oil prices in the U.S. follow global oil prices and have not declined like natural gas. This creates a cost inventive to replace oil based chemicals with natural gas based chemicals. Nylon, a plastics competes with other plastics on the basis of performance and cost. As the cost side of the equation is turned on its head, nylon will be under replacement pressure by natural gas based plastics.
Import – Export: Over the last several decades, a number of manufactured products have shifted in large part or even entirely overseas. These include high volume, everyday items such as toothpaste tubes, ball point pens, and medical consumables. Products with a high chemical content are potential candidates to return to the U.S. for manufacturing aided by the lowered chemical prices and the avoidance of trans-ocean logistics.