What Will 2012 Bring?

US chemical makers face challenges but are gaining a competitive edge

By Thomas K. Swift, American Chemistry Council

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Not that long ago, many industry observers were writing off petrochemicals from the US Gulf Coast (USGC). Production there was far more expensive than in Western Europe and Northeast Asia. A pending wave of capacity in the Middle East only added to dour sentiments. However, the revolution in shale gas has changed USGC economics radically for the better. By 2010, the USGC had become second only to the Middle East for low production costs. Moreover, ethane supplies are tightening in the Middle East and are constrained; the era of low-cost feedstocks in that region soon may be over.

As a rough rule of thumb, a ratio of Brent oil price to Henry Hub natural gas price above a band of 6:1 to 7:1 enhances the competitiveness of USGC-based petrochemicals and derivatives such as plastic resins compared to other major producing regions. (Other factors such as co-product prices, exchange rates and capacity utilization play a role in competitiveness as well, of course.) As a result of shale gas, this important ratio has exceeded 7:1 for several years and recently has surpassed 25:1, which is very favorable for US competitiveness and exports of petrochemicals, plastics and other derivatives (Figure 2). This has led to strong gains in US plastics exports. Such exports have stabilized, though, but mainly because of the crisis in Europe and weakness in that region's economy. Some capacity constraints have occurred and rising North American demand for plastic resins has cut into exports.

The impact of abundant low-cost shale gas now extends beyond petrochemicals to production of other chemicals including fertilizers and downstream products. Companies are reconsidering capital investment in North America and have announced a slew of projects. With a recovery in Europe's economy, the startup of some of these projects and sustained competitiveness, the outlook for North American exports of plastic resins is quite good in the medium and long term. In turn, this will generate new business and, importantly, jobs.

Many forecasters are concerned about an outright downturn, i.e., a recession, in the US economy. Certainly the higher energy prices and the supply chain shock emanating from Japan earlier in the year, as well as continued weakness in housing, the European debt crisis, US debt issues, uncertainty and other factors are working against the recovery. And other risks lurk in the background. A combination of these could engender a vicious cycle of financial distress, asset depreciation, and falling incomes, sales, production and employment. These challenges potentially could push the global economy back into recession. Most notable is the European debt crisis and the emerging recession there, which would adversely affect US exports and our economy and, should a financial crisis emerge, definitely tip the United States into recession. The odds of a recession are about 40%. Should another downturn occur, US chemicals output excluding pharmaceuticals, instead of growing roughly 2.5% in 2012 would likely decline 3%!

The economy clearly is at a critical juncture, but most forecasters expect the recovery to progress, although at an anemic and at times uneven pace. Let's hope the consensus scenario comes to pass, but the prudent observer will prepare for the alternative scenario as well.

THOMAS K. SWIFT is chief economist and managing director of the American Chemistry Council, Arlington, VA. E-mail him at kevin_swift@americanchemistry.com.

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