Renewed competitiveness due to shale gas (and the resulting disconnect between U.S. natural gas prices and global oil prices) is prompting new investments — we count over 50 projects announced in the last two years, representing aggregate capital spending exceeding $40 billion — that will boost exports in the years ahead. The large surpluses in basic chemicals will continue to expand, as will surpluses in specialties and consumer products. These gains will more than offset continuing trade deficits in pharmaceuticals and agricultural chemicals, and result in growing trade surpluses.
The consensus is that U.S chemical output will improve during 2013. Volume of chemicals, excluding pharmaceuticals, will increase 1.9% in 2013 and 2.3% in 2014. Strong growth is expected in plastic resins as export markets revive. Demand from end-use markets, most notably light vehicles and housing, will drive production of specialty chemicals. Gains in consumer products, which were strong last year, will moderate in 2013 and 2014. After a weak 2012, demand for agricultural chemicals will revive. In the long term, growth in U.S. chemicals will outpace that of the overall U.S. economy. Pharmaceuticals eventually will emerge as a growth segment.
Although projected year-on-year growth rates for most segments during the next few years appear good, they must be considered in the context of the exceptionally sharp declines seen in 2008 and continuing into 2009. It may take years for activity to recover from these steep declines and exceed past peaks. Another factor is that these projections reflect the consensus; mainstream forecasters' models largely are demand-driven. The significant investment in shale gas is a supply-side response and suggests a much higher growth profile, as we'll discuss later. Thus, the consensus outlook likely is too low.
The industry is sensitive to a number of risks. High and volatile energy costs are paramount in this regard, as are potential adverse regulatory and other policy initiatives. Fiscal squabbles in Washington could dampen domestic industrial activity, while an even weaker world economy would adversely affect exports.
With a stalling of volumes, overall operating rates slipped during 2012. Looking forward, modest gains in chemical industry production volumes and stable capacity suggest improving operating rates this year; strengthening production volumes could boost capacity utilization even higher in 2014 and beyond. The more than 50 projects already announced will result in fairly strong gains in capacity through 2017.
U.S. investments in chemicals surged 19.8% in 2011. These gains continued into 2012; capital spending grew 15.5% to about $38.1 billion last year.
Capital spending cycles generally lag cycles of industry activity — profits and operating rates serve as leading determinants of spending. (Other factors influencing the level of investment include the business cycle, long-term business expectations, taxation policies, the cost of capital, the burden of debt, the supply of credit, and mandated expenditures, e.g., due to regulations.) In general, improving production and utilization rates, cost containment from earlier cost-reduction efforts, low feedstock and other raw material costs (compared to Europe and Northeast Asia) and higher selling prices resulted in a strong recovery of profits from 2010 into 2012. Given the new dynamics from shale gas, the current upswing in profits possibly will last longer than in recent cycles. In addition, utilization rates have risen, although they remain below the levels of several years ago and the long-term average.
With improving operating rates and profit margins, and a low cost of capital, the U.S. chemical industry will increase investment in new plant and equipment. The need to replace worn-out and outdated assets is apparent and will spur some spending. However, improved U.S. competitiveness resulting from shale gas will be the most important driver. The industry's investment cycle clearly has re-engaged; capital spending quickly has surpassed the most recent peak.
The recovery will strengthen into an expansion by mid-decade, with greater capital spending for capacity additions expected during the next five years. Thanks to shale gas, the United States is becoming an increasingly preferred location for plants. Substantial new investments in petrochemicals and derivatives will arise from shale gas developments. Basic olefins capacity will increase by 35% to 40%, various industry consultants estimate. Double-digit gains are expected through 2015 with only a minor slowdown in capital spending after that. By 2017, capital spending by the U.S. chemical industry will reach $64.5 billion, more than double the level at the start of this decade.
SHALE GAS DEVELOPMENTS
The availability of gas from shale is possibly the most important domestic energy development of the past 50 years. Following a decade of high and volatile natural gas prices that destroyed industrial demand and led to the closure of many gas-intensive manufacturers, shale gas offers a new era of American competitiveness that will lead to greater investment, industry growth and employment.
Increasing domestic shale gas production is helping to reduce U.S. natural gas prices and create a more stable supply of natural gas for fuel and power. It also is leading to more-affordable supplies of natural gas liquids (NGLs), including ethane, which is a key petrochemical feedstock.
As we've already noted, U.S. chemical makers have announced more than 50 projects in the past two years to capitalize on the competitive advantage of abundant supplies of natural gas and NGLs. Such projects include new ethylene crackers as well as units for derivative products (i.e., polyethylene, ethylene oxide, etc.), methanol, ammonia and on-purpose ethylene co-products.