Shale Revolution Accelerates Chemicals Industry

Submitted by Wall St. Daily as part of our contributors program

Shale Revolution Accelerates Chemicals Industry

By Tim Maverick, Commodities Correspondent

It certainly is a good time for the $800-billion U.S. chemicals industry.

According to the American Chemistry Council (ACC), U.S. chemical production will continue to expand this year and next. The ACC forecast year-over-year output growth of 3.2% for 2015 and 3% for 2016, and foresees even better times ahead. It expects the domestic chemical industry’s growth to exceed that of the nation as a whole in the years to come.

The ACC sees the industry becoming a growth engine for the economy, forecasting a rise in the 5% range in the 2017-to-2019 period. It also expects record trade surpluses for the industry by 2020.

The chemicals industry owes most of its recent success to one crucial factor.

Shale Revolution = Chemical Renaissance

The game-changing innovation of fracking has unlocked reserves trapped in shale formations across the United States. Fracking has released abundant and cheap natural gas and natural gas liquids (NGL), such as ethane, which have revived the U.S. chemicals industry.

You see, U.S. companies now enjoy a huge advantage over foreign competitors that use naphtha as a feedstock. Naphtha is derived from crude oil, and is still expensive relative to NGLs.

The shale gas revolution has literally turned the global chemicals industry on its head.

Less than a decade ago, the outlook for producers of domestic bulk chemicals, such as ethylene, was grim, with production capabilities being shipped overseas.

But now, more and more investment in U.S. production capacity is either underway or in various stages of planning.

An Investment Catalyst

According to the ACC, 238 U.S. chemicals companies have announced investment projects worth a total of $145 billion.

That’s up from $90 billion in announced projects as of mid-2014.

Capital spending in the industry soared 64% from 2010 to 2014, to $33.4 billion. The ACC expects spending to jump another 37% to $45.8 billion by 2018.

Note that about 61% of the announced investment in U.S. chemicals production is coming from foreign companies.

That’s not to say, however, that U.S. companies are standing on the sidelines.

U.S. companies spending big to ramp up production include Du Pont (DD), Dow Chemical (DOW), Eastman Chemical (EMN), Westlake Chemical (WLK), Celanese (CE), and LyondellBasell Industries (LYB). Major oil companies such as ExxonMobil (XOM) are also boosting their chemicals capacity.

Dow Chemical, for example, is spending $6 billion on expanding its Gulf Coast facilities, including a new “cracker” plant to produce ethylene. This hydrocarbon is a basic building block for other industrial chemicals.

LyondellBasell CEO Bob Patel, who succeeded longtime leader Jim Gallogly in January 2015, recently told the Financial Times that he expects the oil-to-gas price ratio to remain favorable for U.S. companies. And he continues to see the United States as the most favorable location for ethylene production.

Positive Reaction

The recent performance of LyondellBasell’s stock indicates that investors can make a lot of money from a well-run chemical company.

LyondellBasell listed on the New York Stock Exchange in October 2010. Since then the share price has nearly quadrupled.

And the company is enjoying strong operating momentum, with management reporting record earnings per share for the first quarter of 2015.

With the shale boom showing few signs of petering out, U.S. chemicals producers are set to benefit from low natural gas and NGLs prices for the foreseeable future.

Are these – dare we say it – the best of times for the industry?

And the chase continues,

Tim Maverick

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By Tim Maverick