How Does Exxon Plan To Tap The Growth In Global Chemicals Demand?

Chemicals are used in a wide variety of products and play an important role in the world economy. Plastics and other petrochemicals form an integral part of most of the manufactured products we use today. The global demand for chemicals grew from around 100 million metric tons to 150 million metric tons between 2000 and 2010, and is expected to surpass 200 million metric tons by the end of this decade, growing at a pace faster than the global GDP. A majority of this growth in chemicals demand (around 67%) is expected to come from the Asia-Pacific region, where improving standards of living are leading consumers to purchase more household and packaged goods that are manufactured from chemical products. In fact, China alone is expected to represent half of the growth in global chemicals demand with its rapidly growing middle-class and expanding purchasing power. Exxon Mobil (NYSE:XOM), one of the world’s largest chemical producers, is making several strategic investments in its chemicals portfolio to tap into this growth. In this article, we provide an overview of three of the company’s most significant chemical projects that will increase both its manufacturing capacity and cost advantage. ^[1]

We currently have a $107/share price estimate for Exxon Mobil, which values it at around 13.4x our 2014 GAAP diluted EPS estimate of $7.96 for the company. According to our estimates, the Chemicals division contributes more than 15% to Exxon’s total value.

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Leveraging The Low-Cost Advantage In The U.S.

A glut of natural gas supply in the U.S. has also led to more affordable supplies of ethane, a natural gas liquid that is a key raw material used in the chemical industry. Ethane is cracked to form ethylene, the simplest unsaturated hydrocarbon, which is one of the most important feedstock in the plastics value chain. It is used in the manufacture of polyethylene, also called polythene, which is the most widely used plastic in the world.

The chart above shows that producing ethylene from U.S. ethane is currently a lot cheaper than producing the chemical in Asia or Europe, where most of it is derived from the steam cracking of naphtha. Naphtha is derived from crude oil. It constitutes around 15-30% of crude oil by weight. With the shale gas supply boost in the U.S. resulting in a cheap source of ethane, there has been a divergence in operating margins between naphtha and ethane based ethylene production plants. This has provided chemical companies with a huge opportunity to expand their margins by reducing feedstock costs. According to a recent industry report, chemical production capacity in the U.S. is expected to go up by 30% in the next decade as companies invest billions of dollars to expand their ethylene production capacity on the U.S. Gulf Coast. ^[2]

Exxon plans to tap into this favorable feedstock scenario by building a new ethane cracker at its Baytown, Texas, complex. The steam cracker with a capacity to produce 1.5 million tons of ethylene per year will provide feedstock for its downstream chemical processing facilities. The company also plans to add two new high-performance polyethylene lines at its Mont Belvieu plastics plant, each with a capacity of 650,000 tons per year. ^[3]

We believe that these new facilities, which are expected to come online in 2017, will further extend Exxon’s low-cost advantage in the U.S. chemical industry and fuel significant operating margin improvement in the long run. The company currently sources more than 80% of its ethylene in the U.S. from ethane cracking, which compares to the industry average of below 60%. As the new ethane cracker comes online, Exxon’s low-cost advantage will grow further.

Moreover, the new polyethylene processing facilities are also expected to boost Exxon’s high-performance plastics sales volume. These end products are used in a wide range of consumer and industrial applications ranging from bags to electric insulation materials. Exxon expects the global demand for polyethylene and other chemicals to increase at an average annual rate of around 4% in the short to medium term.

Product Extension In Saudi Arabia

In Saudi Arabia, Exxon is working with its joint venture partner, Saudi Basic Industries Corporation, to extend the range of chemical products it produces in the Kingdom. A new 400,000 tons per year world-scale facility will produce specialty synthetic rubbers, polyolefin elastomers and carbon black, and will be integrated into the joint venture’s plant in Al-Jubail on the Arabian Gulf. This project will also provide the benefits of a lower cost structure by leveraging on the existing supply chain capabilities and other infrastructure. ^[1]

According to Exxon, the new project will help create a world-class rubber and elastomer value chain in Saudi Arabia, and also provide a strategic platform to help it meet the growing demand for rubber-based automotive, construction and appliance products in the Kingdom, the Middle East and in Asia. During the most recent annual analyst presentation, Exxon noted that the ongoing construction work for the project is on schedule and it is expected to start up some time next year.

New Specialty Chemicals Facility In Singapore

Exxon’s largest integrated chemicals manufacturing facility is located in Singapore, well positioned to serve the rapidly growing markets in Asia. The company completed the expansion of its petrochemical plant in Singapore (which included the addition of a new ethylene steam cracker) last year. This made available to the company a wide range of byproduct molecules that can be upgraded to speciality chemical products.

In order to capture this value, Exxon recently approved a project to add facilities that produce premium synthetic rubber to support the growing tire market, and premium resins for adhesive applications such as packaging and fabrics. The company is already a leading global supplier in both of these high-growth product lines and expects to further its advantage. These new world-scale units will benefit from low-cost feedstock available at the site. In addition, integration with a large chemical and refinery complex will enable lower capital and production costs by leveraging the existing site utilities and infrastructure. Exxon expects to begin construction on the project this year, with the start planned for 2017. ^[1]

Because of these ongoing projects, we currently forecast Exxon’s chemical sales volume to increase from around 24.1 million metric tons last year to almost 26.5 million metric tons by 2021.

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1. Exxon Mobil 2014 Analyst Meeting, exxonmobil.com [↩] [↩] [↩]
2. Cheap Gas Fuels Chemical Boom As Dow Invests Billions, bloomberg.com [↩]
3. ExxonMobil Chemical Company Begins Multi-Billion Dollar Expansion Project in Baytown, Texas, exxonmobil.com [↩]