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Tempered optimism ahead of wave of US project start-ups

Posted on April 7th, 2017 by in Chemicals Industry News and Analysis

San antonio

It’s happening. The US cracker project wave is amplifying with Dow Chemical announcing the completion of its 1.5m tonne/year ethylene project in Freeport, Texas – the second new US cracker after the Occidental Chemical/Mexichem start-up in the first quarter of this year.

Dow made its announcement on 28 March – the last day of the American Fuel & Petrochemical Manufacturers’ (AFPM) International Petrochemical Conference (IPC) in San Antonio, Texas.

A day earlier, amid the hustle of the IPC event, Total, Borealis and NOVA Chemicals announced their three-way 1.0m tonne/year ethane cracker project in Port Arthur, Texas, which comes with a new 625,000 tonne/year Borstar polyethylene (PE) unit at nearby Bayport.

Total will add its existing 400,000 tonne/year high-density PE (HDPE) plant at Bayport into the joint venture, in which it will own 50%. The new cracker is expected to be completed by the end of 2020.

Senior executives at AFPM were relatively optimistic about the global market being able to absorb all the new PE and other ethylene derivative volumes without a major downturn in profitability, citing some construction delays allowing for demand to catch up to supply.

DISSENTING VIEWS ON C2, PE

Not everyone was in the bullish camp. Peter Huntsman, CEO of Huntsman Corp, in an interview with ICIS, warned “the ethylene bubble has got to burst”.

“To put billions and billions of pounds into the market and not see a disruption, is unrealistic,” he said.

Bob Bauman, president of Polymer Consulting International, sees a plunge in PE prices as three new crackers with downstream PE units likely start up within six months of each other in 2017-2018.

Despite producers’ stated export focus, “no doubt they will have to place product in the domestic market”, Bauman said.

“For US PE and ethylene, 2019 will be the worst year, and 2020 won’t be much different,” he added.

US POLITICAL UNCERTAINTY/BORDER TAX

All this construction, and planned construction, comes amid the most uncertain and volatile political climate in decades – not just in the US but for the world.

After the overall ‘Trump Bump’ the industrial and commodities sectors enjoyed amid the initial euphoria, a palpable element of caution has been injected into the collective consciousness.

For some, it is about whether tax reform (tax reduction for most corporations) is in jeopardy after the Republican healthcare debacle.

For others, it revolves around what happens if a border adjustment tax (BAT) actually does happen as part of this tax reform – not just to US imported raw materials but whether it draws retaliatory measures by other nations.

While largely optimistic on the Trump administration’s willingness to engage with the industry on regulatory and tax reform, the failure of the Republican-led healthcare overhaul “is a concern”, noted AFPM president Chet Thompson at a press conference at IPC.

The US chemical sector, excluding pharmaceuticals, had $121bn in exports in 2016 and enjoyed a trade surplus of $28.2bn, according to the American Chemistry Council (ACC).

For an export-dependent sector such as US chemicals, any disruption in trade would have huge impacts on its supply chain.

The product from the US wave of new crackers and derivative units is primarily targeted for export, and in the form of PE pellets. The US essentially aims to use its huge shale gas resource to supply the growing polymer demands of the world.

“We have some concerns about any border adjustment tax’s (BAT) impact on trade as it could be interpreted by countries as protectionist,” said Peter Cella, president and CEO of Chevron Phillips Chemical, who also noted that the US chemical industry plans to grow exports by 7%/year over the next five years.

“We are optimistic that the governing [by the Trump administration] will be different than the campaigning, and that the government realises how important trade is. It’s important to avoid the appearance of being anti-trade,” Cella added.

A “pure version” of the BAT would not comprise direct duties on imports, but eliminate the ability of companies to deduct imported raw materials and goods as an expense for tax purposes.

“We hope they don’t rush it. It needs time and a comprehensive look,” said Neil Chapman, president of ExxonMobil Chemical, on tax reform and a potential BAT.

“At the end of the day, Congress will find ways to make tax reform revenue neutral – you can’t rely on just [economic] growth [for higher tax revenues]. So there will be winners and losers,” said Chapman.

“We have to get comfortable as a country that someone’s going to lose,” he added.

Chapman and Cella spoke on a panel discussion at the IPC.

PETER HUNTSMAN ON US DEFICIT

But higher US economic growth, if it does come, also won’t be a panacea for climbing out of the mountain of federal debt piling up, said Peter Huntsman in his 28 March breakfast meeting talk at the IPC called “A view of the North American Chemical Industry (and other sundry views)”.

Peter Huntsman uses this forum to let it rip on a slew of topics – from economics to the price of oil, and political and social views in the US and around the world (Note all ‘Huntsman’ attributions below are to Peter Huntsman rather than the company).

Huntsman pointed out the US budget deficit is growing at around $700bn/year, and that even if the US can get to 4% GDP growth, this would only generate $130bn in additional tax revenue – “nowhere close to being balanced”.

By 2027, even at current low interest rates, interest on US federal debt will account for 19% of the entire budget versus 7% today, he warned.

For now, however, US GDP appears relatively stable and Huntsman is also seeing good demand in China with the economy growing “probably in the low single-digits”, he said.

Europe worries Huntsman a bit more, as GDP growth has been sluggish “despite the largest wealth transfer, from OPEC to the EU, with the collapse of oil from $100, to $30/bbl” in 2014-2015. Barring that and central bank easing, “Europe probably would have seen a prolonged recession”, said Huntsman.

OIL OUTLOOK

Speaking of oil, Huntsman is unabashedly bearish on the long-term price trend as the US churns out more and more hydrocarbons.

“We will continue to underestimate the impact of innovation on oil supply,” he said, referring to continuing leaps in shale fracking productivity.

This technology has led to once declining fields such as the Permian Basin in Texas being prolific once more and on a larger scale.

“The Permian was the epitome of peak oil. Now there are billions more barrels of recoverable oil from this 100-year old field. There is nothing like it in the world,” said Huntsman.

He called $20-30/bbl not necessarily the floor, and $50/bbl “the new ceiling”.

2ND WAVE OF US CRACKERS, AND AROMATICS?

But this is certainly not the consensus view on oil. If it were, companies would not be gearing up for a second wave of new US crackers. Lower oil typically means lower chemical and polymers prices.

ExxonMobil and SABIC are scouting sites for their new 1.8m tonne/year joint venture cracker on the US Gulf Coast, and likely to make an announcement this year, noted ExxonMobil’s Chapman.

And while Chevron Phillips Chemical is focused on completing its 1.5m tonne/year cracker in Q4 2017, don’t be surprised if it announces yet another cracker – something it stated it was exploring years ago.

Plus, you may see something really new. How about an aromatics project in the US?

“For the same reasons US shale catalysed opportunities in the olefins market, that set-up could be there for aromatics as well,” said Chevron Phillips’ Cella on the sidelines of the IPC.

The company’s proprietary aromatics process for the on-purpose production of benzene as well as toluene uses light liquids – light paraffins and naphthenes – abundant in US shale.

To find out how to read more news and analysis stories from ICIS, go to www.icis.com/about/news/


 

All opinions shared in this post are the author’s own.

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