Gas-powered growth continues for US chemical companies

Gas-powered growth continues for US chemical companies

Backed by low feedstock prices from shale gas, US chemical companies are maintaining steady growth in 2015. Overcapacity might become an issue within the next few years as a new generation of plants comes online. Companies are also challenged by regulatory restraints and investor activism. Nevertheless, expanding markets both at home and abroad, relatively cheap energy costs, a strong infrastructure, and competitive product prices all suggest that the US chemical industry will continue to enjoy the competitive advantages of the ‘shale gale’ for at least the rest of the decade.

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Riding the shale gale

The rising tide of the US economy is helping a variety of industries, not the least of which is chemical manufacturing. Along with positive trends for the US economy in general, the single biggest growth driver for today’s US chemical industry is the domestic availability of cheap feedstocks and lower prices for electricity based on natural gas-fired generation.

The abundance of natural gas — boosted by the widespread use of hydrofracking to extract previously unavailable reserves — has helped the chemical industry across all sectors. Even with the recent drop in oil prices, the US still enjoys a significant ‘ethane advantage,’ with an oil-to-natural-gas ratio of approximately 18:1. The US Energy Information Administration (EIA) expects current levels of domestic natural gas production to continue, further boosting feedstock supply for chemicals in the US (subject to any impact on oil prices from the potential for increased Iranian exports).

A surge in capital investments

Shale gas has made the US an attractive location for capital investment by both domestic and foreign chemical companies, reversing a decade-long decline. Along with this increase in investment and plant construction comes the risk of overcapacity. China’s slowing rate of GDP growth, the uneven economic recovery in the Eurozone, ongoing capacity expansion in Asia, and unforeseen reversals in the global economy might result in new capacity not being absorbed by continued growth in domestic and export markets.

Strong growth for end-user markets

The combination of cheap gas and oil has helped reduce US manufacturing costs, stimulate production, limit inflation and improve consumer spending. Especially important is the continued strong growth in domestic end-user markets that are key to the chemical industry.

Overall, US automotive manufacturers have returned to pre-recession sales levels. Continued demand is expected from more employment and increased availability of credit. Spending for US commercial construction increased in 2014, and growth in industrial construction increased by almost as much. Sustained growth is also expected in consumer/retail markets. 

Product exports to double by 2030

The chemical manufacturing sector is one of the top exporting industries in the US, accounting for US$189 billion in trade that represents 12 percent of all US exports. Recent recessions in Japan and Brazil, coupled with economic slowdowns in other nations, have reduced exports. But as new investments in the chemical industry come online, basic chemicals export growth is expected to accelerate.

The KPMG perspective

US chemical companies are enjoying the advantages of shale gas, record levels of capital investment, a track record of continued innovation, and the overall strength of the domestic economy. But now is the time to make the decisions that will build a robust, outward looking, globally dominant chemical industry in the US. Failure to do so risks wasting a once in a 100 year opportunity. Executives who are delaying making bold strategic decisions should remember that, in an industry as dynamic as this one, the status quo generally does not last for long. Something will inevitably come along to change the rules of the game once again.

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