LSU Energy Summit 26 October 2016 Opportunities and Challenges from New Chemical and Plastics Investment Martha Gilchrist Moore Sr. Director, Policy Analysis and Economics
Shifting Competitive Dynamics and New Chemicals Capacity New Investment in Chemical and Plastics Capacity Exports and Transportation
The Chemical Industry is Energy-Intensive Fuel, Power and Feedstock Costs as a Percent of Total Costs Chlorine/Caustic Soda Sodium Carbonate (Soda Ash) Acrylonitrile Adipic Acid Aniline Benzene Butadiene (1,3 ) Cumene Ethylbenzene Ethylene Ethylene Dichloride (EDC) Ethylene Glycol Ethylene Oxide Methanol Phenol Propylene Styrene Terephthalic Acid Vinyl Acetate Polyethylene (LDPE) Polyethylene (LLDPE) Polyethylene (HDPE) Polypropylene (PP) Polystyrene (PS) Polyvinyl Chloride (PVC) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: ACC analysis Anhydrous Ammonia Urea Energy Costs Other Costs
Surging Ethane Supply Thousand Barrels per Day 1,600 1,400 1,200 1,000 800 600 400 200 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Gulf Coast Oklahoma Appalachia Other Sources: US Energy Information Administration, ACC analysis
NA Petrochemical Competitiveness Depends on Feedstock Spread $/gallon $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 YTD Spread between Naphtha and Ethane Ethane Naphtha Sources: US Energy Information Administration, IHS Chemical Week, ICIS
U.S. Chemical Industry Global Cost Advantage Relative Position of U.S. (2005 2015) (Petrochemical Production Costs) HIGH 2015 PRODUCTION COSTS Estimated * ($/lb.) MIDDLE EAST UNITED STATES IN 2015 CHINA WESTERN EUROPE OTHER NORTHEAST ASIA RELATIVE POSITION OF UNITED STATES IN 2005 LOW GLOBAL SUPPLY (billion lbs.) *Based on estimates from best available data
Lower US Manufacturing Costs: Case of High Density Polyethylene (HDPE) $ per Metric Ton In 2005, U.S. is among highest cost producers globally because of high natural gas costs in U.S. US Gulf Coast (2005) US Gulf Coast (2015) Northwest Europe (2005) Northwest Europe (2015) Middle East (2005) Middle East (2015) Northeast Asia (2005) Northeast Asia (2015) Raw Materials Utilities Direct Costs Other Costs
Lower US Manufacturing Costs: Case of High Density Polyethylene (HDPE) $ per Metric Ton By 2015, US among the low cost producers globally, but because of falling oil and naphtha prices a shallower (less steep) cost curve US Gulf Coast (2005) US Gulf Coast (2015) Northwest Europe (2005) Northwest Europe (2015) Middle East (2005) Middle East (2015) Northeast Asia (2005) Northeast Asia (2015) Raw Materials Utilities Direct Costs Other Costs
Oil-to-Gas Ratio: A Proxy for U.S. Petrochemicals Competitiveness When the ratio is above 7, U.S. competitiveness is enhanced. Oil price declines have created some uncertainty about future Current ratio remains very favorable for U.S. competitiveness Sources: EIA, ICE, NYMEX
New Investment in Chemical and Plastics Capacity
North American Ethylene Capacity Million metric tons 50 Second Wave 45 40 First Wave 35 30 2005 2010 2015 2020 2025 Source: ICIS
Net Ethylene Capacity Additions by Region Thousand metric tons 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Other Asia-Pacific Northeast Asia Africa and Middle East Eastern Europe W. Europe Latin America North America 0-5,000 2000-05 2005-10 2010-15 2015-20 2020-25 Source: ICIS
ACC Database of New Chemical Industry Investment in the U.S. Building began as early as 2010 with small projects to increase ethane utilization As of mid-october, ACC is tracking 277 projects valued at $168B 61% of projects are foreign or include a foreign partner Additional projects in Canada and Mexico In addition, ACC is tracking more than 500 plastic processor projects 47% Complete Planned 7% 12% 34% Under Construction Delayed/ Uncertain
Cumulative Announced Chemical Industry Investments from Shale Gas # of Projects 300 275 250 225 200 175 150 125 100 75 50 25 0 $Bil $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Total Investment Number of Announced Projects Source: ACC analysis, December 2010 June 2016
Geography of Shale-Advantaged Chemical Investment * Each green pin represents one or more announced chemical industry investments
Shale Advantage Driving Capacity Expansion Across Many Products Ethane, Propane and NGL Feedstock Ethylene capacity expected to grow by half Ethylene Derivatives PE, vinyls, MEG, EO, etc. Ethlyene cracker co-products on-purpose propylene (PDH, MTP), butadiene Propylene derivatives - polypropylene Complementary products, i.e., chlor-alkali for PVC, industrial gases, etc. Methane Feedstock Methanol and derivatives Nitrogeneous fertilizers ammonia, urea and derivatives (AN, UAN) Demand Driven Products Chemistry used in hydraulic fracturing, drilling, and oil/gas production
New Investment in Chemicals and Plastics $ million (3 month average annual rate) $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 00 02 04 06 08 10 12 14 16 Chemicals (left axis) Plastics and Rubber Products (right axis) $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Source: Census Bureau
Investment by Industry Segment* Plastic Resins 11% Other 7% Chlor-Alkali and other Inorganics 2% Fertilizers 20% Bulk Petrochemic als 60% *Some large cracker projects with derivatives projects not separately broken out Source: ACC analysis
Industry Investments & Plastics Processors Shale-Driven Benefits 70% of announced chemical industry investment is bulk petrochemicals and plastic resins. Increased resin capacity increased processing capacity Other Benefits of U.S. manufacturing Increased consumer desire for Made in the USA products Rising costs (wages) in China Reduction of transportation/logistics costs Manufacturing proximity to customers, supply chain
Plastics Processor Projects Expansions New Construction ACC is tracking over 500 plastics processor projects. 30% New Construction 70% Expansions Adding capacity New lines New equipment Since June 2012, plastics processor projects have been announced by over 400 companies in over 40 states. Source: Plastics News, ACC analysis NOTE: The data is based on publicly available information, which is believed to be accurate, but have not been independently verified by ACC.
Announced Plastics Processor Projects by State Announced Projects 40+ 30 39 20 29 10 19 5 9 Announcements since June 2012 Source: Plastics News, ACC analysis NOTE: The data is based on publicly available information, which is believed to be accurate, but have not been independently verified by ACC. Updated 8/1/16 1 4 0 Note: 1 project has been announced in AK; none in HI (not shown)
Impact on Major Markets Consumer and Institutional Products Healthcare/ Medical Products Transportation Building & Construction Industrial/ Machinery Packaging Automotive Electrical & Electronic Investment across markets: One-third in Consumer & Institutional Products and/or Transportation markets Medical/Healthcare and Automotive are large subsets One-fifth in Packaging markets Various other markets also experiencing growth NOTE: This chart is intended to be a proportional representation, based on ACC analysis and publically available information, of plastics processor projects by Major Markets. The PIPS definitions for Major Markets were used to develop this chart.
Exports and Transportation
150 130 110 90 70 U.S. Captures Market Share Away From Western Europe Chemistry Production (2012=100) 50 1987 1992 1997 2002 2007 2012 2017 2022 United States Western Europe Japan Sources: Eurostat, Federal Reserve, METI, ACC analysis
Where Will New Production Go? Olefins generally move via pipeline. The majority expected to go to domestic derivatives producers, but exports will also increase Derivative products, i.e., plastic resins easier to transport About half of plastic resins expected to be exported to markets in Latin America, Asia, and Europe Port of Houston will see largest increase in outbound volumes creating challenges to upgrade and expand infrastructure and networks Panama Canal expansion may shift shipping patterns and expand opportunities for exports to Asia
Much of the New Capacity is Export-Oriented U.S. trade surplus for the selected chemicals increases from $19.5 billion to $43.3 by 2030. Trade deficit in C1 chemistry shrinks, but continues for aromatics C2 trade balance expands in just about every regions. C3 derivative exports recover after PDH/MTP projects come online. Source: Nexant
Key Investment Risks for Chemicals and Plastics Workforce development Chemical plant operations personnel, engineers, etc. Construction trades and labor Shortages of key equipment, etc. capital cost escalation Transportation and Logistics Unpredictable energy dynamics Market access/trade exposure More stringent environmental and other regulations Market imbalances created by variations in regional supply vs. demand growth and government policies
Transportation Challenges Port congestion in Houston Ship Channel may lead to alternate routes (i.e., Charleston) or greater use of intermodal Container imbalance along Gulf Coast Rail car loadings will grow significantly - rail congestion expected to worsen, esp. Houston Trucking capacity constrained by driver shortages, etc. Expansion of packaging, warehousing capacity
Questions? martha_moore@americanchemistry.com (202) 249-6182 www.americanchemistry.com