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IHS WPC 2014: Shale will shift global distribution of chemical earnings

1:15 PM MDT | March 26, 2014 | Clay Boswell

The shale revolution will dramatically affect the global distribution of chemical industry profits, says Dave Witte,senior v.p. of IHS and general manager of IHS Chemical. Earnings in North America leaped ahead of the global average beginning in 2009, and Witte expects the trend to continue beyond 2018.

Witte spoke today about the dynamics behind trends in chemical supply, demand and earnings at the IHS World Petrochemical Conference in Houston.

“From an earnings standpoint, we have a bipolar world,” he says. “On one hand, we’ve got advantaged feedstocks. On the other hand, in some places in the world, and certainly in some value chains, it’s quite difficult, and the earnings are less than robust.”

Chemical earnings were “lackluster” in the aftermath of the global financial crisis, Witte says, but they recovered in 2013. “From our viewpoint, going forward, the global utilization rates of basic chemicals and plastics is expected to improve in 2014, marginally, and the cycle will be extended out through 2018. However, the nature of this will change,” he notes.

Ebit in Western Europe will continue to follow the global average, but in Asia Pacific, there will be higher highs, and lower lows, he says. “Going forward, we’re a little more pessimistic on the recovery in Asia Pacific on an overall market basis for the industry,” he explains. 

The greatest change will come in North America. Historically, earnings in the region tracked the global average. “As we go forward, we don’t see the volatility in the cycle, and certainly the up-cycle will be much higher than it has been in the past,” Witte says. This is primarily due to the expectation of a long-term advantage for certain US chemical feedstocks. 

Witte points to IHS analysis of ammonia and ethylene margins to illustrate the significance of the change. In 2008, North America accounted for 10% of global ammonia production and 8% of profits, he says. In 2018, however, North America will account for 12% of production, and 20% of profits. Likewise, North America accounted for 25% of ethylene production and 19% of profits in 2008, but though the proportion of production will decline to 24% in 2018, the share of profits will increase to 30%.

The outlook will significantly increase foreign direct investment. “We see a whole host of foreign players looking to come in,” Witte says. “This isn’t just a US producer-based phenomenon. Others are recognizing that this a place to invest to try and capture part of that profit pool.”

Slowing or reversal in the offshoring trend will create new opportunities for producers in North America, Witte says. IHS forecasts that on-shoring and near-shoring will drive demand growth 0.5-1% higher, with supply-chain intensity (SCI) playing a major role in determining the nature of those opportunities.

Markets with low SCI such as apparel and footwear, will remain offshore, Witte predicts. Products affected include ethylene glycol, polyester, nylon in apparel, and polyurethane, ethylene vinyl acetate (EVA), and sytrene-butadiene-styrene (SBS) in footwear. Markets with a mid-range SCI such as furniture could be near-shored, affecting products such as polyurethane, polypropylene, and high-density polyethylene.

Witte says the reshoring opportunity is greatest in markets with the highest SCI – complex markets with a short lifecycle, high shipping costs vs. value, and high quality requirements such as automotive, electronics, appliances, and aerospace. Products consumed by these industries include polypropylene, acrylonitrile-butadiene-styrene (ABS), nylon, polyurethane, polystyrene, polyacetal, carbon fiber, polycarbonate, and epoxy.

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