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IHS WPC: Feedstocks have divided industry into haves and have-nots

11:51 AM MDT | April 1, 2013 | —Clay Boswell

Adams: Opportunities abound in changing market.

New opportunities based on the surge in unconventional oil and gas production in the United States as well as other developments in the energy market have divided the global petrochemical industry into haves and have-nots, according to Gary Adams, chief advisor at IHS Chemical. “Those who have been able to move away from an oil-denominated feedstock basis have done extremely well,” he said. “Those that cannot … have been challenged for the most part and are not achieving the level of earnings for reinvestment.”

Adams made his remarks in a state of the industry address at IHS Chemical’s 2013 World Petrochemicals Conference, held last month at Houston.

Global demand for basic chemicals and plastics grew only 2.7% in 2012, just half the historical norm, Adams noted. Demand in North America grew just 1.4%, while demand in Europe declined. China contributed 70% of the total growth.

Producers have invested in new capacity, but the market is not oversupplied, he observed. “That’s not the case because we’ve developed this bipolar market of producers with significant margins versus producers with little or no margins in their business,” he said. Higher-cost units are being shut down and production consolidated, “so supply has been added, but it also has been constrained,” he added.

Production in Asia has risen steadily for two decades—slowing during the recession, but quickly recovering—and though demand growth has eased in the last year or so, the region continues to attract investment. “There’s a tremendous amount of opportunity … to match [demand growth] with production,” said Adams. “You will see significant production [growth] in that part of the world.”

Production growth has stagnated in South America and Central America, a consequence of rising feedstock costs during 2005–06, the recession, and political developments, Adams said. “But I think there’s quite a bit of opportunity,” he added. “I’m quite optimistic about Latin America.” Citing the growing population, natural gas developments in the south, and deep oil basin developments in Brazil, he projected that production will increase toward 2020.

“West[ern] Europe is a very different story,” he said. “We see production continuing to decline over the next several years. A lot of it has to do with [natural] gas.”

Between 1990 and 2010, production generally declined at the same pace in both Europe and the United States. Since then, production in Europe has continued to decline, but in the United States, it has increased dramatically, and it will continue to do so going forward, Adams noted.

Energy, he explained, contributes up to 70% of the production cost of some products. “When gas prices [in the United States] met parity with crude in [2000], we quit growing production here,” he noted. “We offshored downstream businesses, started to depend on imports of finished goods much more heavily, and, throwing the recession on top, demand fell.” Since, then, domestic prices have plummeted relative to crude oil, and the impact on production has been dramatic.

“We’re into the recovery stage, supported by exports, and going forward it will grow even larger,” he projected. As new investments come into North America, production will increase, and much of it will be directed to international markets, he added.

“The pace of this change in capacity, this change in the velocity of investment, has everything to do with opportunity—opportunity of pathways to market, but also opportunities to generate product in a cost-efficient manner,” Adams said. “And this $100 billion of investment that we already put our hands around here in North America will continue to grow moving forward.”

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