IHS WPC: State of the industry is a matter of feedstock opportunities: Adams

21:03 PM | March 20, 2013 | Clay Boswell

New opportunities based on developments in the energy market, including the surge in unconventional oil and gas production in the United States, have divided the global petrochemical industry into haves and have-nots, said Gary Adams, chief advisor at IHS Chemical. Adams made his remarks in a state of the industry address on Wednesday at IHS Chemical’s 2013 World Petrochemicals Conference in Houston.

“Those who have been able to move away from an oil-denominated feedstock basis have done extremely well,” Adams said. “Those that cannot … have been challenged for the most part and are not achieving the level of earnings for reinvestment.”

Global demand for basic chemicals and plastics grew only 2.7% in 2012, just half the historical norm, Adams said. Demand in North America grew just 1.4%, while demand in Europe declined. China contributed 70% of the total growth. “Demand recovery has really been limited to fast-growth economies,” he said. “Most others haven’t seen recovery of any sort.”

Even so, producers have continued to invest in new production capacity, but the market has not become oversupplied, he observes. “One would think, coming out of a recession, a few years later, without significant demand growth and economic activity, that we'd be overwhelmed with supply,” he said. “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.”

Higher-cost units are being shut down and production consolidated, “so supply has been added, but it also has been constrained," he said. Production in Asia has risen steadily for the last two decades—slowing during the recession, but quickly recovering. Demand growth has eased in the last year or so, but the region continues to attract investment. “There's a tremendous amount of opportunity … to match [demand growth] with production,” Adams said. “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 would rise 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 will continue to do so going forward, Adams said.

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.”

Now, however, the United States is the largest producer of natural gas in the world. Domestic prices have plummeted relative to crude oil, and the impact on production has been dramatic, Adams said.

“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.”