America’s chemicals industry is booming. But politics may get in its way
It is one of America’s largest export sectors, but it will suffer in a trade war
“THIS is what $3bn looks like.” So beams a manager at Chevron Phillips Chemical (CPC), a petrochemical company jointly owned by Chevron and Phillips 66, both American oil firms. She throws open her arms in a figurative embrace of a giant cracker (pictured) built by the firm in Baytown, a gritty part of Houston. The new plant turns vast quantities of ethane, which is derived from natural gas, into ethylene, an important building block in plastic. Another nearby facility, which the firm has recently expanded, converts the ethylene into plastic resin that is sold worldwide. All told, CPC has spent some $6bn expanding its chemicals-production infrastructure around Houston.
A decade ago, this would have been unimaginable. Chemicals firms in America, beaten down by rivals from the Middle East that enjoyed cheap feedstocks and others from China feasting on subsidised capital, had not invested in new local plants in years. Growth in global demand for chemicals, once roaring, had slowed thanks to the global financial crisis. America had costly workers, ageing capital stock, pricey feedstocks and sluggish demand. Some crackers were shut down.
It is astonishing, then, that the CPC plant is just one of six new megaprojects in America. According to the American Chemistry Council (ACC), an industry umbrella group, over $185bn in new chemical investments has been announced since 2010, with half of those plants already built or currently under construction (see chart). The industry now accounts for roughly half of all investment in American manufacturing. With annual shipments of over $500bn, it is one of America’s largest export sectors.
This remarkable turnaround in the American chemicals industry’s fortunes raises two questions. Why did it happen, and how sustainable is the boom? The answers point to how clever new ideas are reshaping the “old economy”. They also offer clues about the viability of the industrial renaissance that President Donald Trump wants for America and highlight the risks of his recent trade initiatives.
Behind the rejuvenation lie two things. One is a recent wave of what Jason McLinn of Bain, a consultancy, calls “portfolio reshaping”. Commodity chemicals, which are produced in bulk, and specialty chemicals, such as those used as additives and ingredients, do not have much to do with each other, he says, but chemicals firms seeking growth in sluggish markets like America typically developed both. Now, under pressure from activist investors, bosses are spinning off non-core businesses and bulking up in core areas. This is producing firms with the gargantuan scale needed to take on their giant state-sponsored international rivals. This week, for example, news surfaced that American regulators will approve the $60bn takeover of Monsanto, an American agrochemicals firm, by Germany’s Bayer.
Dow, whose long-standing boss, Andrew Liveris, stepped down as chairman this month, is a case in point. By acquiring DuPont, a local rival, for $130bn last year, he turned Dow into the world’s biggest chemicals firm by sales. The next step in the master plan is to combine the specialty and agricultural-chemicals arms of the two firms, and spin each of them out separately. What remains will focus on the automotive, packaging and construction industries. David Witte of IHS Markit, a research firm, believes it will create a pure-play rival to the biggest firms in the sector.
“I’d rather own a small, subscale, poorly-run cracker in America than any in Europe right now,” chuckles Jonas Oxgaard of Bernstein, an equity-research firm. That quip alludes to the other enormous edge that the American chemicals business has at the moment. The shale revolution is unleashing a tidal wave of cheap natural gas and related liquids that can be used instead of pricier, petroleum-derived naphtha (the feedstock typically used outside America) to make chemicals.
The cost advantage is most evident in the “shale crescent”, a gas-rich swathe of land the size of Germany that includes parts of Ohio, Pennsylvania and West Virginia. Not only is the ethylene produced there much cheaper than naphtha abroad, but making more sophisticated chemicals and plastics in this region also saves on transport costs since much of American manufacturing is close by. Royal Dutch Shell, a European oil giant, is building a $10bn chemicals complex in Pennsylvania.
Exciting stuff, but there are potential snags. One is inadequate infrastructure. Mark Lashier, boss of CPC, is worried about congestion at Houston’s busy port and so has invested in alternative routes involving both rail and sea. Shell’s Graham van’t Hoff observes that in Texas and Louisiana, “you just connect to a gas pipeline and off you go.” In contrast, the shale crescent requires a massive buildout of pipelines, ports and logistics facilities.
Another potential obstacle to expansion is rising costs. The capital cost of a new petrochemical plant is at least 50% higher in America than in China today, estimates IHS Markit. Because of its many fallow years, the American chemicals industry has lost a generation of talented field managers, welders and other workers. Labour shortages are a big headache and expense.
The darkest cloud, though, is politics. Consider Mr Trump’s tariffs on imports of Chinese steel and aluminium. Dow says that the steel tariffs alone will add $300m to the cost of its new plants in Texas, and threatens to build its next facilities in shale-rich Argentina or in Canada instead. The ACC observes that China imports 11% of all American plastic resins, noting with alarm that 40% of the American products to which China has assigned retaliatory tariffs are chemicals. This tit-for-tat may, in the end, prove mostly bluster. However, it would be rum indeed if Mr Trump’s efforts to support local heavy industry ended up derailing the ongoing revival of America’s once-moribund chemicals sector.