America’s Plastic Revival

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Even with the increase in petrochem production, prices may not come down too much

America’s abundance of shale gas is set to turn it into a powerhouse of plastics, pharmaceuticals, fertilisers and other petrochemicals once again. Producers elsewhere are watching signs of an incipient production boom in ethylene (a key input) derived from cheap ethane (a natural gas constituent) instead of costly naphtha (a crude oil derivative). With gas now available at a fraction of its oil-equivalent price, the US could easily become one of the world’s lowest-cost petrochem producers, suggests an IHS Global Insight study.

“As 75 per cent of the cost of producing these chemicals and plastics is related to the cost of energy-derived raw materials [naphtha or ethane],” says Gary Adams, chief advisor at IHS’s chemicals cell, “the price of oil versus natural gas would play a key role in defining where new capacity is built.” Right now, North America has a clear competitive advantage. This marks a revival. The region was a major petrochem producer till the late 1990s, after which it lost competitiveness as a result of high oil prices. Many US plants closed down, even as new capacity came up in the ethane-rich Middle East and in demand-rich China. Gas-derived feedstock has shifted the scenario since. Analysts now say that if shale gas extraction turns eco-friendly, its stable supplies can help America beat the Middle East on cost. Note that the latter, with huge export surpluses from oil, often suffers the ‘Dutch disease’ of a strong currency rendering everything else uncompetitive. 

North America is earmarked for about $95 billion of investment in new ethylene capacity over the next 10 years. Ethylene is hard to transport, and since the region’s own demand for petrochemicals is expected to stay moderate, the broad aim is to make and export petrochemicals, plastics and other products to other markets. “India is expected to become a much larger importer of basic chemicals and plastics,” says Adams, “or can even participate by investing in new US chemical plants and transporting the production to India.” 

Domestically, Indian companies use oil-based naphtha as raw stock for petrochemicals. Reliance ranks among the world’s biggest petrochem producers, and would surely be watching US developments closely for implications to its own global competitiveness. Yet, Adams does not expect a drastic fall in global ethylene prices. North America and the Middle East together account for only 30 per cent of the world’s annual ethylene capacity (about 150 million tonnes), and another 10 million tonnes coming up may not make much difference. Oil-based producers will not go out of business anytime soon.