Chemical production in the U.S. is expected to surge over the next five years, compared with the last two decades. The significant growth in output as new production capacity comes online and the challenges and innovative solutions that come with this growth will be key topics at the Downstream 2019 Conference this week in Houston, Texas.

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Nearly 10,000 petrochemical, chemical, refining and LNG professionals will convene at the George R. Brown Convention Center in Houston, Texas this Tuesday and Wednesday for the world’s largest ever downstream event, the Downstream 2019 Exhibition and Conference.

The event has tripled in size since its start four years ago, largely a result of the tremendous growth in the industry.

U.S. chemical industry output is expected to continue to grow in 2019 despite a challenging global economy, according to the American Chemistry Council’s (ACC) Mid-Year 2019 Chemical Industry Situation and Outlook. Growth in key domestic end-use markets and a sustained competitive advantage tied to surging supplies of natural gas and natural gas liquids (NGLs) from shale activity are spurring new capital investment in American chemistry. Solid production gains are anticipated as new capacity comes online.

“Growth rates in U.S. chemistry over the next five years are expected to surpass average growth over the previous 20 years,” said Martha Moore, senior director of policy analysis and economics at the ACC said. “Provided that access to export markets remains open to our producers, expanding global demand will be met by shale-advantaged chemistry sourced from the U.S.”

To date, 334 chemical and plastics projects cumulatively valued at $204 billion have been announced, with 53% of the investment completed or underway and 40% in the planning phase, according to the ACC.

Image: American Chemistry Council

With slowing growth prospects across much of the globe and rising trade tensions, chemical exports are not performing as well as expected a year ago. Manufacturing also appears to be slowing. However, chemical inventories are in a more balanced position, housing is expected to ease slightly before continuing its slow recovery, and the automotive sector will stay at relatively elevated levels. Both are important end-use markets for chemistry.

Rising business investment will continue to drive U.S. GDP growth, though at slower rates than the previous two years. Growth in consumer spending, while moderating, is also making a positive contribution. GDP is projected to rise by 2.5% in 2019, 1.9% in 2020 and 1.8% in 2021. The chemical industry will be a source of strength, with growth of 2.5% in 2019 and 3.0% in 2020. In fact, chemical industry growth will exceed that of the U.S. economy through 2024, the ACC said.

U.S. Investment Advantages

America’s plentiful and affordable supplies of natural gas and NGLs are driving the new investment. Further gains in capital spending are anticipated, increasing by 5.4% this year and 4.9% in 2020. Capital spending will reach $43 billion by 2024, the ACC said.

“The U.S. remains an attractive destination for chemical industry investment,” the Outlook noted. “Since 2010, petrochemical producers have announced significant expansions of capacity in the U.S., reversing a decades-long decline.”

The U.S. is now the top producer of oil and natural gas in the world, with an additional benefit in the form of increased NGLs.

Surging US Ethane Supply Drives Investments

Image: American Chemistry Council

Investments by type

Natural gas feedstock is only used for agricultural chemicals and methanol, but NGLs can be used as feedstock for many basic organic chemicals such as ethylene and propylene, which are used in the production of plastics.

U.S. petrochemical investment has thus focused on agricultural chemicals, methanol, ethylene and ethylene derivatives, mainly polyethylene (PE).

71% of investment thus far is bulk petrochemicals and plastic resins. Of that, 52% of total investment (~ $105 billion) is petrochemicals and 19% of total investment (~ $37.5 billion) is plastic resins, according to the ACC.

Nearly 20 facilities, “crackers,” are being built or expanded to convert NGLs such as ethane and propane into ethylene, the most used petrochemical and the main ingredient in PE plastic.

U.S. manufacturers have already added 6.5 million tons of PE production capacity since 2017. U.S. producers are expected to add 12.1 million tonnes of PE before 2022, according to ICIS.

The ethylene to PE to compounding chains have continued to build up in the U.S. with infrastructure in the US Gulf and Northeast.

Increased resin capacity means increased processing capacity.

In addition to the more than $100 billion in petrochemicals investments, there are nearly 750 plastics processor projects, valued at nearly $20 billion. One-third is new construction and two-thirds is expansions.

Since June 2012, plastics processor projects have been announced by more than 550 companies in over 45 states, according to the ACC.

Fertilizers are another major target of capital investment. More than 20 U.S. plants are being built or expanded to convert gas into ammonia.

U.S. Cost to Build

The average cost to build a 1.5 million tonne/year ethylene cracker in the U.S. is around $2.5 billion or about $1,600/tonne.

Smaller plants such as Huntsman’s 120,000/tonne year ethylene oxide unit cost $150 million or about $1,200/tonne. Agrium’s 610,000/tonne year urea plant cost $720 million to build or around $1,100/tonne.

The largest complex to date is an $11.13 billion complex being built near Lake Charles, Louisiana by South Africa’s Sasol. At the heart of the project is an ethane cracker that will produce 1.5 million tonnes of chemicals produced in the facility to be used in six downstream plants on-site to produce a range of high-value derivatives including ethylene oxide, mono-ethylene glycol, ethoxylates, low density and linear low-density polyethylene, and alcohols.

The crude oil to natural gas price ratio is the key metric the strategic decision makers keep their eye on.
If they overrun too much on construction costs, the ratio will either cover their losses or exacerbate them, either way it will determine their return on investment.

The current ratio remains favorable for U.S. competitiveness. Strong consumer demand for derivatives is also in their favor.

U.S. Margins and competitive advantage

The abundance of NGLs provides U.S. chemical owners with a margin advantage over global competitors that use more expensive, oil-based feedstock and energy supplies.

Ethylene, the precursor to many key petrochemicals, is most commonly produced via steam cracking of NGLs, steam cracking of naphtha, or catalytic cracking of gas oil.

More than 90% of US ethylene producers crack ethane, up from two-thirds a decade ago. This is used as feedstock to create ethylene and derivatives.

Products are traded globally and priced off crude oil, which is the main feedstock for much of the world’s ethylene and derivatives production.

The cost to produce is significantly cheaper in the U.S. when using NGL feedstock, but sellers are exporting more than half of derivatives made and can price products off the world price, which is based off crude oil. This has created better margins for U.S. facilities.

Export Nation

Since the first wave of projects came online, 25-30% of U.S. PE production now is exported.
U.S. exports of PE plastic to Asia were expected to rise more than fivefold by 2020, with China as the primary destination, according to research company IHS Markit.

The U.S. chemical industry trade surplus continues to grow, but potential expansion is limited by reduced external demand due to slower global growth and rising trade barriers, the ACC said.

The U.S. chemical industry will post a $37 billion trade surplus in chemicals this year as exports rise 5.9% to $149 billion and imports rise 2.4% to $112 billion. Two-way trade between the U.S. and its foreign partners will reach $260 billion in 2019, a 4.4% expansion over last year, though trade growth has slowed considerably, according to the ACC’s numbers.

By Heather McGuire Doyle