US chemical makers stuffing their piggy banks ahead of expansion boom, expenses

Make no mistake: The US chemical industry faces its share of challenges, whether on the regulatory or market dynamics front, as it seeks to bask in the feedstock advantage afforded by shale gas.

But capital should not be one of them.

Take integrated plastics producers, who continue to enjoy record-high or near record-high operating margins amid solid start-of-year demand and depleted feedstock prices.

It’s no surprise, then, that many majors — including ExxonMobil Chemical, Dow Chemical, ChevronPhillips Chemical, Formosa Plastics and Shell Chemical — have plans to build world-scale olefins plants in the US Gulf Coast within the next five years. Others — including LyondellBasell, Westlake and Ineos — plan, or are already undergoing, capacity expansions at existing facilities.

We are talking tens of billions of dollars worth of investment capital.

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Olefins are chemicals — considered key building blocks–that can be derived from the “cracking” of natural gas liquids including ethane, which the US is long because of the surge of shale gas production. Olefins such as ethylene and propylene are the precursors of many of the types of plastics used in everyday life, including polyethylene, polypropylene and polyvinyl chloride.

A conservative estimate this week would put the profit margin for an ethane-fed steam cracker at or above the 50-cent/lb ($1,100/mt) mark. That roughly translates into a $650/mt return on feedstock cost, if we take into account spot ethane has been trading at or near 11-year lows for much of the month,  below the 25-cent/gal mark.

That’s great for producers, but what about the end-users?

The prevailing theory is that this vaunted feedstock advantage will be passed on in a meaningful way to buyers, converters and, ultimately, the consumer at the supermarket, the hardware store or the car dealership.

It is, after all, a selling point for chemical manufacturers as they seek support for these expansions and related industry infrastructure projects, both in Washington and the communities in which they operate.

But that point seems a good three to five years away. And it would occur only if significant expansion capacity at both the olefin and polymer levels come online, and, as some market participants put it, the industry begins swimming in material.

For now, cracker margins for producers using ethane as feedstock averaged more than 34 cents/lb ($750/mt) in 2012, with the lowest margins seen around 18-19 cents/lb to start the year, according to Platts data. Margins using ethane, ethane/propane mix or propane have hung around 50-60 cents/lb to start the year.

Not bad for an industry that five years ago considered 10-cent/lb margins good. The margins seem too good to pass up. Or quit, for that matter.

This type of advantage is far from what those on the buying side of the equation are seeing, though. PE producers seek increases on domestic contracts that, if fully materialized, could total 9 cents/lb ($200/mt) for January and February combined. Meanwhile, the polypropylene market is having to absorb a 16-cent/lb ($350/mt) increase for January contracts, with another increase of up to 7 cents/lb possible for February, sources said.

The bulk of these increases appears to stem from a cost-push on the olefin front. It’s been created by tighter supplies, the result of cracker outages (both planned and unplanned on the ethylene side), and supply constraints stemming from decreased output from refineries and crackers, as well as recent production issues in at least one on-purpose plant, on the propylene side.

Meanwhile, buyers and end-users are left to ask: What about me?

To which a producer might be tempted to answer: Look at it this way. We have to pay for those expansion projects somehow.

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