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Plan smart petrochemicals investments despite energy volatility and economic uncertainty

13 July 2016 Mark Eramo

Over the last half-decade, the once predictable market trajectory for petrochemicals has become a high-stakes guessing game for many chemical companies. Energy markets that were once reliably shaped by high crude oil prices are now influenced by a variety of forces, including price declines. These forces have resulted in shifting competitive positions within the chemical industry combined with expanding and contracting profitability along different value chain segments.

This hazy economic picture has created a higher degree of uncertainty in the chemical industry than IHS Chemical has seen for many years. Investment decisions suddenly seem to carry a higher level of risk. Market volatility has caused a collective pause in the approval of new projects, as strategic planners struggle to deliver sound investment cases to executive management.

Yet demand for petrochemicals continues to increase. After all, basic energy sources - such as crude oil, natural gas, and coal - provide the raw materials and essential BTUs needed to produce higher-value chemicals and plastics used to create the world's durable and non-durable consumer goods.

But which energy sources, feedstocks, and geographies are a good bet, today and in the future? In this dynamic environment, how can industry boardrooms and executive teams gain insight into evolving market conditions, parse trends, and confidently plan investments?

Boost investment confidence with tools and strategic insight

Decision makers must carefully assess a wide variety of variables. Consider the impact of changing energy and feedstock values of crude oil and natural gas on a BTU basis. From the late 1990s to 2005, these energy sources traded near parity. With heightened growth in the development of non-conventional oil and gas in 2006, North America became a low-cost region for chemical production. When crude oil prices dramatically declined in late 2014, commodity chemical prices dropped, too. In the US, the margins for polyethylene shrunk but margins for polystyrene and polypropylene set new records. The takeaway: Investors must assess opportunities by region, market, feedstock, level of integration, and value chain.

Geography - especially relative to the location of chemical assets around the world - is also a key variable. China's decade of investment has created a huge cluster of capacity in the coastal provinces, and many investments have migrated to the west. IHS expects this capacity to grow from 175 to 215 million metric tons (MMT) over the next five years. Growth is not limited to China, however. North America is expected to nearly match this pace of growth, expanding from 90 to 121 MMTs.

It can be difficult to predict the impact of volatile energy markets, changes in economic growth, operating performance of existing assets, unplanned supply interruptions, and geopolitical turmoil. But waiting until all signals are clear is not a viable strategy. Build cycles for most projects average four to six years. Any delay in the execution of new facilities projects could affect chemical production from 2020 to 2022, creating supply limitations not seen since the late 1980s.

Companies that understand the complex, dynamic changes in the petrochemicals value chain are better positioned to anticipate evolving market forces and create effective strategies for success. By combining scenario planning flexibility with analytical capabilities, industry expertise, and strategic insight, IHS Chemical can support this effort. We help companies confidently create integrated value-chain forecasts that provide the basis for capacity investment decisions and are flexible enough to respond to market volatility.

For more information on market conditions that are shaping petrochemical investment decisions, read this new IHS Chemical report.



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