Video: How will chemical trade patterns evolve which companies will leverage the opportunities?

Low-cost feedstocks will make North America a major petrochemicals exporter. Shipping and logistics firms will be positioned to profit from that trade.

Interview Transcript

When you look at the American market place and the developments that have occurred in tight oil, as well as in unconventional gas, ultimately resulting in low cost energy, and low cost feed stock for the petrochemical industry, it's resulted in a resurgence, essentially a renaissance, for North American petrochemicals.

So, after more than a decade of literally no investment in new capacity, we're now looking at substantial investment between now and the next five to ten years that will result in a very strong, significant increase in new capacity. When you look at that increase in new capacity relative to the fundamental demand growth, domestically in North America it will result in a sudden increase and certainly a surge in exports out of this region.

What are the key factors influencing regional trade in chemicals?

So, when you think about regional trade, in the petrochemical sense, the first thing you need to remember is not necessarily one size that fits all. When we think about base petrochemicals and plastics and the trade that exists between the Americas, between Europe and the Middle East and with Asia, the fundamental factors that influence that trade essentially are the rate of domestic demand growth, as compared to the rate at which a region is increasing its domestic capacity to produce those products.

For those regions that are low cost that have slower demand growth essentially they will build more assets than domestic market can consume, and therefore they'll be non-exporters, or vice versa, as is the case in China. They have domestic demand growth that is significantly stronger than their ability to build new capacity to supply that demand and therefore they rely heavily on the outside world to supply them products so that they can meet their domestic demand.

What is the current state of trade and how might that change?

When we think about the fundamentals that influence regional trade, looking at the current state which essentially breaks down between low cost regions and high cost regions, we see the low cost regions like North America and the Middle East being incremental not exporters to the rest of the world. Other regions that are higher cost, such as Latin America, Europe, parts of Asia, especially China, are net importers. That's where we sit today.

As new capacity comes on stream in North America, we see North America becoming a much larger and a much more significant net exporter of petrochemicals and plastics into the future. Again the domestic market is just not growing fast enough to absorb all the new capacity. North America will likely push products first into Latin America, will push into Europe, and we also see North America continuing exporting into the Asia market place.

Middle East will continue to play the role they've played for many years which is an incremental net supplier and net exporter into the international market, mainly going into China. China is an interesting case. China is also building a lot of new domestic capacity which will start to impact the amount of product that they need to import. For certain markets this will create some short term imbalances as they bring this new capacity on stream.

Who are the likely winners and losers as trade patterns change?

Clearly, when you look at the potential and continued expansion of net trade in petrochemicals and plastics the clear winners are what I would call logistics companies. In order for all the capacity that will be built and shipped around the world, there is a significant amount of what I would call logistics investments that have to support that, otherwise the product doesn't move. So the shipping companies, the packaging companies, the container companies; these are the companies that have to be expanding their capabilities in all parts of the world in order to facilitate this growth in capacity and this increasing net trade of products.

One example to think about is if you just look at ethylene derivatives. If you go back to the late 90's the early 2000's, and look at what we're forecasting by the year 2020 to the year 2025, you're probably looking at almost a tenfold increase in the net trade of ethylene derivatives as we build more capacity in lower demand centers and ship that capacity into areas of the world that are growing at a faster rate.

On the loser side of the equation, really it becomes those countries or those companies that are high cost and have import exposure. So, if I'm sitting in a country and I'm operating at a high cost position and it is easy for imports to come into my country then I could potentially feel, especially in an over-supply situation, a very competitive situation developing in my own backyard which could put more pressure on me, cause me run lower rates, or even forcing me to shut down.

Mark Eramo VP Chemical Insights, IHS Chemical