Low Feedstock Costs Boost North American Chemical Processors' Investment Plans

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Oil & Gas producers continue to be vexed by low prices for natural gas and natural gas liquids (NGLs), but chemical processors are welcoming the abundance of low-cost feedstocks for their products. Flat and stable prices for natural gas and NGLs are giving U.S. and Canadian chemical processors a competitive advantage over rivals who use naphtha for their feedstock. At current prices of about $70 per barrel, crude oil is about 24 times the price of natural gas on a BTU-equivalent basis.

"The elevated oil-to-gas ratio, which is mostly a function of high crude oil prices and low natural gas prices, continues to help drive project spending among chemical producers," Trey Hamblet, Industrial Info's vice president of global research for the Chemical Processing Industry, told attendees at Industrial Info's 2018 Industrial Market Outlook briefing held earlier this month in Valley Forge, Pennsylvania.

"The cost advantages enjoyed by the domestic chemical industry are significant when you consider the price of oil compared to natural gas," he continued. "Most chemical producers in Europe, Asia and Latin America are forced to use high-priced naphtha as the primary feedstock; while in the U.S., companies are producing the same commodities with NGL or natural gas feedstock at a fraction of the cost."

Industrial Info is tracking about $42 billion of CPI projects in the U.S. and Canada that have a high or medium probability of beginning construction this year, Hamblet said at the May 2 briefing. That sum includes about $13.5 billion of projects seen as having a "high" probability of kicking off construction this year. An additional $20.5 billion of CPI projects have a "medium" probability of getting underway this year.

While the $42 billion in 2018 project construction starts is a robust sum, it is down from an estimated $51 billion in industry spending that was forecast at the beginning of the year. However, while the current aggregate project spending estimate is down from Industrial Info's January estimate, the amount of spending characterized as "high probability" has risen sharply from the January estimate, Hamblet noted.

"While the North American market is a large and important one for chemical processors, driven largely by the housing and automotive industries, chemical processors are far more dependent on global demand than ever before," Hamblet said. "Global demand is driving a lot of CPI project activity in the U.S. and Canada."

Spending on grassroot projects is expected to surge this year and next, and the size of individual grassroot projects is a factor driving overall project spending upward, Hamblet said. Roughly $14 billion of grassroot CPI projects are scheduled to begin construction this year, and in 2019 more than $25 billion of grassroot CPI projects are scheduled to begin construction. By contrast, 2017 saw about $8 billion of grassroot projects begin turning dirt, and significantly less than $5 billion began construction in 2013, 2014, 2015 and 2016.

Click on the image at right to see grassroot project pending by U.S. and Canadian chemical processors from 2013 to 2017, and projected spending for 2018 and 2019.

Spending on chemical processing unit additions and in-plant capital projects also are expected to rise sizably over 2017 levels, Hamblet told the Valley Forge Outlook attendees. This year, U.S. and Canadian chemical processors are scheduled to begin construction on about $15 billion of expansions and unit additions, up from about $9 billion in 2017. In-plant capital projects with a "high" or "medium" probability of kicking off this year are expected to total about $2.8 billion this year, up from about $1.6 billion last year.

Maintenance spending is expected to be relatively flat with 2017 levels, but is forecast as rising nearly 20% in 2019, he added. "Operating rates for CPI facilities are at near-record levels and utilization rates are incredibly high," Hamblet remarked. "There is a large and growing fleet of chemical processing facilities in the U.S. and Canada, and a larger fleet means more turnaround maintenance projects."

Turning to the Great Lakes and Northeast regions, Hamblet said Industrial Info is tracking about $25.5 billion in active project spending, including 12 grassroot projects, 79 expansions and unit additions, 93 in-plant capital projects and 342 maintenance projects. Project activity is especially high in Ohio, northeast Illinois, southwest Pennsylvania and southeast Pennsylvania, he commented.

"We expect chemical processors in the U.S. and Canada will be making hefty investments this year and next, though we don't expect all projects to begin according to their current schedule," Hamblet said. "Strong global demand for chemicals, particularly from Europe, China and South Asia, will be driving CPI project activity in North America, where our low-cost natural gas and NGLs give companies here a significant competitive advantage over foreign rivals."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.