summary-date March 2017
Approximate net recovery on cost
- Chemical industry shipments are expected to grow by 23 percent over the next three years, pushing industry shipments to $1 trillion by 2020
- U.S. chemical exports are expected to expand 7 percent per year (on average) through 2021
- Exports of specific chemicals directly linked to shale gas are projected to reach $123 billion by 2030, more than double the total in 2014
Industry changes impact value: The chemical industry in the United States can be segregated into three separate categories: base chemicals, specialty chemicals, and consumer chemicals representing approximately 60, 25, and 15 percent, respectively, of the annual domestic chemical production. Base chemicals are broken down into one of three sub-categories: petrochemicals, polymers, or basic inorganics. Specialty chemicals are typically developed for single-use applications such as dyes and pigments used in textile manufacturing, crop protection, and other industrial uses. Consumer chemicals are products that are typically sold directly to consumers such as cosmetics and personal care items, soaps, detergents, and other cleaning products, perfumes, and flavorings. The chemical manufacturing sector is one of America’s top exporting industries, with $196 billion in exports in 2016, accounting for 14 percent of all U.S. exports.
The chemical industry forecasts additional output from more than $163 billion in announced U.S. investment projects will generate $104 billion in new shipments by 2023. After several years of slow growth and contraction, output by the U.S. chemical industry is expected grow by 3.6% in 2017 as compared to a decline of 1.6 percent in 2016, according to the American Chemistry Council. This gain for 2017 will be largely attributable to the continued availability of low cost shale gas. The U.S. trade surplus for specific chemicals directly linked to shale gas is projected to increase from $19.5 billion to $48.3 billion by 2030.
Shale gas wells use hydraulic fracturing technology to capture natural gas from shale deposits. Shale gas is then separated at the well into methane and ethane, both of which are sold to industrial users. The abundance of this low-cost shale gas has led to increased demand for ethane as prices hit historic lows in 2015. Although natural gas prices have been rising (which will impact ethane prices), historically, and on a worldwide basis, natural gases in the U.S. remain very low.
Ethane is also a key feedstock used in the manufacture of ethylene, which in turn is used to manufacture a variety of petrochemical products such as polyethylene resin, one of the more widely used petrochemicals. Prices for natural gas, ethane, ethylene, and polyethylene (four bellwether petrochemical products) increased 108, 51, 22, and 13 percent, respectively, over the course of 2016.
The prices for natural gas and ethane are forecasted to increase by 2 and 16 percent, respectively, in 2017. Ethylene is projected to decrease by 1 percent, and polyethylene is projected to decrease by 11 percent over the same period. Demand is anticipated to remain strong across all platforms as production capacity is increased with the addition of four ethylene cracking plants throughout the U.S.
Infrastructure shortfall threatens growth: Based on a study conducted by PricewaterhouseCoopers (“PwC”) on behalf of the American Chemistry Council, inadequate transportation infrastructure and services could drive up costs for U.S. chemical manufacturers over the next decade. Released in March 2017, the report surveyed 68 chemical companies to identify logistics challenges and any potential impact on the industry. U.S. chemical and plastics projects are expected to increase production by 53 million metric tons per year, requiring an addition 1.8 million shipments annually by 2020. However, such rapid growth threatens to overwhelm the nation’s transportation infrastructure.
PwC estimates that over the next 10 years, inadequate port facilities, rail delays, and shortages of truck drivers could cause chemical companies to incur an additional $29 billion in operating costs and $23 billion in capital expenditures. Additionally, the buildup of excess inventories could translate to a cost of $22 billion in working capital. As a result, domestic chemical companies could face significant increases in operating costs and capital spending if industry growth continues to outpace infrastructure improvements. Congress was asked to approve a $1 trillion investment in infrastructure in February 2017, but the introduction of major legislation could take months to finalize and will likely face significant political challenges in the interim.
Timely appraisals to understand procurement, manufacturing, and storage related costs in this rapidly changing industry are critical to maintaining accurate values, while offsetting potential risks associated with ongoing volatility in commodity markets. Partnering with an appraiser that understands the changes in value that could arise from ongoing volatility in the chemical trade is key to mitigating risk in a rapidly changing industry.