Materials

US Specialty Chemical Landscape And Drivers

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<p style="text-align: justify;">Sourcing and Trading/brokering within the $750 BIL USGC (Texas Chemical Council, American Chemical Council reports) chemical sector have several potential revenue streams. The Houston TX and Louisiana areas are slated for more than $150 BIL (Houston) and $70 BIL (LA) of capital expansion projects driven by the &ldquo;shale gas&rdquo; low-cost raw material revolution. Here I have identified several potential focus areas, and business models for growth in commodity chemical sourcing, importing, trading and brokering over the next 3-5 years. These ideas are in addition to developing sales outlets to support the existing product mix in TX, MX, and LA, or wherever nonoverlapping potential exists.</p><ol style="text-align: justify;"><li>USGC producer supply length, excess capacity ~ go to market agreements</li><li>Import sourcing is driven by domestic supply gap related to demand</li><li>Import supply powered by significant buyer commitment to enable baseload</li><li>Import agency equipped with Global Producer dedication and redeployment resource</li><li>Export consortia, by consolidating co-product marketing with one customer model</li><li>Boutique Specialty Chemical Businesses</li></ol><p style="text-align: justify;">BACKGROUND UNDERSTANDING</p><p style="text-align: justify;">The task is to identify and highlight by this thesis, a compelling roadmap for building a new trading portfolio or a business book, that has an ongoing revenue stream, no asset base, and that is entrepreneurially operated.</p><p style="text-align: justify;">INDUSTRY TRENDS MARKET DRIVERS</p><p style="text-align: justify;">The petrochemicals industry continues to be impacted by globalization and integration of the world economy. Several factors influencing world petrochemicals are:</p><ul style="text-align: justify;"><li>Product Integration&mdash;Most major petrochemical companies are integrated (forward to downstream derivatives and backward to raw materials) to improve margins and to secure raw material source. This has resulted in some petrochemical companies either divesting non- integrated plants, forming a partnership with another company to improve operating efficiency (including sales, marketing, and distribution), or ceasing operations.</li><li>&nbsp;</li><li>Economies of Scale&mdash;World-scale petrochemical plants built during the past several years are substantially larger than those created over two decades ago. As a result, smaller, older, and less efficient units are being shut down, expanded, or, in some cases, retrofitted to produce different chemical products. (APA: Petrochemical Industry Overview - Chemical Economics ... (n.d.). Retrieved from <a href="https://www.ihs.com/products/petrochemical-industry-chemical-economics-handbook.)">https://www.ihs.com/products/petrochemical-industry-chemical-economics-handbook.)</a></li><li>&nbsp;</li><li>Price of Crude Oil&mdash;Crude oil prices had been on the rise since 2004 and traded for nearly $139 per barrel at its peak in mid-2008. However, by midyear 2014, prices began to slowly collapse from over $105 per barrel to below $35 per barrel by January 2016, climbing to $50 by June, as oil production in non- OPEC countries (especially the United States) rose, and global demand slowed. Markets are impacted significantly by sharp price fluctuations, creating a cloud of uncertainty in upstream and downstream investments.</li><li>&nbsp;</li><li>Environment&mdash;Increasing concerns over fossil fuel supply and consumption, regarding their impact on health and the environment, have led to the passage of legislation globally that will affect chemical and energy production and processing for the foreseeable future. (Petrochemical Industry&nbsp; Overview&nbsp; - Chemical Economics HIS 2017, Retrieved from https://www.ihs.com/products/petrochemical-industry- chemical-economics-handbook.)</li><li>&nbsp;</li><li>Technology&mdash;Manufacturing processes introduced in recent years have resulted in raw material replacement, shifts in the ratio of coproduct(s) produced, and cost. This has led to a supply/demand imbalance, particularly for smaller downstream petrochemical derivatives. Also, growing environmental concerns and higher crude oil priced has expedited the development and commercialization of renewable derived chemical products and technologies, previously considered economically impractical. This is not a significant trend impacting synthetic processes due to the little cost of light feeds and the high cost of R+D and meager yields of the renewables at this stage.</li><li>&nbsp;</li><li>Shale Gas Development&mdash;Among the various technological advances, the combination of vertical hydraulic fracturing (&ldquo;fracking&rdquo;) and horizontal drilling in multistage hydraulic fracturing resulted in a considerable rise in natural gas production (APA: Petrochemical Industry Overview - Chemical Economics ... (n.d.). Retrieved from https://www.ihs.com/products/petrochemical-industry-chemical- economics-handbook.) and light feedstock in the United States. This new potential has caused many countries to re-examine their natural gas reserves and pursue development of their gas plays. USA chemicals have pivoted towards this significant feedstock advantage, which is $400 per ton on ethylene,</li></ul><p style="text-align: justify;">$200 on propylene and looked towards massive capacity expansions far beyond domestic demand with an eye on the export market.</p><ul style="text-align: justify;"><li>Regional Production&mdash;before 1980, the United States, Western Europe, and Japan accounted for 80% of primary petrochemical production in the world. In 2014, their share had declined to 32%, as a result of development in emerging markets abroad, especially in the BRIC countries (Brazil, Russia, India, and China). However, United States will move from 22% of the ethylene supply to 32% by 2019 driven by the 9 MIL tons of supply constructed on the USGC. Future USGC production of ethylene, propylene and methanol derivatives will exceed regional demand in some cases by 33%.</li><li>Political Uncertainties&mdash;Situations in virtually all parts of the world&mdash;the Middle East, Africa, Eastern Europe, and South America&mdash;have growing global implications for the supply and demand of petrochemicals.</li></ul><p style="text-align: justify;">Economic Growth and Demand&mdash;Overall expansion of the population and an increase in individual purchasing power has resulted in an increase in demand for finished goods and greater consumption of energy in China, India, and Latin America. (APA: Petrochemical Industry Overview - Chemical</p><p style="text-align: justify;">Economics ... (n.d.). Retrieved from <a href="https://www.ihs.com/products/petrochemical-industry-chemical-">https://www.ihs.com/products/petrochemical-industry-chemical-</a>&nbsp; economics-handbook.) New capacity in USGC will be targeted towards import substitution (if any) or Latin American and global (Europe) export markets (BRASKEM IDESA import replacement in MX)</p><ul style="text-align: justify;"><li>Balance with Energy Demand&mdash;As both energy and chemical markets &ldquo;compete&rdquo; for hydrocarbon molecule demand, fluctuations in energy demand can conversely affect petrochemical market volatility. Lower crude prices and lower power consumption will lead to higher petrochemical demand and vice versa. Due to consumer confidence and potential discretionary spending, due to more disposable income.</li></ul><p style="text-align: justify;">USGC has a very significant and growing low-cost, stable supply of petrochemicals and raw materials. Big Oil and Petrochemicals, almost always insource all aspects of capital expansion project management and execution. This is also the case for sales and marketing, unless coproduction of some grades are a distraction, or not core to the business model. Small to medium-sized and non-US based operators, may seek partnerships for marketing.</p>
KR Expert - Stephen Friedewald