By Hector L. Rivero, President & CEO Texas Chemical Council and Association of Chemical Industry of Texas
Despite a slowdown in America’s economic recovery, the outlook for the U.S. chemicals manufacturing industry is more encouraging.
According to the American Chemistry Council’s (ACC) 2011 Year-End Situation and Outlook published late last year, gradual improvement will occur in 2012, before a stronger recovery takes hold in 2013.
The key to the domestic chemical industry recovery is continued access to the vast, new supplies of natural gas from previously untapped shale deposits. After years of high and volatile natural gas prices, the new economics of shale gas are creating a competitive advantage for domestic manufacturers, leading to greater investment, job creation and industry growth. Texas is among several states reaping the benefits of abundant supplies.
ACC’s President and CEO Cal Dooley said, “Most major end-use markets for chemistry in the U.S. have recovered, though growth has slowed for overall U.S. manufacturing.”
Dooley also noted that while developed nations – constrained by debt and tighter fiscal policies – are likely to expand chemistry production only moderately, output from emerging markets will increase more rapidly.
“The shale gas production boom is moderating natural gas prices and creating more stable supplies, which has allowed U.S. chemical manufacturers to become more competitive with producers abroad,” Dooley added.
Historically, an oil-to-natural gas price ratio of 6:1 or higher increases the global competitiveness of Gulf Coast-based petrochemicals and derivatives like plastic resins. For the last few years this ratio has been above 7:1, but more recently the high ratio of oil-to-natural gas prices has been more than 25:1, helping to spur capital investment.
The boom in oil and gas is creating both demand-side (pipe mills, oilfield machinery) and supply-side (chemicals, fertilizers, direct iron reduction) opportunities and this is likely to continue. There is also strength in light vehicles and aircraft, a recovery in construction materials, and industries involved with business investment (iron and steel, foundries, computers) are still strong.
The outlook for chemicals points to modest growth over the next several years and depends on strengthening domestic demand and an improvement in exports abroad. Exports were up nearly 11% to $189 billion in 2011 and are expected to exceed $230 billion in 2014.
Another study by PricewaterhouseCoopers indicates that developing domestic shale gas reserves has the potential to save U.S. manufacturers billions of dollars in energy costs and employ one million more workers. The report also acts as a call to action, by urging manufacturers to become “active stakeholders in the shale gas industry.”
“We do believe there is the possibility of a renaissance in U.S. manufacturing,” said Bob McCutcheon, one of the co-authors of the study.
According to the report, companies can see significant cost saving if they have access to cheap natural gas, especially since manufacturing consumes one-third of the country’s energy output. This will especially benefit industries like metals, chemical and industrial manufacturing that have high energy costs based on manufacturing processes.
Additionally, the chemical industry can see savings in raw materials that are derived from natural gas, which is expected to lead to more U.S. investment.
And the shale-oil and natural-gas boom has cracked open another lucrative market: gas liquids used to make plastics. The same drilling technologies that have unlocked vast amounts of crude and natural gas from previously unproductive shale formations also are reaping large stores of ethane, propane and butane, known as natural-gas liquids.
Processing ethane into chemicals is 50% cheaper than using crude oil-derived naptha and its availability has made U.S. petrochemical companies the envy of overseas competitors.
An earlier ACC study projected domestic petrochemical investments of approximately $16 billion related to reasonable increases in ethane supplies. Looking at the broader chemical industry, capital investment is expected to exceed $25 billion, further fueling economic and job growth.
But Dooley appropriately notes: “To sustain the recovery’s momentum, we need sound economic, energy and environmental policies that will encourage the growth of America’s manufacturing sector.”
By Hector L. Rivero, President & CEO Texas Chemical Council and Association of Chemical Industry of Texas
If there were ever a year to remind Texans of our state’s water issues, 2011 was it. During months of drought and heat, our reservoirs and lakes dipped, cities restricted water usage and aging water mains burst. The persistent dry conditions paved the way for a record-breaking number of devastating wildfires across Texas.
The drought was estimated to have caused at least $5.2 billion in losses, and the fires cost billions more in damage. The past summer was the hottest on record and climatologists predict the state has finished the second year of a nine-year drought.
According to a recent draft of Texas’ state water plan, without improvements to our current system, by 2060, more than 80 percent of Texas’ population could lack enough water during a drought. To deal with a population that’s expected to double by then, Texas’ water infrastructure needs $231 billion in upgrades.
Some of those water, sewer, flood-control and conservation projects will be more easily financed because voters approved Proposition 2 back in November.
Smaller government entities that build and maintain our water system (towns, cities, and municipal utility districts) can’t borrow money as cheaply as the mighty state of Texas can. So to help out, the Texas Water Development Board (TWDB) will set up a fund to lend the little entities money at lower rates of interest than they would be able to get on their own.
The cost to Texas taxpayers is virtually nothing because the loan fund – up to $6 billion at any given time – will be financed through state bonds. Those bonds are paid off via loan payments from the smaller water entities, which in turn get their money from local taxes and bill payments.
This also helps cities by creating a revolving fund because they need access to capital without having to ask voters to replenish it every few elections. By keeping the fund under $6 billion, the TWDB won’t need to get it reauthorized at the polls. That certainly helps cities to plan ahead, just like the state has helped veterans gain access to a revolving fund for mortgages and land purchases.
Because Prop 2 passed, Texans will spend more on infrastructure and less on interest. No state tax dollars will be needed, and the local savings will show up in lower water bills.
Since state lawmakers won’t reconvene until January 2013, Lt. Gov. David Dewhurst and House Speaker Joe Straus have assigned “interim charges” to examine important issues this year.
Various committees in the Texas Legislature have begun studying the impact of the drought’s effect on power generation, agriculture and the economy.
Our industry has been asked about how the drought has affected business, and what water conservation initiatives industry employs in their operations that might be considered by Legislature in developing its future water policy.
While the chemical industry uses large volumes of water, most plants return well over 95 percent of the water used to downstream sources; and that water is returned cleaner than when it was captured. Many facilities are located along the Texas coast, so they are often at the end of rivers that provide them with water for their operations. As droughts dry up our state’s rivers, lakes and reservoirs, this impacts the supply of water for cities, agriculture and manufacturers all along a river basin and can often create dire shortages for industrial facilities located downstream.
Without an adequate supply of water, manufacturers would be unable to operate, resulting in significant loss of investment and jobs in many communities.
Another issue with wide-reaching implications to the chemical industry is the future of “fracking” (or hydraulic fracturing) for natural gas drilling. Key lawmakers are encouraging drilling operators to invoke recycling technologies in their fracking operations.
The chemical industry in Texas is poised for new investment and job growth as a result of abundant new supply of natural gas from previously untapped shale deposits. Further development of shale gas and ethane can promote even greater expansion for our industry, provided sound science is used in any new regulations on gas producers.
Water will be one of the most important public policy issues for decades. It is important that all of us do our part to support conservation, recycling technologies, and sound public policy that will ensure a supply of water for our cities, our agricultural producers, and manufacturing for generations to come.