The shale gas revolution in the U.S. has led to exponential growth of the petrochemical industry. Investment in the industry has been gradually rising, specially in the ethylene value chain. The U.S. economy is expected to witness investments worth 110 billion dollars in petrochemical plants and projects.
Production capacity of ethylene is likely to rise by nearly 40 per cent. Nearly 10 mtpa of ethylene capacity will come on stream likely within the next 4-5 years.
Demand for ethylene derivatives in emerging and developed markets is rapidly increasing. The recent economic crisis, however, has resulted in a decline in demand for all major ethylene derivatives.
The reason for this decline could be reduced exports. There is still considerable debate over whether the U.S. petrochemical industry exports can change this situation.
China seems to be the preferred destination for exports. China has experienced tremendous increase in demand for petrochemicals- a growth driver for an export-oriented economy. However, now that Chinese market is gradually moving toward becoming a developed economy demand for several commodities, including petrochemicals, is expected to moderate. The economy will likely move at a sustainable pace of growth. China is also planning a transition from export-based economic model to one that is focused on improving local consumption. Subsidies to firms to export may stop and this could reduce output.
China is heavily dependent on imports, even for petrochemicals, and this has been a cause of concern for the government. However, over the last few years China has ramped up its output which has changed the global supply situation. There are a number of coal-based projects being established in order to produce petrochemicals, including PVC and polyolefins. 5 propane dehydrogenation units are to add 3 mtpa of propylene capacity. Technology to produce MEG from coal is also expected to interest investors.
China is also likely to be home to another shale gas revolution. The country is said to have the largest shale gas reserves. But tapping into this vast resource will likely take time.
Sinopec has been making a lot of progress in developing China's first shale gas field. Analysts expect that the shale gas boom will most likely support petrochemical production.
China will remain an importer, but the reliance is expected to be much smaller than before primarily due to decline in demand and increase in local output.
US petrochemical companies dependent on shale gas will have an high cost position for ethylene and derivatives. These companies will also be extremely competitive in Europe. Increased petrochemical output from the U.S. will lead to reduced capacity in Europe, pushing smaller players to withdraw from the market.
However, there won't be any large-scale closures as this would affect energy security of the region.
There is a possibility that the shale gas boom in the U.S. could lead to closure of older and higher cost plants in order to construct new facilities with latest technology.
An export-oriented petrochemical growth is highly unlikely because majority of the consumers prefer local production. Firms also rely on suppliers who can quickly fulfil their demands. This argument supports investments in the developing markets.
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