Published on October 2, 2014
The shale gas revolution has revitalised the North American petrochemical industry, resulting in increased capital investment in new projects. Apart from oil and natural gas, shale fields also contain natural gas liquids (NGLs), thereby providing the market with new supplies at low costs. This cheap feedstock has led to a shift in profit pools, benefitting petrochemical manufacturers instead of gas producers and processors.
Asian petrochemical firms have started relying on LPG replacing costlier naphtha as the key raw material. These firms have begun setting up tanks and are retooling plants to store and process LPG imported from the United States. Petrochemical companies in Taiwan, Japan, Thailand and South Korea have increased consumption of LPG since June (gas costs nearly USD50/ton less than naphtha).
Firms like Samsung Total Petrochemical, Royal Vopak and LG Chem have started expanding import chemicals or retooling plants. Increased use of LPG and rise in tanker supply will also help bring down US-Asia freight costs. Increased Asian reliance on LPG will help US cut down surplus of the gas and also provide the shipping industry with more business.
However, falling demand for naphtha will affect regional suppliers of the fuel like India’s ONGC and Kuwait Petroleum. Increase in LPG supplies has widened the price gap between LPG and naphtha.In June, the average price of the gas was US$916/ton versus naphtha's US$972.While in June 2013, gas was USD17 cheaper than naphtha. Asia makes up for over a quarter of US LPG exports and that is expected to rise rapidly this decade, from 90,000 bpd in 2014 to 230,000 by 2019.
LPG supplies from the Middle East are also set to rise but exports may not increase as much as US shipments. LPG from US is available for below USD600/ton versus USD760-780 for gas from the Middle East. Thus, US LPG (considering the freight rates as well) will be much cheaper for Asian consumers.
However, considering the design of petrochemical units in Asia, only about 15 per cent of naphtha can be replaced by LPG.
Another market where demand for North American petrochemical goods can increase is Latin America. The Latin American economy is steadily growing thereby driving demand for chemicals and finished goods, and the market also has significant chemical capacity coming from the North American producers as the region represents a profitable export option because of its geography, demand and economics.
However, in order to take advantage of the opportunities available, Latin American industry should make considerable investments in infrastructure.
