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Is your organization mobilized for the Shale Gas Decade? October 23, 2013 Tom Gellrich TopLine Analytics
Agenda • Dramatic North American Advantage • Chemical Industry Drives Next Wave • Translates Into All Manufacturing • Ohio Valley is a Central Focus • Four Disruptive Impacts • Conclusions • Questions and Answers
1973 Energy Shock
3.2x Increase Source EAI
1979 Energy Shock
2.0x Increase Source EIA
2008 – 2012 Energy Shock
3.8x Decrease Source EIA Natural Gas
North American Manufacturing Advantage 2008 $10.32 $2.74
2012
$11.40 $11.86 $1.25 $2.98
Source: World bank Pink Sheet Average natural gas prices $/MBtu
$14.38 $15.59
Chemical Industry Drives the Next Wave
• Shale gas = Fuel + Feedstock • Fuel + Feedstock can be 80% of the cost of chemicals
Pricewaterhouse Coopers White Paper
Dramatic Shift In 7 Years Ethylene
Source: American Chemistry Council
Dramatic Shift In 7 Years Ethylene
Source: American Chemistry Council
Global Chemical Shift • “The feedstock cost for new crackers in [Saudi Arabia] will be around $6/MBtu as there’s not enough ethane availability … this cost will be much higher than the US gas price, which is currently at $3.504.00/MBtu” –
Jamal Malaikah, president and COO, National Petrochemical Industrial Co (NATPET), Apr 2013
• “The shale gas revolution initiated in the US… is now reshaping not only the energy industry, but global economy and geopolitics as well.” This could cause “a great deal of discomfort” to Asia’s petrochemical sector. –
Yoshimitsu Kobayashi, chairman of the Japanese Petrochemical Industry Association at APIC, May 2013
• “The shale gas revolution in the US has turned the global petrochemical industry inside out…Basic petrochemicals can now be made in the United States for about half the cost as in Europe” –
Tom Crotty, Ineos group director, ChemWeek Interview October 2013
• “The supply of low-priced products that are based on coal and shale gas will become a threat to the existing petrochemical industry and will bring a significant change in its structure.” –
Han-Hong Ban, chairman of the Korea Petrochemical Industry at APIC, May 2013
US Chemical Industry Responds 2012 to 2020 • $70 billion in capital investment – 97 projects – 60 million metric tons of chemicals
• Jobs: – 485,000 direct – 700,00 indirect
• Taxes (federal, state, local) – $20 billion during investment phase – $14 billion on-going
• Just the first wave
Source: American Chemistry Council
Chemical Industry Drives the Next Wave Ammonia Methane Methanol
Ethane
Natural Shale Gas
Propane
Ethylene
Propylene
N-Butylene Butane Isobutylene
Source: PwC and TopLine Analytics
Manufacturing Sectors
Product Categories Fertilizers
Apparel and Accessories
Adhesives
Beverages and Tobacco Products
Alkyd Resins
Chemicals
Solvents
Computer and Electronics
Corrosion Inhibitors
Fabricated Metal Products
Textiles
Food and Kindred Products
90%
Inks, Adhesives
Leather and Allied Products
Shampoos, Detergents, Soaps
Machinery, Except Electrical
Paints
Nonmetalic Mineral Products
Coatings
Paper
Pipes, Hoses, Wire Coating
Petroleum and Coal Products
Coolant, Antifreeze
Pharmaceuticals
Films, Packaging, Bottles
Plastics and Rubber Products
Paint Remover
Primary Metal Manufacturing
Plastics
Printed Matter and Related Products
Tires and Rubber
Textile and Fabrics
Lubricant Additives
Textile Mill Products
Solvent, Industrial Cleaners
Transportation Equipment
80%
Wood Products
Polyethylene Economics Polyethylene Cost
US
China
Natural Gas costs
$/MBTU
Crude Oil costs Ethylene cost
$/BBL $/ton
1085
109 1980
Ratio for one ton of HDPE Ethylene cost
$/ton
1.025 1112
1.025 2029
Utilities Direct Cost Other Costs Total Costs
$/ton $/ton $/ton $/ton
15 51 132 1309
36 17 132 2214
1349
2281
Typical polyethylene margin Potential HDPE selling price
Source: NYMEX 11/13/2013
3.75
3.00% $/ton
2.3x Delta
Polyethylene Processor Economics Polyethylene Part
US
China
Polyethylene HDPE Part weight
$/ton grams
1349 100
2281 100
Parts Polyethylene HDPE
units $
20000 1349
20000 2281
Utilities
units
44
109
Labor
$/Hour
31.79
1.38
Labor Other Costs Non Polyethylene HDPE Costs
$ $ $
95 102 241
4 75 185
1637
2540
Typical part processor margin Potential Part HDPE selling price
14.00% $/ton
1.6x Delta
Ohio Valley at the Center • Polyethylene processing within 500 miles – 6MM tons/year – 45% of entire NA demand – 49% of NA converter sites Source: Townsend Solutions and Penn State
Four Disruptive Impacts Shale Gas economics drive Opportunity and Risk in manufacturing: • On-Shoring • Full Substitution • Partial Substitution • Oil versus Shale Gas
On-Shoring • Toothpaste tubes return to US production – 95%+ US toothpaste tubes are produced in China – 90% toothpaste tube by value content are plastics – US shale gas is driving down US plastics production costs 60% to 80% – Avoid the w/c and logistics cost of shipping from China to the US
• Substitute toothpaste tubes with thousands of other items – Household: Ball point pens, lighters, window blinds… – Medical: IV bags, syringes, oxygen masks, disposable gloves…
Innovative companies will appear and drive widespread on-shoring
Full Substitution • Pressure treated wood – Used in decking, fencing, and exterior trim applications – 7 billion board feet/year
• Competing products, all superior performance but higher price: – Plastic composite – Other wood such as cedar, redwood
• As shale gas prices drive down plastics costs plastics composite products achieve price parity with pressure treated wood • Other sectors: food containers, paint containers, lawn furniture Innovative companies completely replace entire products and market sectors
Partial Substitution • Plastics have for years been used in durable goods, and continue to increase in content – Light weight – Easy to fabricate – Long life, do not corrode
• Potential demand increase in durable goods – Automobiles – Appliances Innovative companies are driving product platforms increase plastics content
Oil versus Shale Gas • Chemical industry complex by-product manufacturing – Shift in US ethylene production to using ethane from 2005 to 2102 drove US butadiene prices 500%
• Some chemicals can only be produced (technically or economically) via crude oil • They compete based on price / performance with those from shale gas – Carpets/Clothing: Nylon, Polyester and Polypropylene Innovative companies are shifting production to shale gas derived chemicals
Conclusions • Shale gas is a dramatic US revolution. • Next wave of change is in manufacturing driven by Chemical Industry. • It will require unconventional thinking but isn’t that what drove the shale gas revolution? • Is your organization mobilized for the Shale Gas Decade?
Questions?
TopLine Analytics
We assist companies in addressing the challenges and opportunities to compete in the changing landscape brought on by the shale gas revolution
Tom Gellrich
www.TopLineAnalytics.com
267-205-1263