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http://online.wsj.com/article/SB1000142405274870471820457461...

Required reading for those who invest in the chemical industry.

The US industry has long had a price advantage that comes from low cost natural gas. Much of the industry originally located on the Gulf Coast before the days of interstate pipelines. Orphan gas could be contracted for prices under $0.25/MM BTU. When prices hit $9/MM BTU recently, chemical companies lost their edge vs international competitors.

But now that shale gas discoveries have made NG cheap again (down to $4/MM BTU now typical), it is tempting to invest again.

Price for ethylene (the basic building block of the US chemical industry--especially for plastics and many other chemicals) is currently set by high cost producers that use oil as a feed stock. Oil prices set the spot price of ethylene at $1100/ton, while gas based producers can make it for $550-600/ton according to WSJ. Hence, they again have a nice margin in this business. That makes them eager to sell ethylene and to operate numerous downstream plants to convert profitable ethylene into forms that can be easily monitized. (This is the basic product silo strategy of the chemical industry: Large plants operating cheaply with product converted into any form necessary to move the volumes and baseload the supply chain.)

But price fluctuations in recent years have made long term profitability questionable. Plants costing hundreds of millions must operate for decades to be profitable, but low prices and fading customers have caused turmoil making new investment risky. Without new investment, the US cannot maintain its leadership. But with more and more manufacturing moving to Asia, can investment be justified?

In time gas based exports from the US should displace oil based production in Europe and Asia. That would reduce oil prices and demand as petrochemicals consume almost one tenth of global oil.

But given the uncertainty will it happen?
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