The Miracle of Shale Gas
But with the commercialization of shale gas in the US, the industry has seen a remarkable turn of fortune. Today, the outlook for many US Chemical companies feels overwhelmingly upbeat. With a new and abundant source of low-cost feedstock, the US market has transformed to become one of the most advantageous markets for chemical production in the world.
The changing dynamics have spurred a wave of new investments (according to the ACC, almost $25 billion has been earmarked by US Chemical companies for the construction or expansion of new facilities) that have signaled a renaissance for commodity chemical production. The availability of low cost energy and feedstock in the form of shale gas has already provided a boon to the economy and, notwithstanding another economic shock, should help consumers and manufacturers drive the economy into an era of steady growth.
The drive for cost-efficiency
Much can also be said for the industry’s recent actions aimed at reducing the cost base. Indeed, out of the turmoil of the 2008 global financial crisis, many US Chemical companies have made significant progress in reducing their operating costs, rationalizing operations and increasing margins. Significant consolidation has been occurring, even while companies take advantage of new opportunities in outsourcing, tax efficient supply chain management and cost rationalization.
The tenacity of the US economy has also played a part in returning optimism to the US Chemical industry. True, the long-awaited recovery has been slow to take hold, but the outlook for the US economy, particularly when juxtaposed against the woes of the Eurozone, seems positive and steady. As a result, many US Chemical companies are anticipating a period of economic expansion - auto sales are growing strongly and growth will inevitably return to the construction sector as well.
The growth dilemma
However, there remain a number of risks on the horizon. The first – and likely most problematic – is that the exponential addition of new capacity in the Chemical industry will lead to an oversupply that outstrips demand within the national market, returning the industry to the cyclicality that was such a problem in the past.
Tied to this are the growth projections for global Chemical sales. While the US economy has returned to growth, overall it remains a mature market which could not absorb all of the announced new capacity. Europe and Japan have seen somewhat sedate growth, while the emerging markets have boomed ahead with China, India and Latin America in the lead.
US Chemical companies should place strong focus on developing their supply lines into the new growth economies. This will require companies to take immediate action. The opening up of many emerging markets to import growth can be a slow and complex process, often requiring the establishment of joint ventures and careful consideration of issues such as transfer pricing, regulation and business structuring. US Chemical companies need to take actions today that should guarantee markets for products to be produced in four or five years time.
Strong winds prevail
Other risks are also present. Continued debate over the guidelines and regulations for the extraction of shale gas remain vague and – if shown to be overly restrictive – may drive up costs in the near-term. The emergence of a shale gas industry in other countries may erode the US’s current competitive advantage. The contagion of the Eurozone crisis may spill over and reduce growth projections in markets as far afield as Asia.
While all of these are possibilities, the prevailing assumption is that this new era of massive opportunity is a stable and sustainable reality for US Chemical companies. Clearly, the medium term outlook for the market is one of optimism.
By Mike Shannon, Paul Harnick and Tom Meike
Mike Shannon is the Global and US Leader of KPMG’s Chemicals and Performance Technologies practice. Mike leads the audit of a number of global chemical companies and is one of our most experienced audit partners in the industry.
Paul Harnick is the Chief Operating Officer of KPMG’s Global Chemicals and Performance Technologies practice and is currently on rotation to KPMG in the US. Paul specializes in emerging market strategy and cross-border transactions in the chemical industry.
Tom Meike is a Managing Director in Advisory with KPMG in the US. Tom is responsible for advisory initiatives in KPMG’s North American Chemicals and Performance Technologies practice. He can be contacted at firstname.lastname@example.org