The unleashing of cheap gas has revived one of the world’s most controversial industries, and is stuffing billions of dollars into investors’ wallets…
From crop seeds to rubber soles on our shoes, very little of what we consume is not without some use of chemicals.
Because their products are found in nearly everything we use and consume, chemical firms have enjoyed slow, yet steady and reliable growth for decades.
But the winds of change have arrived. And if profits are your modus operandi plain and simple, then right now could be the perfect time to invest in the chemicals sector.
You see, US chemical firms – especially companies that produce ethylene –have been benefiting from a dramatic spike in profitability spurred on by cheaper energy input costs.
Compared with other gas-producing countries, US natural gas is 2.6 to 3.8 times lower, with prices having fallen by more than 50% in the last decade.
Not surprisingly, the chemical industry’s use of natural gas for feedstock has soared. Where the majority of foreign firms still use crude oil, the use of gas has climbed to as high as 80% in US companies, according to research firm IHS.
And as mentioned in one my recent articles, we’re seeing a proliferation of ethane cracker facilities and the production of the byproduct ethylene – a key ingredient in many plastic-related goods.
The increased gas usage and the margins resulting from running cheaper ethane crackers have helped chemical companies boost their annual profits by some $6 billion, says IHS.
Where it used to cost around $1,000 to produce one ton of ethylene, it’s now down to about $300 in the US. Comparatively, the same amount of ethylene produced in Asia is in the ballpark of $1,700 per ton.
Betting on natural gas staying affordable over the long-term, both chemical and energy companies are wasting little time capitalizing on their profit windfall.
In fact, IHS estimates that the chemical industry will make $129 billion in new investments nationwide as a direct result of shale gas, through the construction of new plants and refitting of existing ones.
This is expected to add more than 50,000 permanent jobs to an already thriving workforce of around 800,000.
As recently as 2009, many petrochemical plants were threatening to close or were closed down.
A mere half-decade later, industry experts are anticipating a multiplier effect, where one job in the plant will create five others in related contractors and suppliers.
Trade magazine ICIS Chemical Business estimates that US capacity to make ethylene will expand by a whopping 38% in the next few years. And that has chemical industry investors grinning from ear to ear.
“It is a huge deal,” says Joe Chang, global editor of ICIS. “It’s a great amount of expansion, all based on the premise that you’re going to have these low-cost natural gas feedstocks for a long time.”
Top Chemical Stocks To Buy:
Chemical giant Dow Chemical (NYSE:DOW) announced it is investing $4 billion to bolster production in the US, including a new ethylene plant in Freeport, Texas.
Royal Dutch Shell (NYSE:RDS.A) will be building a multi-billion dollar ethane cracker facility in western Pennsylvania, which will allow it to take advantage of the abundant natural gas from the Marcellus shale.
That’s just a sign of things to come for the chemicals boom. Plenty of other projects are in the works as we speak, with even more on the drawing board.
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