The increased supplies of natural gas from shale deposits is changing the landscape for the chemical trades. With abundant feeder stocks at historically low prices, the global chemical industry is in growth mode while the performance in other industry sectors is slow or flat. But will demand match supply?  Can low cost energy and cheap feedstock be enough to sustain growth in the U.S. chemical industry? Or will over capacity tilt the scales downward? Shaleconomics The increased supplies of natural gas from shale oil plays have been described as a “game changer” for the US chemical industry and in turn, the global chemical market.  Natural gas is a preferred feedstock for US chemical manufacturers. But up until recently, natural gas prices in the US have been high and supplies volatile, impacting the competitive position of US chemical manufacturers as well as investment.  But the shale-gas with its relatively low price gives US chemical manufacturers a feedstock advantage [natural gas-ethane] over many global competitors that rely on naphtha, a more costly, oil-based feedstock. For example, 74% of the crackers in Europe run on naphtha with only a small portion getting ethane from the North Sea petroleum assets. Add in the relatively low cost for electricity, in a kilowatt dependent industry, and the competitive advantage for North America is clear. Thus far shaleconomics seems to be delivering.  Since the advent of lower cost shale-gas in the late 2000s, US chemical manufacturers have been out performing their overseas competitors – a position inconceivable in the 1990s when chemical plant investment was moving out of the US and into the Middle East and Asia.  In 2014 the US chemical industry grew by 2%, over 3% in 2015 and around the same is forecast for 2016. The US chemical industry annually accounts for US$800 billion in revenues and produces over 15% of the world’s chemicals. Despite a weakening global economy both tallies are likely to rise through the end of the decade. According to the American Chemistry Council (ACC), the shale-gas boom has resulted in 246 new chemical projects representing $153 billion in investment. This is after a long decline in investment prior to shale-oil. While this may not seem like a boom, the chemical industry growth average is consistently above the average growth rate for US manufacturing as a whole. The US chemical industry (non-pharmaceutical) annually accounts for US$800 billion in revenues and produces over 15% of the world’s chemicals. Despite a weak global economy both tallies are forecast to rise through the end of the decade. Global Markets According to the U.S. Energy Information Administration (EIA), oil prices averaged around $49 per barrel in 2015, a nearly 50% drop from 2014. The EIA forecasts oil will inch up to $51 in 2016. Similarly, natural gas prices also have declined, but not as much. Gas averaged $2.67 per million Btu in 2015, a 40% decrease from 2014. The EIA is forecasting natural gas prices to hit $2.88 this year. Even the gap between oil and gas feedstock has narrowed. The advantage still lies with U.S. producers. Electricity costs are inline with competition because of natural gas-fired electric generation. China, India, Australia and South Africa have lower electricity prices than the US. On the other hand, the US has significantly lower electric rates than Europe. Shaleconomics has moved the US from being a high-cost producer of key petrochemicals and resins to being the world’s second-lowest cost producer behind the Middle East.  According to the EIA, natural gas is used as a feedstock mostly in nitrogenous fertilizers, methanol, and hydrogen gas production. Demand for these products is expected to increase, and natural gas feedstock use is expected to grow by more than 3% per year through 2025. In the U.S. the “bulk chemical” sector has benefited most from the natural gas boom. Bulk chemicals are predominately intermediate products used to produce final products such as plastic containers or fertilizer. In general, bulk chemicals fall into three groups: organic chemicals (resins, synthetic rubber, and fibers), inorganic chemicals and agricultural chemicals. In terms of value of shipments, organic chemicals are the largest percentage within bulk chemicals, accounting for 47% of the value of bulk chemicals shipments in 2013.  High Impact on Trade According to a recent report by IHS, shale-gas will have a high impact on US chemical trades. The think-tank is forecasting US shale gas-derived chemical expansions of more than 100 million tons of new capacity by 2025. Much of that new capacity will be dedicated to plastics, significantly increasing the US net export position. Major US chemical production additions include ethylene, propylene, methanol, ammonia and their derivatives, such as plastics and fertilizer. This new capacity will alter trade patterns as domestic fertilizer production replaces imports from South America, the Black Sea and the Middle East.  To a degree the shale-gas impact has already started to take effect. According to ACC, from 2001-2006 exports of thermoplastics, as a share of North American production averaged less than 13%. Since shale-gas production entered the picture, US production has begun to rise and forecasts say the export share will be in excess of 30% by 2020. The long-term question is whether over capacity from the global expansion of chemical production will outrun projected growth in demand. Besides the U.S. regions, the Middle East is massively ramping up their chemical production owing to the low cost of feedstock. Traditional importers of chemicals like India and China are also adding additional capacity. For example, India could move from being a net importer of polyethylene to an exporter of the chemical by the end of this year. The new production capacity has already begun to impact Europe’s chemical export trade. Total EU chemical sales dropped 2.8% in 2015 compared to 2014.  According to the European Chemical Industry Council sales in the fourth quarter of 2015 declined by 1.6% compared to the fourth quarter of 2014.   And chemical sales during 2015 were 2.8% below the pre-crisis full-year peak reached in 2008.