Chemical & Energy

INSIGHTS
2017 issue 2ihs.com/chemical
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Chemicals and globalization
Page 2

Midstream ties that bind USA

‘unconventionals’ with
Petrochemicals
Page 4

Identifying opportunities in
a turbulent time - China’s
chemical industry outlook
Page 6

Naphtha faces competition

from abundant natural gas

The implications
liquids
Page 8

of globalization
Speciality chemicals – surfing
the wave of globalization
Page 10

Commercialization
Protectionism versus opportunity opportunities for chemical
technology
Page 12

Trends in Petrochemicals
Futures Markets: Ethylene
hedging is a new option
Page 13

NAFTA – The balance 23 years

later Good? Bad? Just ugly (to
some)?
Page 16

Feeding the Bear – the outlook

for petrochemical feedstock
in Russia
Page 18
IHS Markit Chemical & Energy
Insights | Vision

Chemicals and globalization

↘↘Chemicals is truly a global industry. GOP-backed Border Tax Adjustment
Whether it is enabling monetization (BTA), India’s ‘Make in India’ or
of resources in countries with supply China’s ‘Made-in-China 2025’ policy
in excess of local demand, or are clearly aimed to this end while
connecting intermediates with the potential demise of TPT in favor
competitive labor that can manufac- of bilateral agreements or rising
ture more competitively or leverage a anti-immigration sentiment create
better capital cost, there are few uncertainty and threaten to de-rail
other supply chains that are more many of what have been primary
Dave Witte | Senior Vice globally connected. As such, the drivers of global economic growth.
President, IHS Markit & growing anti-globalization backlash There are a range of potential
General Manager, Chemical mandates an assessment of the outcomes impacting chemical
E dave.witte@ ihsmarkit.com potential implications and risks for industry. An all-out trade war is
T +1 (281) 752-3276 the industry. Interestingly, it is possible, though unlikely. More
L Houston mostly the developed world where likely are policies that encourage
the outcry is loudest. And these domestic production and dis-incen-
indictments are from political circles tivize imports. Industry de-regula-
that have historically been the tion and a lower overall corporate tax
proudest advocates of free-trade. are likely to support this repatriated
In hindsight, it is apparent the investment as are policies that
post-millennial WTO entry of China encourage capital repatriation. But
onto the world stage that was the the net effect is likely to slow global
catalyst recent protectionist demand growth, especially for
movements. Rapid dislocation of consumer products that have low
workers cloistered in relatively tight margin and/or high price elasticity.
geographies has meant concentrated Sectors that have a large import cost
pockets of under-employment. component (such as US autos) would
Local governments were slow to also be negatively affected. On the
react and this inability to minimize supply-side, high-margin sectors that
workforce dislocation sowed the have a high material or labor compo-
seeds of what is now manifesting as nent are likely to see increased
a discontented workforce clamoring investment over time.
for protection. While it is too early to quantify the
It is probably too early to say with impact on specific countries or
any certainty how policy actually sectors, it is clear that countries are
progresses, but directionally some increasingly focusing on protection-
themes are emerging. These include ist policies that will impact market
more protectionist trade and labor development. . Only those countries
policy and fewer multilateral trade with clear competitive advantage will
blocks. Potential scenarios such as have the position needed to support
promoting tax schemes like the US or grow exports.

AMERICAS EUROPE, MIDDLE EAST, AFRICA ASIA PACIFIC

T +1 800 447 2273 T +44 (0) 1344 328300 T +65 6439 6000
E [email protected] E [email protected] E [email protected]
or [email protected] or [email protected] or [email protected]

@IHS4Chemical © 2017 IHS: All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or
otherwise, or be stored in any retrieval system of any nature, without prior written permission of IHS Global Limited. Any views or opinions expressed do not necessarily represent
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linkedin.com/company/ihs in this publication at the time of going to press, IHS Global Limited and its affiliates assume no responsibility as to the accuracy or completeness of and, to the extent permitted by
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are solely responsible for the content of the advertising material which they submit to us and for ensuring that the material complies with applicable laws. IHS Global Limited and
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any actions or omissions taken in reliance on information or any statement contained in advertising material. Inclusion of any advertisement is not intended to endorse any views
expressed, nor products or services offered, nor the organisations sponsoring the advertisement. Trade marks : IHS Maritime & Trade is a trade mark of IHS Global Limited.

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 IHS Markit Chemical & Energy
Insights |

Midstream ties that bind USA

‘unconventionals’ with Petrochemicals
↘↘Unconventional oil and gas resource develop- and the area’s ethylene plants has increased by 2.4
ments in the United States has been a “game million B/D (barrels per day) more than doubling
changer” for the global oil market causing many oil capacity to 4.0 million b/d.
companies to substantially alter their business strategies NGL pipeline additions tapping into Permian supplies
with respect to regional exploration deployment. Not include DCP’s Sand Hills, ETP’s West Texas Gateway and
only has this rocked crude oil and gas market stakehold- ETP’s Lone Star Express. New ties into the Midconti-
ers, but there has been a substantial ripple effect (some nent and Rockies plays via the Borger, Conway and
might claim tsunami) for the petrochemical industry as Medford NGL hubs have been Enterprise’s Front Range/
well. Much of the unconventional gas in North America Skelly-Belvieu/Texas Express network, Oneok’s Sterling
Cindy Poynter | Senior Director, has been wet gas, which requires the removal gas liquids III and DCP’s Southern Hills. Note that the latter was a
Midstream in order to meet pipeline heat content specifications, conversion of the Seaway Products Pipeline to NGL
E cindy.poynter@ ihsmarkit.com thus, the North American natural gas liquids market has service. Also to support the level of NGL infrastructure
T +41 22 721 1766 seen a renaissance in activity to the benefit of U.S. investment required, Spectra and Phillips 66 formed the
L Geneva ethylene producers utilizing gas liquids as a feedstock. 50/50 joint venture company, DCP, which has had a
This surge in North American NGL supplies has not only major role in the capacity expansions.
impacted the regional market, the USA’s shift from an
NGL importer to a major export source, also has Northeast USA’s Revolutionary Role
substantial global implications. In addition to the increase in NGL supply availability
west of the Mississippi, the Utica/Marcellus basins in
Mont Belvieu Bound the US Northeast are also playing a major part in the
Prior to the addition of Oneok’s Overland Pass pipeline NGL market revolution in North America. Gas process-
connecting new Rocky Mountain supplies with the ing capacity in the area has surged to 9.5 billion cubic
Conway NGL hub in 2009, the US natural gas liquids feet per day at the end of the first quarter of 2017 from
infrastructure had remained fairly static for 30 years. less than1 billion cubic feet per day in 2010. IHS Markit
The subsequent boom in unconventional oil and gas study “Shale Gas Reloaded” assessed that unconven-
resource developments spawned a flurry of new projects. tional gas development in the region would continue to
Since late 2011, NGL transport capacity to Mont Belvieu be economic with gas prices at a threshold level of
$1.80-2.00/MMBTU. This analysis has been verified by
NGL /LPG Pipeline Network - Marcellus the comparatively high level of drilling that has been
sustained in the area since the collapse in oil prices in
late 2014. IHS Markit projects a continued increase in
regional ethane and propane production, exceeding 600
thousand B/D by 2020.
Market options for the rising US Northeast NGL
production have included:
• Ethylene plants in Marcus Hook, Sarnia, as well as
Chicago
• Exports to Europe, Latin America and Asia
• Transport to the US Gulf Coast petrochemical market
To provide access to the Sarnia, Ontario, petrochemi-
cal hub, the joint venture of Sunoco Logistics and
MarkWest brought the 65 thousand B/D Mariner West
line on-stream in December 2013, moving ethane
northwestward from the MarkWest NGL fractionator at
Houston, Pennsylvania. Also currently under construc-
tion is Kinder Morgan’s Utopia Pipeline which would
© 2017 IHS Markit. All rights reserved. Provided “as is”, without any warranty. This map is not to be reproduced or disseminated and is not to also move ethane destined for Sarnia and effectively
be used nor cited as evidence in connection with any territorial claim. IHS Markit is impartial and not an authority on international
boundaries which might be subject to unresolved claims by multiple jurisdictions. double the ethane transport capacity from Utica/

4   |   2017 issue 2   |   www.ihs.com

 IHS Markit Chemical & Energy
| Insights

Marcellus. NGL /LPG Pipeline Network - Texas

As a result of increased LPG availability in the US
Northeast, Kinder Morgan has considered reversing the
eastern section of the Cochin Pipeline which had been
the primary source of ethane and propane feedstock to
the Sarnia petrochemical complex. Under the plan the
eastern section of the Cochin Pipeline would supply
NGL from the Utica/Marcellus basins to the Chicago
area. The western section of the Cochin pipeline
originating in Kankakee County, Illinois, was reversed
previously in March 2014 to supply condensate
northwestward to Alberta as diluent for the heavy oil
production there. In the interim, the eastern section of
Cochin has been inactive for the most part.
Sunoco Logistics and MPLX’s MarkWest remain key
players in the development of the NGL infrastructure in
the Utica/Marcellus basins. The Mariner East line is an
oil line conversion to LPG service brought online in
fourth quarter of 2014 (ethane service also began early © 2017 IHS Markit. All rights reserved. Provided “as is”, without any warranty. This map is not to be reproduced or disseminated and is not to
in 2016) providing access from eastern Pennsylvania to be used nor cited as evidence in connection with any territorial claim. IHS Markit is impartial and not an authority on international
boundaries which might be subject to unresolved claims by multiple jurisdictions.
Sunoco’s Marcus Hook ethylene plants as well as export
markets. The increase in export volumes has supported reduced the transport time for VLGC’s (very large gas
the expansion of the pipeline capacity to Marcus Hook. carriers) to Asia thus making this growth market for
The Mariner II pipeline began construction earlier this supplies more attractive. This is certainly a step change
year and is scheduled to begin operation in the fourth from 2010 when the USA was in a net NGL import
quarter of 2017. This project will increase LPG transport position.
capacity to Marcus Hook by 275 thousand B/D and will IHS Markit expects drilling to continue in key NGL
add 2.1 million barrels of storage at the terminal. rich basins such as the Permian and Utica/Marcellus and
Looking south to the established NGL market on the that NGL supply availability will remain on the rise
US Gulf Coast, in its 125 thousand B/D Appalachia-to- albeit at a slower pace than in recent years. Thus the
Texas-Express (ATEX) project, Enterprise’s decided to second wave of ethylene plant additions can be expected
convert an existing refined product line to NGL service online post 2020. Ethane and propane surplus to
as well as add new lines to provide access to Mont domestic needs will find outlets in the global petro-
Belvieu for the Utica-Marcellus suppliers. chemical and fuels markets.
IHS Markit monitors oil and gas pipeline, gas
Destinations South, West as well as East processing, and associated infrastructure developments
The surge in the NGL supply picture induced US globally on a daily basis in our Midstream Essentials
ethylene producers to expand capacity. Over 4.0 million Database which can be mapped and queried online by
tons per year was added on the US Gulf Coast from 2013 clients. A database sample is represented in our North
through the first quarter of 2017, including a restart of a American NGL/LPG Pipeline map which can be
Dow Taft cracker that was shut in 2009. Another 6.7 downloaded at www.ihs.com/NAMpipelines.
million tons per year under construction with over half
scheduled to come online this year; 7.5 million tons per Cynthia Poynter, Senior Director - Midstream, manages the IHS
year remain on the books (second wave) if NGL supply Energy Infrastructure & Markets Database portfolio of products
availability and prices remain favorable. Ethane which provide critical information on oil & gas transportation,
consumption as a USA petrochemical feedstock processing and primary market facilities worldwide. The
exceeded 1.1 million B/D in 2016, almost double the database has been designed to support IHS clients in the
2005 level, and IHS Markit expects sector demand to assessment of investment opportunities all along the energy
exceed 1.5 million B/D by 2020. chain from the supply source to the market level. Ms. Poynter’s
Investment in LPG export terminals also has surged expertise includes the pipeline, refining, gas & power, LNG and
on the US Gulf Coast to exceed 1.2 million B/D. ‘in renewable energy sectors globally with an in-depth under-
annual capacity’. According to IHS Waterborne data, US standing of the inter-relationship of the sectors and implica-
exports of LPG were over 1.0 million barrels per day in tions for clients’ decision support information needs. She holds
the first quarter of this year with exports to Asia a Bachelor of Science in Chemical Engineering from the
exceeding that for Europe and Latin America. The University of Kentucky and started her professional career in
expansion of the Panama Canal has substantially DuPont’s Engineering Services Division.

www.ihs.com   |   2017 issue 2   |   5

 IHS Markit Chemical & Energy
Insights |

Identifying opportunities in a turbulent

time - China’s chemical industry outlook
Economic and bought back renminbi to try to stabilize the
↘↘The Chinese economy has been clouded by currency. The measure seems to be working and the
global economic and political uncertainty for over two currency has been stable since Q4 2016. On the other
years, with economic growth slowing down through- hand, with the United States walking away from the
out 2015 and 2016. The good news is that economic Trans-Pacific Partnership (a free-trade agreement that
expansion began to gain momentum towards the end excludes China), doors will open for China to develop
of 2016 and beginning of 2017. its own Asian free-trade area.
Looking back, 2016 has not been short of “sur- On the supply side, growth was led by the tertiary
prises”. The biggest surprise is probably Trump (services) sector’s 7.6% y/y expansion. The primary
Paul Pang | Vice President, winning the US election. The implications of a Trump sector (agriculture) grew 4.0% y/y, while the second-
IHS Chemical presidency will depend on whether the incoming ary sector (manufacturing, mining, and construction)
E paul.pang@ ihsmarkit.com Trump administration follows through with some of expanded 6.1% y/y. From the demand side, growth was
T +86 21 2422 9016 its extreme campaign promises (e.g., a trade war and overwhelmingly supported by consumer spending,
L Singapore mass deportations) or takes a more pragmatic which accounted for 71% of China’s real GDP growth
W www.ihs.com/chemical consulting approach and focuses more on growth. For China, a in 2016. Consumer spending will be the key for
Trump administration comes to power during a continuous economics growth, and will account
challenging time for the country. Growth is slowing growing share of the country’s GDP.
and the central bank is trying to manage a gradual China will enter (or has already entered) the “New
depreciation of the renminbi, which has fallen to its Normal”, i.e. economic growth trending down and
lowest level against the dollar since 2008. While growth being driven less by manufacturing and capital
frictions between China and US are likely to remain investment. IHS Markit projects China’s real GDP is
elevated over the next few years, an all-out trade war projected to increase by 6.4% in 2017 and 2018.
between China and the United States seems unlikely.
The recent increase in US interest rates and apprecia- China Chemicals
tion of the dollar have worsened capital outflows and China has been the key driver for global growth in both
put more downward pressure on China’s currency, chemical demand and investment for nearly two
which could add more fuel to the political fires. The decades. In 2000, China did not play a significant global
key reason behind the currency devaluation is capital role in either chemical consumption or production.
outflow. In mid-2016, the Chinese government Following its rapid expansion in consumer product
tightened controls on moving money out of the manufacturing industry, chemical demand also
country, sold massive US dollar denominated reserves experienced its fastest growth period from 2005 to
2012. By 2015, China accounted for one-third of the
Chart 1: Development of petrochemical demand in China: 2010-2020 demand for global base chemicals, and is by far the
largest consuming and producing country in the world.
As the economy began to slow from 2012, the demand
% Year on year demand growth

250,000 14%
12 growth for chemicals also showed signs of weakness.
200,000
The most challenging year was 2015 when demand
Million tons

10
150,000 8 growth dropped to the lowest level since global
100,000 6 financial crisis in 2008. Even in olefin value chains
4 which enjoyed the best profitability, the demand
50,000
2 growth for most derivatives has been slow.
0 0 As China gradually enters into a “New Normal”, the
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 demand growth for chemical is expect to slowdown as
well. IHS Markit forecasts the demand growth for key
■ PE ■ PP ■ Caustic ■ MEOH ■ PET ■ PVC ■ SM ■ Soda ash chemicals will be at around 5-7% per year for the next
■ TDI ■ MDI ■ PC ■ Nitrile rubber ■ Polybutadiene ■ SBR Growth rate four years, significantly below the historically growth
rate. This “New Normal” growth rate will likely
Source: IHS Markit. © 2017 IHS
extend beyond 2020. However, even as growth in

6   |   2017 issue 2   |   www.ihs.com

 IHS Markit Chemical & Energy
| Insights

China slows, the country continues represents over Chart 2: Aggregated capacity for benzene, PX, ethylene, propylene,
half of global demand growth, and remains to be the MEG, PTA, methanol
largest growing country. It is still the key driver for 180 60%
global chemical demand growth.
In the meantime, China continues to build up 150

Ownership (Percent)
domestic production capacities in both conventional 120 40

Capacities(Million)
petrochemicals and unconventional chemicals. These
unconventional chemicals include coal-to-chemicals, 90
MTO (from imported methanol), propane dehydroge- 60 20
nation (PDH), and coal-to-MEG. Most of these
unconventional investments were committed during 30
the period of high crude oil price when profitability for 0 0
these unconventional routes to chemicals was very 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
attractive. However, after the collapse of crude oil
Foreign Sinopec PetroChina CNOOC
pricing, the profitability of these unconventional
Local provincial Private Private & local
chemicals has been severely compressed. The new
Source: IHS Markit. © 2017 IHS
investment in this area has fallen sharply after 2015.
Conversely, the conventional petrochemical routes
have turned profitable again, and investment in this high quality products.
area has picked up again. Several mega-size integrated In terms of macro policy, the Chinese government
petrochemical complexes are either under construc- is gradually deregulating the chemical industry. The
tion or in the planning phase. entry barriers into the Chinese chemical industry for
On the back of slower demand growth and a private companies is now much lower. The govern-
continuous capacity growth plan, China will become ment has even started to deregulate the upstream
more self-sufficient. The percentage of import refining sector, which used to be tightly control by a
materials will decline, but the absolute import volume few state-owned oil majors. This lays the foundation
will continue to grow. for private companies to enter into petrochemicals. At
One of the major structural shifts that has hap- the same time, the government is tightening
pened over the past decade is a move to private environmental and safety regulations, thereby
ownership. Back in 2000, there were almost no increasing costs incurred by chemical producers. The
privately-owned chemical companies in China. private companies have the highest cost escalation.
During the rapid growth period, particularly from This will narrow the cost gap between SOEs, foreign
2009 to today, there has been a surge in private companies and private companies. The government is
investments into chemical industry. In fact, the also trying restructure the industry to increase
majority of investments over the past six years were industry efficiency, and also combat pollution which
made by private companies. Figure 2 shows the growth has become a major problem in most of China. This
of capacity and percent of share by major State- will lead to industry consolidation mainly among local
Owned-Enterprises (SOEs), local provincial companies provincial companies.
and private companies for the key base chemicals. In Chinese companies have been looking for overseas
2016, private companies and local provincial compa- growth opportunities through acquisition or grass-
nies accounted for over 40% of capacity share. This root investment. The pace of overseas investment will
trend of privatization makes the Chinese market more likely slowdown in the near term due to government
dynamic, and much less dominated by a few major capital outflow control put in place in Q4 2016.
SOEs. The competition will become more intense, However, this trend is unlikely to come to a halt as
drive down profit margins, and put significant companies continue to look to grow their market
pressure on the SOEs. The private companies tend to share outside China, as well as access resources and
be more efficient in capital investment and production technologies in their ambition of becoming global
management. Therefore, privatization will lead to a first-tier companies.
more competitive and more efficient chemical
industry for the country as a whole. Paul has acquired more than 27 years of experience in the
The trend will also benefit the country’s chemical industry in various areas, including technology,
downstream manufacturing sectors. It will force operation, process engineering, business planning and
chemical manufacturers to be more efficient and consultancy. Paul currently serves as vice president with IHS
provide a higher quality of products and better
services. The downstream consumers will benefit
from a diminished supply monopoly, lower costs and

www.ihs.com   |   2017 issue 2   |   7

IHS Markit Chemical & Energy
Insights |

Naphtha faces competition from

abundant natural gas liquids

↘↘Current oversupply of NGL is depressing naphtha significant profit advantage. U.S. and Canadian NGL
demand and pricing, but naphtha tightness is production has surged at an average annual growth
possible after 2020 rate of 6.2 percent, from 104 million metric tons
Growing competition from less costly natural gas (MMT) in 2011, to 141 MMT in 2016, due to supplies
liquid (NGL) feedstocks—much of them coming from from both wet gas fields and tight oil production, and
North American shale gas - have dealt a blow to global more growth is expected.
demand for naphtha. Olefins producers with the existing flexible, or new,
Naphtha, a refined petroleum product derived from ethane-feedstock plants in the U.S., are enjoying an
Nick Rados | Global crude oil and marketed in heavy and light varieties, is advantage due to lower feedstock costs, and for
Business Director, Chemical an important feedstock for production of petrochemi- European producers, the access to abundant supplies
Feedstocks IHS Markit cals and blendstock for gasoline. Together, light and of U.S. ethane feedstocks has given their plants new
E [email protected]
heavy naphtha constitute about 40 percent of the life.
T +1 (832) 619-8593
global gasoline pool. Naphtha is no longer the We are headed into an increasingly oversupplied
L Houston
dominant petrochemical feedstock it once was thanks market. Demand growth for petrochemicals and
to competition from the surging production of NGLs, gasoline has slowed due to a global economic slow-
particularly ethane and propane, as reported in our down, while many producers have been adding
recently published IHS Markit report “Light and naphtha production capacity—resulting in excess of
Heavy Naphtha International Market Analysis: naphtha and depressed prices.
Balancing the Naphtha Surplus,” an indepth naphtha Entering 2017, global demand for naphtha (includ-
market analysis. ing natural gasoline) is 1,180 MMT, and the demand
Prior to the U.S. shale gas and tight oil renaissance, growth has been projected to increase to nearly 1,260
naphtha was the leading feedstock for petrochemical MMT by 2020. That translates to an average annual
and gasoline production, but the jump in production growth rate of 1.7 percent—a strong growth rate for a
of ethane and propane feedstocks gave North refined product, but not enough to absorb increasing
American and Western European petrochemical production of both naphtha and NGLs.
producers a cheaper alternative to naphtha and a While the global market for naphtha will be

Ethane & LPG to Olefins Displaces Naphtha to Gasoline

250.0
Forecast

200.0
Million Metric Tons

150.0

100.0

50.0

0.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Light Naphtha to Gasoline Light Naphtha to Stm. Cracking Ethane & LPG to Stm. Cracking

Source: IHS © 2017 IHS Markit

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 IHS Markit Chemical & Energy
| Insights

Large Supply of NGL Pushes Feedstocks Prices

1.1
Forecast
Price Ratio vs. Brent, $/bbl / $/bbl

0.9

0.7

0.5

0.3
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

NAM Light Naphtha / Brent NEA Propane / Brent NAM Propane / Brent

Source: IHS © 2016 IHS Markit

oversupplied until at least 2020, the propane market is paraffinic naphtha is still the predominant feedstock
even more oversupplied, with increasing production for production of olefins, such as ethylene and
coming, not only from U.S. shale resources, but also propylene, while heavy naphtha remains the most
from the Middle East and Russia. Propane prices were important feedstock for production of high-octane
sliding before the onslaught of the U.S. shale renais- gasoline and aromatics chain products, such as
sance, but since then, have plummeted, which in turn polystyrene, PET (polyethylene terephthalate) plastic
put downward pressure on prices for naphtha. and polyester fiber. Gasoline blenders are also at an
The current length in the propane shipping fleet, advantage in the current market because they can buy
along with the opening of the Panama Canal expan- cheaper blendstock at lower prices. Naphtha is cheaper
sion supports incremental trade, but anticipated and octane is relatively cheap at present.
increase in crude and naphtha prices will drive even The current market oversupply does not mean that
greater volumes of low-cost propane to Asia. producers will not have investment opportunities in
The abundance of petrochemical feedstocks is the near to mid-term. Starting in 2020, we foresee a
unlikely to end anytime soon, according to our IHS period where some markets could become short of
Markit analysis, with Saudi Arabia, U.A.E., Kuwait, naphtha, particularly heavy naphtha, if investments
and Russia investing in more naphtha production fall off today. Unlike with light naphtha that can be
capacity. For example, the recent addition of just one substituted with NGL feedstocks to make olefins,
large condensate splitter (Novatek in Russia), has heavy naphtha is indispensable for production of PET
added 4 million tons of naphtha supply, or 3.5 percent plastic and polyester fiber, the fastest growing demand
of global naphtha trade. segment for naphtha.
Ethane imports to Western Europe have already
started from both the Enterprise Products Partners Industry-specific insight alone is not sufficient to make
terminal on the U.S. Gulf Coast and the Sunoco decisions of great scale. Connecting the dots to reveal
Logistics terminal on the U.S. East Coast. Those interdependencies between both adjacent and seemingly
shipments will supply the European facilities of unrelated sectors is required. It’s at these connection
INEOS, SABIC, Reliance, ExxonMobil and others. points where the greatest risks and opportunities await.
Companies are essentially making two different
bets on feedstocks in Europe. While some have bet on Nick Rados, Global Business Director, Chemical Feedstock
excess of U.S. ethane (like those just mentioned IHS Markit, provides an overview of the global naphtha
above), others like Dow and BASF have bet on global market
oversupply of cheaper propane coming from Russia,
the U.S. and Algeria.
In spite of strong penetration of NGLs, a lighter,

www.ihs.com   |   2017 issue 2   |   9

 IHS Markit Chemical & Energy
Insights |

Speciality chemicals – surfing the wave of globalization

Recent political developments are resulting in a mixture of anticipation and anxiety, but some tides cannot be turned back…
The global economic outlook is brighter in early 2017 than it was a year ago, but political and policy uncertainties are also higher now. The rise of
anti-globalization movements in the US and Europe could result in policies that hurt growth, bigly. However, because specialty chemicals are
consumed in more industries and consumer segments than virtually any other materials, the global specialty chemicals industry rides on a tide of
underlying demographic, social and technological megatrends which drive demand despite short term economic swings. These megatrends
represent key facets of economic, cultural and political globalization and include:
Dramatic global population growth (the world’s population has doubled in the last 40 years) which results in increased need for:
Adrian Beale | ● Resource Efficiency - agrochemicals for higher crop yields, photovoltaic cells for solar power, epoxy resins for wind powered turbines,
urbanization and consequent reduced emissions and mandated higher fuel efficiency standards lead to specialty chemical needs for light-weighting
Vice President, IHS Chemical
automobiles, etc.
E adrian.beale@ ihsmarkit.com
● Health & Nutrition – an aging and increasingly health-conscious global population demands better health, nutrition and fitness products in
T +1 832 619 8580
addition to management of basic issues like clean water in developing economies, resulting in rapid growth in nutraceuticals, personal care
L Houston products, flavors & fragrances, cosmetic chemicals and water treatment chemicals.
W www.ihs.com/SCUPinsights ● Technological Development – The constant improvement of high performance materials, renewable fuels, electronics and nutraceuticals, is
essential for further leaps in achievement in order to keep up with the pace of technology change
Regional shifts from West to East driven by China and India both in population and in terms of the economic center of gravity (as shown in the
Colour coding key attached graphic) are leading to a changing profile for the specialty chemical industry.

North Central and Western Central and Middle East Japan China Other Asia World
America South America Europe Eastern Europe and Africa

Regional specialty chemicals consumption per capita, 2015 (dollars)

282 48 221 129 18 320 94 31 75

Specialty chemicals volume growth rates by region, 2015-20 (%)

2.5 2.7 1.1 2.4 3.1 0.7 6.5 3.7 3.4

China outbound M&A activity 2015-16 (US$ billions)

50
2015 2016
40
30
20
10
0
Industrials Consumer High tech Media Healthcare Real estate Materials Retail Others

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 IHS Markit Chemical & Energy
| Insights

Global population in Q1 2017 = 7.5 billion people. World population density (people/km2)

2050

1980 2015

0-10
10-50
50-100
100-500
500+ The economic center of gravity continues to shift eastward

© 2017 IHS Markit. All rights reserved. Provided “as is”, without any warranty. This map is not to be reproduced or disseminated and is not to be used nor cited as evidence in connection with any territorial claim. IHS Markit is impartial and not an authority on international
boundaries which might be subject to unresolved claims by multiple jurisdictions.

With a relatively low consumption per capita of specialty chemicals in India and China, demand has significant room to grow. In China the current drive towards specialty
chemicals can be traced to 3 main factors:
● The slowdown in heavy industries is reducing demand for basic chemicals and prompting a diversification in portfolios.
● Societal factors such as demand for a more environmentally-conscious way of life have resulted in new environmental protection laws requiring increased use of
specialty chemicals for water treatment; chemicals to combat hazardous air pollutants and many new industrial and institutional cleaning chemicals.
● There is a highly consumer-driven shift as the rapidly growing middle classes require more consumer goods such as electronics, personal care, high-end cosmetics
and food & nutrition products stimulating demand for the specialty chemicals which are used to produce them.
All of these factors are encapsulated in China’s 13th 5 year plan which will also shift emphasis from investment and exports to domestic consumption and innovation in
many of these specialty areas. However most Chinese chemical companies are still relatively weak in specialty chemical R&D capabilities. They lack experience in
developing specialty chemicals and have little familiarity with diversifying products and developing close technical partnerships with consumers. All of these factors are
contributing to a critical need for China to partner with, or acquire, specialty chemical producers outside of China in order to obtain not only strategic resources but also to
secure greater advanced technology and market access and we are seeing strong evidence of this externally focused M&A activity. So the geographical shift is turning full
circle as attention turns to the West again, but now it is expertise and people, rather than investments in plant and machinery which is key.
Adrian Beale, Vice President, Specialty Chemicals
[email protected]

25% 27%
World speciality chemical
markets by regions -
2015 vs 2020
23% 24%
17% 15%
14% 2015 total value 2020 total value
15%
7% 6%
5%
$554 $653 5%
5% bn bn 4%
4% 4%

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 IHS Markit Chemical & Energy
Insights |

Commercialization opportunities
for chemical technology
↘↘ The greatest advances in technology development in the history of the chemical industry and notable
have occurred during times of commercial disruption research discoveries continue, there have been many
and other great technical challenges. Witness the commercialization disappointments. Those illustrate
dramatic advances during and after the two world the aspects of risk and reward in technology develop-
wars, and also the leaps in technology in the West ment. The risks are amplified by the need to build
after the USSR launched Sputnik I into Earth orbit in plants at a competitive economy of scale, which
1957. The world may now be in another such requires a “large capital expenditure bet” on a new
disruption due to the populistic anti-globalization technology.
political trend in major democracies. However, For these reasons R&D companies frequently lack
Author | Michael Kratochwill disruption alone is not a strategy for successful resources to fully commercialize their technologies.
Managing Director Transaction technology commercialization, since it brings As a result, the most difficult development hurdles for
Advisory Consulting increased economic risks. inventors are frequently to get the first demonstration
E mike.kratochwill Achieving maximum value from new technologies scale plant and then the first commercial scale plant
@ ihsmarkit.com is critical for chemical companies. Developers have successfully built. Except for companies with
T +1 201-476-7904 historically used the build & operate business model substantial financial and management resources, this
L New Jersey to commercialize their research breakthroughs. is extremely difficult without effectively selling the
W www.ihs.com/chemical consulting However, as many products became commoditized invention to either a large investor or a strategic buyer.
starting in the 1980s, some companies have used the
licensing business model. A review of licensed Commercialization Phases:
chemical technologies indicates a wide range of The typical overall pattern of investment and value
licensing revenue: realization, and the role of key parties in each stage,
• As low as 1 to 3% of total product revenue can be viewed as four phases (see Chart 1). The
• As high as 7 to 10% of product revenue challenge of commercialization is frequently termed
The wide range is primarily due to differences in the the “Valley of Death” in the first three phases for new
strengths and advantages of technologies, potential technologies that don’t “make it”. As a result, many
for market growth, and alternatives available. inventors must cede control of their technology to
Risks in commercialization and scale-up are high for successfully commercialize.
many technologies. Furthermore, many inventions Considering the resources required, technology
turn out to have only modest advantages compared to licensing may be a plausible route to commercializa-
competitors. While successful inventions do abound tion, but it is rare for a major undemonstrated process
technology to be licensed under normal arrange-
Chart 1: Project development lifecycle ments, due to the risks incurred by a licensee.
However, there are many examples of successful
Total value= asset
Phase 1: Phase 2: Phase 3: Phase 4: generated value + partnership arrangements for new technologies. A few
Lab scale, Demonstration 1rs Commercial Nthj Commercial ICAP generated
notable examples:
+ + +
scale scale scale value
Fundamental
Engineering and Business
science, Fundamental
construction development r • Houdry, Socony-Vacuum and Sun Company on
Researchers engineering, pe
EPC company Planners elo catalytic cracking in the 1930s
Process d ev
engineers and financial –Commercial to
sponsors –Technical Va
lue • Halcon International and Atlantic Richfield on
–Economic
propylene oxide in the 1960s
d
pe n • Cargill and Dow Chemical on polylactic acid
tal s
capi
se t
As biopolymers in the 1990s

Licensing versus a Build/Operate Business Model

pe nd
tal s Proprietary technologies continue to be a key strength
ca p i
ICAP
of many successful chemical companies:
Total capital s p e n d Value of invention • Commodity companies compete primarily via
value chains, raw material access, operations and
Source: IHS Markit. © 2017 IHS
logistics. Nevertheless, they are subject to

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 IHS Markit Chemical & Energy
| Insights

business fluctuations with the commodity Chart 2: Global patent and trademark applications*
chemical cycle and prices that track with raw (In millions of applications per year)
material prices. 10.0
• Specialty companies compete primarily on the
9.0 © Global patent

®™
advantage of their products in-use and continual applications
8.0
application-oriented development research.
7.0 World trademark
Specialties are less vulnerable to industry cycles, applications
6.0
but remain subject to broad economic cycles.
5.0 Total patent and
• In both the commodity and specialty segments, trademark
companies with advantaged proprietary technolo- 4.0 applications
gies build value by managing new plant invest- 3.0
ments to satisfy the market growth, while they 2.0
advance their technology. This supports custom- 1.0
ers paying for value, and gives the technology 0.0
holder early-mover market strength compared to 2009 2010 2011 2012 2013 2014 2015
subsequent “me-too” competitors.
Source: WIPO published statistics on global intellectual property filings. © 2017 IHS

The pros and cons for a licensing approach are as follows:

Licensing Approach Advantages: world, combined with continuing nationalistic objectives, appears disruptive for the
• Low capital investment (the inventor does not global chemical industry. Global trade in chemicals and the products made from
need to build out its own plants) them has been very active in recent years, but it appears that local objectives for
• Lower financial and organizational resources economic development, jobs growth and security will now supplant globalization
(compared to owning and operating) trends. The changes may very well be chaotic, but overall they are thought likely to
•Leveraging licensees for improving IP (All shift the chemical value chains to reward competitiveness at a national level. This
licensees benefit from technical advances.) should open the proverbial policy “door” for new technologies to gain footholds on a
more regional basis worldwide.
Licensing Approach Disadvantages: Fortunately, global research and development appears ready to support the
• Sharing intellectual property with licensees economic shift. The trend in total new patent and trademark applications worldwide
• Potential for intellectual property to be “lost” (Chart 2) shows an average annual growth rate for the last six years of about 9%.
• Lower barriers to entry for competitors While the information technology sectors have shown the highest recent
• Litigation against follow-on infringers Intellectual Property development, R&D efforts have been strong in many industry
• Lower revenue (than own/operate) sectors. IHS estimates that global chemical industry R&D spending has grown at
• Need to continue to invest in the technology about 5% per year. Thus, IHS concludes that the world is capable of addressing the
Additionally, if a licensing business model has been technical challenges faced by the global economy. But, the risks and rewards in
undertaken, it is typically not practical to revert to a technology development remain, and the diverse factors affecting successful
build and operate model, since licensees may have the commercialization continue to be formidable. IHS can help in forecasting the
right to build new plants. However, after having addressable market for new technologies and also by providing independent
commercializing on a build and operate business analyses and opinions on the feasibility of full commercial success.  
model, a company can switch to licensing. (e.g. Union
Carbide’s approach with LLDPE in the 1970s) Mike Kratochwill is Managing Director – Transaction Advisory Consulting, with experience in
In IHS’ experience, the R&D steps needed to success- chemical business transaction due diligence, technology commercialization, project finance,
fully license a technology usually follow a pattern: independent engineering and litigation support.

Typical Path to Process Technology Licensing

• 1 to 5 years lab scale test results
• 1 to 3 years integrated pilot plant operation to
reduce scale up risks
• 1 to 2 years of a semi-works demonstration plant
• Special terms may be needed for early licensees
When a new process is licensable, it is common for the
first demonstration plant and commercial plant to be
royalty-free to the operating company funding the
commercialization.

What is New Now?

The rise in populist political pressures in much of the

www.ihs.com   |   2017 issue 2   |   13

 IHS Markit Chemical & Energy
Insights |

Trends in Petrochemicals Futures Markets:

Ethylene hedging is a new option

↘↘Increasing volatility in global oil prices, dislocation Both are in compliance with rigoros requirements of
between new feedstock supply sources and consumption the International Organization of Securities Commis-
growth of petrochemicals, heightened geopolitics, sions (IOSCO) principles established in 1983.
proclivity towards risk taking in certain markets, are Futures trading in the petrochemical sector is still a
all factors driving the chemicals sector towards greater nascent activity and the volume of trades, or liquidity,
usage of hedging instruments on futures exchanges. is relatively low. However, we believe that this activity
In a world of rapidly changing prices and uncertain will increase because of the new global risk factors and
supply and demand patterns, it is sensible for buyers expanded petrochemicals trade in the future.
and sellers to hedge price risk against fixed bench-
Lyn Tattum | marks offered by bodies such as the USA’s Chicago Asia and China are at the vanguard of petrochemicals
Vice President, Mercantile Exchange (CME) and Intercontinental futures trading
Exchange (ICE), or the newer Singapore Exchange Asia is a particular focus of market volatility. It is
VP, Oil, Mid-Downstream and
(SGX), or Shanghai Clearing house (SHCH). interesting to note that a general trend towards
Chemicals, IHS Markit
These bodies enable a company to buy or sell speculative trade on Chinese exchanges is speeding
E Lyn.Tattum@ ihsmarkit.com
products at a pre-agreed price based on benchmark the development of Chinese commodity futures
T +44203 159 3711
L London
figures supplied by expert price reporting agencies. markets.
W www.ihs.com/mds IHS Markit is one such agency. We have a long The Shanghai Clearing House (SHCH) was estab-
tradition of price discovery across a range of petro- lished in November 2009 and in 2015 styrene
chemicals in different regions and at different monomer and monoethylene glycol (MEG) swaps were
frequencies: monthly, weekly and daily. Lately we have launched. Small styrene lots of 100 metric tons can be
moved deeper into discovering prices on a daily basis, quoted in RMB.
as increasingly required by the market and exchanges. Purified terephthalic acid (PTA) futures trading
It is commonplace in the world of oil and energy, to options are available available in with lots as small as 5
hedge risk via usage of exchanges and futures prices. In metric tons. Holding times can be short and daily
the energy sector IHS Markit has strong positions in volumes high.
coal and gas futures via the (former McCloskey) coal Overall, Chinese PTA makers are successfully using
index and the Oil Price Information Service (OPIS). futures and almost every PTA producer has a futures

Benzene US imports (forecast) China imports (forecast)

2016 2.1 million mt 1.5 million mt

US imports (forecast) China imports (forecast)

2021 2.3 million mt 2.3 million mt

Source: IHS
Source: Markit
IHS Markit ©IHS
© 2017 2017 IHS Markit:
Markit: 16965551696555

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 IHS Markit Chemical & Energy
| Insights

team to manage risks, with new dedicated trading In North America the build - up in shale- based
offices opening up in Shanghai. petrochemicals has led to a vast quantity of very
Beyond China, Singapore’s Securities and Deriva- competitive ethylene and a new production base for
tives Exchange, SGX, operates South East Asia’s largest polyolefins and other derivatives - encouraging more
stock market and is increasingly showing interest in consumption, trading activity, market volatility and
petrochemicals markets, as are the exchanges of desire to trade and hedge the trades.
Indonesia, Hong Kong and others. Historically, consumers of ethylene and derivatives
such as polyethylene (PE) might have hedged against
Western markets are becoming more risk aware as West Texas Intermediate (WTI) crude oil. Futures for
volatility grows natural gas liquids (NGLs), currently the dominant
Elsewhere in the world, drivers for growing interest in ethylene feedstock in the United States, became
futures trading have included the spate of outages available through CME in 2008. But a sustainable
experienced in Europe’s polymer plants in summer petrochemical futures market did not emerge until
2015 which caused a surge in prices and unplanned 2009, when CME launched futures for ethylene at the
risk. Williams hub in Mont Belvieu, TX.
Around the same time period, lower global oil prices The hub is crucial to the market because it gathers
led to soaring gasoline and octane demand, plus ethylene from multiple sources into a single pool,
greater US tight oil production, with its lower octane which aggregates market-wide supply and demand
component, also put strain on octane supply. As a signals, although the producer-shared ethylene
result, PX prices surged in the US and Europe, awaken- pipeline delivery system itself acts as a disincentive to
ing further interest in protective tools such as future spot trades.
trading, to lock in prices. As downstream products build up based on the new
Across the range of petrochemicals, benzene has olefins supply, the new trading contracts on offer point
often been regarded as the most likely candidate for to the option of using ethylene as the hedge for
activity in futures trading. In China alone, benzene polyethylene and other products in the olefins value
imports will escalate from 1.5 MMt/year in 2016 to 2.3 chain, in place of oil.
MMt/y in 2020, driven by the demands of 300 million IHS Markit forecasts that the volume of US PE
middle class consumers. exports to China alone will escalate from 487 thou-
Meanwhile, US benzene imports will rise in the sand mt/y in 2016 to 4.2 MMt/y in 2021 – surely a
same period - from 2.1 MMt/ year to 2.3 MM t/year. figure in itself that calls for robust pricing mechanisms
Much of the US supply will be from Asia with a 6-8 to manage the anticipated heightened trading activity
week shipping time providing a large window of and all the accompanied market complexity that
potential price volatility and risk. will arise.

Polyethylene China total imports US exports to China

2016 11 million mt 487 thousand mt

China total imports US exports to China

2021 15 million mt 4.2 million mt

Source:
Source:IHS
IHSMarkit
Markit ©2017
© 2017IHS
IHSMarkit:
Markit: 1696556
1696556

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IHS Markit Chemical & Energy
Insights | Feature

NAFTA – The balance 23 years later

Good? Bad? Just ugly (to some)?
NAFTA – The basics regional and multilateral cooperation to expand and
↘↘President Trump’s declared intention to enhance the benefits of this Agreement.
“renegotiate or break” the North American Free Trade NAFTA became effective on January 1st of 1994. The
Agreement (NAFTA) has revitalized the debate around signing partners also negotiated two side agreements,
the joys and woes that the agreement has brought to on environmental cooperation and labor cooperation.
its members, Canada, Mexico and the United States.
Before rushing into any kind of analysis or prema- Fears were present from day one, South and North of the Rio
ture conclusions, it may be advisable to take a moment Grande
to review NAFTA’s original objectives. The goal to create a regional ecosystem based on free
Raul Alvarez | Director, As stated by one of its own articles (102), NAFTA’s trade and fair competition that would facilitate
IHS ChemicalsConsulting objectives were to: economic growth and investment across the region
Group (a) eliminate barriers to trade in, and facilitate the was the flagship argument of those who favored
E [email protected] cross-border movement of, goods and services NAFTA. Beyond this argument, the moment for
T +1 (832) 619-8602 between the territories of the Parties; getting NAFTA approved by all three countries seemed
L Texas (b) promote conditions of fair competition in the right, despite innumerable challenges. Almost a
free trade area; quarter of a century ago, the world was still going
(c) increase substantially investment opportunities through the first years of a new global order (think
in the territories of the Parties; Berlin wall and reunified Germany). In February of
(d) provide adequate and effective protection and 1992 the Treaty on European Union was signed, and in
enforcement of intellectual property rights in each January of 1993 the single market was established,
Party’s territory; creating the, thus far, most important integrated
(e) create effective procedures for the implementa- commercial block in the world. Meanwhile, on the
tion and application of this Agreement, for its joint other side of the world, China showed off two-digit
administration and for the resolution of disputes; and economic growth rates and was quickly gaining weight
(f) establish a framework for further trilateral, as a global trade hub.
Thus, the need to counterbalance shifts in the
Chart 1: Canada and Mexico - relevance for the US as trade partners economic center of gravity may also have been in the
25% minds of those with a grander vision of NAFTA (of
course, without ever contemplating the dramatic level
of political integration pursued by the EU).
20
Despite the promised benefits of NAFTA, nay-sayers
Share of U.S. Imports

showed up early on both sides of the Rio Grande with

15 opposing arguments. The huge economic and social
asymmetries across the region were one of the major
fuels for concerns (job shifts and losses, destruction of
10
local industry, investment reallocation, etc.)

5 A complex balance
Evidently, a simplistic answer to the somewhat
0 simplistic question of whether NAFTA has been good
0% 5% 10% 15% 20% 25% 30% or bad for its members may result in misleading
Share of U.S. Exports
conclusions (e.g. because of unwanted distortions and
potential intentional manipulation). Moreover, any
Canada 2015 Mexico 2015 Canada 1993 Mexico 1993
retrospective that flashes back beyond 2008 will
Canada and Mexico - Relevance for the US as trade partners
Importance of North America as source of imports - evolution inherently capture the dislocations associated with the
X= Share of US exports, Y= Share of US imports, Bubble size proportianate go imports global economic crisis that was ignited that year.
Nonetheless, a few data points on regional evolution
Source: IHS Markit. © 2017 IHS
between 1993, before NAFTA became effective, and

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 IHS Markit Chemical & Energy
| Insights

2015 may serve as food for thought for the reader. Chart 2: Evolution of US goods traded with Canada and Mexico
In 1993, goods’ exports made by NAFTA countries
represented slightly more than 23% of the global total.
By 2015, NAFTA’s participation had decreased to Total 1993: 144.0 billion US$
Exports Total 2015: 516.5 billion US$
slightly more than 14%. Imports followed the same,
albeit weaker, trend: they decreased from almost 28%
of the global total to about 19.5%. In other words, the
role of the NAFTA countries in global trade dimin- Imports Total 1993: 15.1 billion US$
Total 2015: 592.6 billion US$
ished—most certainly a NAFTA-agnostic
development.
0 20,000 40,000 60,000 80,000 100,000 120,000 140,000
Looking at developments within NAFTA, we find
that during the same period, Canada and Mexico have (Million of US$)
repositioned themselves as trade partners of the U.S. ■ Vehicles (2015) ■ Vehicles (1993)
Canada’s share as a destination of U.S. exports and, ■ Oil, mineral fuels, etc (2015) ■ Oil, mineral fuels, etc (1993)
more notably, as a source of imports suffered a contrac- ■ Electronics and electric equipment (2015) ■ Electronics and electric equipment (1993)
tion. Mexico, on the other hand, improved its position ■ Plastics, rubber, articles thereof (2015) ■ Plastics, rubber, articles thereof (1993)
in both cases. In 2015, Mexico received close to 16% of ■ Computers and data processing eq. (2015) ■ Computers and data processing eq. (1993)
exports made by the U.S. and supplied about 13% of ■ Chemicals and fertilizers (2015) ■ Chemicals and fertilizers (1993)
goods imported by the U.S. (a similar share as Canada). ■ Edible vegetables, fruits, nuts (2015) ■ Edible vegetables, fruits, nuts (1993)
Although total goods traded between the U.S. and ■ Pharmaceutical products (2015) ■ Pharmaceutical products (1993)
Canada exceeded the size of the trade between the
Source: IHS with data from Census Bureau. © 2017 IHS
U.S. and Mexico by almost $45 billion in 2015, the U.S.
had a bigger trade deficit with Mexico than with
Canada (roughly $45 billion more). relocation-- regional growth in light vehicle production has not been able to keep
While the participation of NAFTA partners in U.S. pace with growth in light vehicle sales resulting in a higher proportion of extra-
imports has remained basically unchanged (at around regional light vehicle imports.
26%), Canada and, more significantly, Mexico have At this point, it seems fair to ask whether NAFTA’s extra regional goods imports,
reduced the portion of goods that they source from such as vehicles, would not be even higher today, had the local companies not had
within the region (from more than 69% to over 59%, the possibility to equip their supply chains with the most cost-effective and
and from more than 75% to roughly 50%, respectively). efficient elements (or locations) in order respond to global competition
Interestingly, the share of intraregional exports Chemicals trade, saw huge increases—but remained a small portion of total
made by the U.S. increased between 1993 and 2015, trade. The share of Chemicals and Fertilizers in U.S. imports decreased slightly (to
from slightly more than 30% to over 34%, whereas less than 2% of the total, while their participation in U.S. grew (from about 2% to
Canada and Mexico slightly reduced the proportion of more than 2.5%). One may ask: was the shift caused by NAFTA? By the shale
exports made within the region. In 2015 they revolution? By Mexico’s petrochemical stagnation? By none of the above? What-
represented around 78% for Canada and approximately ever one’s point of view on the subject, it is important to be reminded about all
84% for Mexico. positive and negative consequences of NAFTA that are not as palpable. Here are just
A serious evaluation of NAFTA’s impact on its a few of the positive ones:
members is a complex task. On the other hand, it •A  stronger region, with a stronger sense of partnership
seems shockingly easy to confirm the arguments of • A model for the rest of the Americas
isolationists through a superficial glance at trade data • Access to a wider variety of affordable products
looks like an easy way. • Level playing field
Shifts in car production are a common topic in • I ncreased flexibility for producers to optimize value chain
debates about NAFTA. U.S. vehicle exports to Canada • Reduced product piracy
and Mexico more than doubled between 1993 and Right now, it is hard to predict what will be next for NAFTA. Whatever its
2015, and imports increased more than three-fold. mid-term destiny, let us hope that when we look back at it many years in the
Other developments have also taken place during this future, we will be able to say that it was as good for all of North America as it was for
time, though. Through this period, the ups and downs each one of its members.  
of crude oil prices, and consequently of gasoline, were
followed by shifts in consumer behavior (in the same Raul joined IHS Chemicals Consulting team as a Director in 2013. Before joining IHS, Raul served for
period, car sales dropped by almost 12% while light six years as a Sr. Consultant and Manager for Latin America at Nexant. During his twenty years in the
truck sales grew by more than 84%). During the global industry, Raul was a long-time collaborator of BASF, where he occupied management positions in
economic crisis, the U.S. government had to come to strategic planning, marketing & sales, and as a business unit leader. Raul holds Masters in Engineer-
the rescue of the local auto industry. Foreign brands ing (Plastics) and Mechanical Engineering degrees from RWTH Aachen University in Germany, and an
have strengthened their position in the region. The Industrial Engineering degree from CeNETI, Mexico. He completed the coursework towards an MBA
net result has been that —despite production at UNAM Mexico and was trained in Management in the Plastics Industry at SKZ/IHK, Germany.

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 IHS Markit Chemical & Energy
Insights |

Feeding the Bear – the outlook for

petrochemical feedstock in Russia
↘↘A switch from liquid to gaseous steam cracker world, but even in the 1980’s about 70% of ethylene
feedstocks has been occurring throughout the world was produced from gaseous hydrocarbons (ethane,
petrochemical industry since the 1970s and it is likely propane, butane) in the United States, whereas in
that the distribution of commodity petrochemical Europe and Asia (Japan) over 85% of ethylene at the
manufacturing will continue to become more closely time was produced from liquid naphtha and other
related to the geography of natural gas production. feedstocks. The mature state of the American
Historically, naphtha had been considered a more gas-processing sector made available a sizeable
attractive feedstock than ethane because the value of amount of light hydrocarbons (ethane and C3-C4
by-products obtained from heavy feed cracking had streams), in addition to some of these light materials
risen faster than the naphtha feedstock cost. More coming from deeper oil refining. Moreover, high US
Sean Stevenson | recently, however, the advantage has clearly shifted to motor gasoline demand favoured the use of any
Managing Director, NGLs, particularly in the Middle East and in the US, gasoline fractions as a component for automotive fuel
IHS Chemicals Consulting although heavy feedstocks including naphtha and production. In Europe, crude oil refining has long
E sean.stevenson@ ihsmarkit.com condensate feeds are still favoured in Europe, Japan, experienced a surplus of gasoline fractions which
T +442082764775 South Korea, and China. Construction costs of frequently found use as feedstock for petrochemical
L London crackers based on NGL feedstock are also lower: a operations.
W www.ihs.com/chemical consulting naphtha-based cracker is 1.5-1.7 times more capital Russia, in stark contrast, historically neglected
intensive than an ethane-based plant. NGL feed- NGLs in the Soviet era and for many years continued
stocks have caught up rapidly and in 2016 an esti- to do so following the end of the Soviet Union.
mated 49.4% of ethylene feedstock was comprised of Whereas globally the recovery of petroleum liquids
ethane, propane, and butane versus a 41% share for (gas condensate and other NGLs) has been integral to
naphtha. IHS expects the use of light feedstocks to the economics of natural gas production, this has been
increase to just over 50% of the total by 2020. less true for Russia. The Soviet Ministry of Gas (and its
It is interesting to contrast the different approaches successor, Gazprom) remained largely indifferent to
of the former Cold War superpowers to petrochemical liquids, which were viewed as the purview of the Oil
investments based on NGLs. Ministry and thus neither the Soviet state nor
The North American “shale gale” over the last Gazprom invested substantial capital or resources into
decade and accompanying deflation of NGL prices has NGLs recovery.
clearly accelerated the uptake of ethane use for The overall picture has begun to change in recent
petrochemical feedstock relative to other parts of the years, particularly given the rise of a new class of
“independent” (non-Gazprom) gas producers for which
Chart 1: Ethylene consumption and GDP growth per capita in liquids production is a central part of their overall
Russia versus other regions of the world, 2000-16 business. The continued absence of much necessary
equipment, dedicated pipelines, markets, or a receptive
8.0
corporate culture in the gas sector means that the
Average annual growth rate

7.0
Russian gas industry still remains largely focused on
6.0
pipeline gas (albeit with significant consumption into
(CAGR*) %

5.0 natural gas based chemicals such as methanol and

4.0 fertilizers) and less receptive to the potential of the
6.9
3.0 associated gas liquids-certainly when compared with
2.0 4.1 4.3 the United States. Ethane for example has till now
3.0
1.0 remained a niche feedstock for ethylene manufactur-
0.0 0.6 ing in Russia, due to its low availability: only 0.74
-0.5 -0.6
-1.0 million metric tons per year of ethane was used in
Russia North Western South Middle Northeast Southeast ethylene production in 2016 (around 11 weight percent
America Europe America East Asia Asia
of the cracking feedstock mix). It is separated at only a
■ Ethylene use per capita GDP per capita handful of gas plants, all of which are located in the
*Compound average annual growth rate. Source: IHS Markit. © 2017 IHS
Volga-Urals region near petrochemical consumers.

18   |   2017 issue 2   |   www.ihs.com

 IHS Markit Chemical & Energy
| Insights

The underutilization of relatively economical NGLs chemical complex in Yamal-Nenets Okrug (West
by the Russian petrochemical industry has, in turn, Siberia) and the Amur gas chemical complex in Amur
undermined the competitiveness of petrochemical Oblast (Russian Far East) that partners SIBUR and
products—a key reason Russian consumption of Gazprom in a joint venture. Rosneft is aiming to shift
petrochemicals has lagged well behind the growth to gaseous feedstock for an existing ethylene cracking
seen in other emerging markets, even during periods unit at the Angarsk petrochemical plant. The plant’s
of robust economic growth. Over the past 15 years LPG loading rack and storage capacity were recon-
Russian GDP demonstrated substantial growth overall structed in 2014, enabling the plant to have increased
(notwithstanding two recessions): during an era of LPG consumption from last year.
high commodities prices: its average annual growth These ambitious plans to utilize gas and NGLs as
rate (CAGR) over this period exceeded 3.5%. Moreo- cracker feedstocks significantly redress the historical
ver, since the population of the country slightly balance which favoured heavier feedstocks in Russian
decreased during this period, GDP growth per capita
was quite substantial, even compared with the rapidly
expanding economies of Asia. At the same time,
growth in ethylene consumption in Russia over
The development of Russia as a player in
2000-16, though significant, lagged behind GDP global polymer markets, predicated on its
expansion, unlike the pattern in other emerging new found appetite for lighter
markets. In Northeast and Southeast Asia, for petrochemical feedstocks, is only likely to
example, ethylene consumption grew faster than GDP
during this period, while ethylene production growth
increase over the next decades.
was quite remarkable in the Middle East due to the
availability of abundant and low-cost NGL feedstocks
(see Figure 1. Ethylene consumption and GDP growth crackers. The competitiveness of the new NGL based
per capita in Russia versus other regions of the world, units is allowing them to target export as well as
2000-16) domestic markets and will swing Russia from being a
A growing realization of the poor competitive net importer of polyolefins such as polyethlene and
position of Russian petrochemical assets due partially polypropylene to a net exporter for the first time.
to feedstock choice along with improving infrastruc- Whilst heavy feedstocks continue to be leveraged
ture for NGL separation and transportation has seen where there is seen to be advantage (reflected in
this start to change. Since 2010, the pace of ethylene proposed projects at Nizhnekamskneftekhim and
expansion has picked up: in 2016 total capacity FEPCO’s proposed refinery + naphtha cracker at
amounted to 3.1 million metric tons per year, up 13% Nakhodka in the Russian Far East), the development
from 2010. Even more important than the expansion of Russia as a player in global polymer markets
of plant capacity during this period was the launch of predicated on its new found appetite for lighter
new transportation infrastructure reconstruction of petrochemical feedstocks is only likely to increase
existing pipelines for rising volumes of NGL produc- over the next decades.
tion in West Siberia (Purovsk-Tobolsk raw NGL This article is a condensed and updated version of a 2016
transportation system). IHS research note “Russia’s Petrochemical Feedstocks Shift to
Although the bulk of Russian output of key NGLs with Increasingly Abundant Domestic Supply” by
petrochemical products, including ethylene, remains Aleksandr Scherbakov, Senior Research Analyst and John C.
concentrated in the Volga-Urals region, the emerging Webb, Director of IHS’s Russian and Caspian Energy team.
new centers of petrochemical production are mainly Additional contributions by Sean Stevenson.
in West Siberia and other regions in relatively close
proximity to abundant gaseous feedstock supplies. At Sean Stevenson is a Managing Director of IHS Chemicals
the vanguard of this was SIBUR’s propane dehydroge- Consulting based in London. He has almost 29 years’ experience
nation (PDH) unit supplying a 500kta polypropylene in the Petrochemicals industry including plant operations
plant which became operational in Tobolsk in 2014, management, commercial and business development roles and
consuming propane separated from West Siberian consulting. He has managed numerous consulting engage-
fields. Further investment here includes SIBUR’s huge ments in Russia and the CIS and monitors industry develop-
new Zapsibneftekhim II petrochemical complex, ments in this region closely.
which will be one of the largest crackers in the world
and will become a major consumer of NGLs and is due
for startup in 2020. Other ambitious ventures
centered around light hydrocarbon feedstock supplies
include Gazprom’s planned Noviy Urengoy gas

www.ihs.com   |   2017 issue 2   |   19

 CHEMICAL

2017 Events Calendar

WPC 2017: 32ND ANNUAL WORLD PETROCHEMICAL CONFERENCE
Houston, TX, USA | March 20-24, 2017
INTERNATIONAL LPG SEMINAR & WORKSHOPS
Houston, TX, USA | April 4-6, 2017
EMEA AROMATICS AND OLEFINS CONFERENCE 2017
Düsseldorf, Germany | June 13-14, 2017
PEPP 2017: 25TH ANNIVERSARY POLYETHYLENE-POLYPROPYLENE
CHAIN GLOBAL TECHNOLOGY & BUSINESS FORUM
Düsseldorf, Germany | June 14-16, 2017
ASIA LPG SEMINAR & WORKSHOPS
Singapore | July 11-13, 2017
GLOBAL CHLOR-ALKALI CONFERENCE
Antwerp, Belgium | September 13, 2017
WORLD SODA ASH CONFERENCE 2017
Dubrovnik, Croatia | September 19-21, 2017
35TH ANNUAL WORLD METHANOL CONFERENCE
Berlin, Germany | September 29-30, 2017
GPS 2017: THE 5TH ANNUAL GLOBAL PLASTICS SUMMIT
Chicago, Illinois, USA | October 11-13, 2017
LATIN AMERICA LPG SEMINAR & WORKSHOPS
Location TBD | November 7-9, 2017
LAPPC 2017: 7TH LATIN AMERICAN PETROCHEMICALS AND
POLYMERS CONFERENCE
Rio de Janeiro, Brazil | November 10-11, 2017
ACRYLONITRILE, DERIVATIVES & FIBRES CONFERENCE
Singapore | November 1-3, 2017
5TH ANNUAL ASIA CHEMICAL CONFERENCE
Singapore | November 1-3, 2017

3424-TS-0117
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