capSpire Blog

Over the past thirty years, globalization surged as a central theme for chemical companies as they increased their international footprint and utilized other regions’ inexpensive labor and raw materials.  These companies remained laser-focused on investing in opportunities outside of the United States, and they gradually reduced their footprint within the states.

But times are indeed changing. Canada-based Methanex, the largest producer of methanol, is currently spending over $1 Billion to disassemble two of its factories in Chile and rebuild them along the gulf coast in Louisiana.

The move is globalization – in reverse!  And Methanex isn’t the only company moving back into the U.S.  Several other large chemical players, including Exxon, Chevron, Dow Chemical, and Sasol are also expanding their U.S. footprint by building or expanding their investments within the United States.

What’s driving this change?  Cheap natural gas and feedstocks.  With prices at roughly 25% of their 2005 levels, operation and raw material costs are at a low not seen in some time.  The shale gas plays in Eagle Ford, Barnett, Bakken, and Marcellus have provided an abundance of gas as well as natural gas liquids (NGLs).

For companies building new plants, this driver (as well as existing infrastructure such as waterways, pipelines, inexpensive and abundant energy, and feedstocks) makes the U.S. a smart option for chemical companies to expand their operations.

This is great news for the United States’ petrochemical industry.  However, it’s during these times that companies need to need to plan for troughs in their business cycles.

For every exceptional year, such as 2012, where the U.S. logged a trade surplus of $800 million for the first time in eleven years, there could be a year like 2005.  During that year all-time high energy and feedstock costs drastically increased the cost to produce plastics and fertilizers, which was a leader factor to reduced demand.

Let’s think about a few factors today that could affect energy and feedstock prices in the future.

• The U.S. continues to grow as a liquefied natural gas (LNG) exporter by retrofitting existing LNG import terminals.
• As NGL prices remain low, liquids like ethane and propane are also being exported.
• Traditional coal, oil, or lignite powered electricity plants (both U.S. and International) look to retrofit to gas.
• Increasing price volatility in the NGL markets

What will the price of natural gas be when it powers 50% of U.S. electricity? 75%? How about after several large natural gas-driven manufacturing facilities come on line on the U.S. Gulf Coast?  Will projected supply be enough to dampen the possibility of price spikes?

With this type of market volatility in the energy industry, companies must be proactive in not only limiting their exposures on the petrochemical and feedstock side, but also controlling their costs on the energy side.  capSpire works with a number of industry leaders to increase efficiencies of their business processes by leveraging Commodity Trading and Risk Management (CTRM) solutions.  These efficiencies allow industry leaders additional capacity to evaluate their positions with different scenarios as the U.S. energy economy continues to transform.

CTRM systems are great tools to manage financial and physical contracts, record product movement, automate the creation of invoices, and value current positions and inventory.  These systems also integrate externally to interface contracts, actual prices and forward price curves to automate the entire data management process.  This streamlines the reporting of financial and physical product positions and allows for the analysis of different price shock scenarios.

What tools are you using to manage your risk?  How do you analyze your positions?

Contact our capSpire CTRM experts to learn how industry leaders are resolving this problem.