A story I've been following the last few months is where shale is starting to go beyond energy and out to other industries. A classic example of this is the US chemical industry.

Chemicals play nearly as important a role in the macro economy as energy.  Petro-chemicals and natural gas are the feedstock for plastic and fertiliser.  Eighty per cent of the cost of nitrogen based fertiliser is natural gas. Similarly, natural gas liquids like ethane are a major cost component of ethylene for plastic, which impacts everything made from, or wrapped in, plastic.

The US shale revolution provides low cost natural gas and ethane and impact other markets like hydrochloric acid. So low cost US shale means much more than cheap energy:

The head of Dow Chemical Co. said Thursday that the U.S. can become a low-cost leader for the global industry as shale gas production increases and cheap natural gas from the Middle East is diverted to produce power.

Demand for commodity and specialty chemicals is returning to pre-recession levels and U.S. exports to Asia have soared, with prices rising amid tight supplies for the building blocks of everything from diapers and packaging to autos and consumer electronics.

I've already highlighted how companies like BASF are building plants in places where there was no production like West Virginia to take advantage of Marcellus produced ethane at give away prices. The conventional wisdom in chemicals was based on the other conventional wisdom: US energy would be expensive and declining. As a result the world chemical industry started to move from the Gulf of Mexico to the Persian Gulf, costing jobs and pushing up prices. But that was then and this is now:

Cheap U.S. natural gas prices already give its chemical companies an advantage over many overseas rivals, though this is eroded by the cost of shipping to fast-growing Asian markets. Mr. Liveris said the development of domestic shale-based deposits could narrow the cost gap with the Middle East.

He said Dow would accelerate efforts to move away from low-value commodity business, though the outperformance of its basic chemicals and plastics operations drove results that surpassed analysts' expectations as the company absorbed higher raw material costs and secured a 10% rise in prices.

Which means Dow Chemical is doing just fine thanks:

The company reported a profit of $511 million for the quarter ending in December compared with $172 million a year earlier.

This underlines even more how slowing down Europe shale production by looking the gift horse of shale in the mouth will end up shooting the chemical industry and many others in the foot.

nohotair.typepad.co.uk/no_hot_air/2011/02/us-chemicals-now-the-low-cost-leader-thanks-to-shale.html

Feb. 4, 2011