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Cheap Gas Fuels Chemical Boom as Dow Invests Billions

Dow Chemical Co. (DOW) and other U.S. chemical makers will boost output capacity 30 percent in a decade as they invest billions of dollars in factories to take advantage of low-cost shale gas, researcher IHS Inc. said.

The producers are adding 105 million metric tons of capacity by 2024, led by ethylene and methanol units on the Gulf Coast, Russell Heinen, a senior director at the firm, said in his presentation at the IHS World Petrochemical Conference in Houston today. Growth will peak in 2017 with the addition of 23 million tons of capacity.

Gas prices that have dropped by half in a decade in the U.S. are allowing producers to process liquids such as ethane into chemicals at a lower cost than other regions of the world. Dow is spending about $4 billion to expand output in Texas and Louisiana.

“Companies are placing bets that the energy revolution is real and sustainable,” Jim Fitterling, Dow’s executive vice president of feedstocks, performance chemicals and supply, said today at the conference.

The cost advantage, combined with expanded production, will result in a fivefold increase in U.S. earnings from ethylene, the world’s most used chemical and a key ingredient in plastics, Dave Witte, senior vice president at IHS, said in a presentation. Ethylene earnings will rise to $31.6 billion in 2018 from $6.9 billion a decade earlier, he said.

Lower energy costs are also attracting other industries to invest in the U.S., which will help consume some of the new chemical production. Still, exports will need to increase to keep U.S. chemical markets balanced, Witte said.

Spending Peak

U.S. capital spending on chemical factories will peak in 2016 at $14 billion, four times current levels, IHS’s Heinen said in his presentation distributed at the conference. Project costs will increase about 4 percent a year through 2020, led by a 5.2 percent annual increase in labor costs, Heinen said.

Global chemical capacity additions, led by Chinese coal-based production, will peak at $120 billion this year and then decline as U.S. construction ramps up, he said.

To contact the reporter on this story: Jack Kaskey in Houston at jkaskey@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net Carlos Caminada, Robin Saponar

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