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It all begins with energy.
Energy is needed to make basic chemicals and plastics. Basic chemicals and plastics are required to produce durable and non-durable goods all over the world. Demand for chemicals and plastics, in turn, is subject to global economic growth.
Because energy is at the very top of this chain, production costs for basic chemicals and plastics are highly dependent on energy and energy-derived raw materials inputs. In fact, these materials can account for 75 percent of the total cost of the end product.
Therefore, it's no wonder that new developments in non-conventional oil and gas markets in North America are making the continent increasingly appealing to global chemical companies. After a decade of new investments in the industry happening mostly in the Middle East and Asia, IHS predicts North America will attract much of the new capacity throughout the current decade.
The benefits of this are clear: investment, jobs and revenue. The risks are a bit more difficult to see, although they could have a great impact on the industry. These include capital cost escalation, market access and trade exposure and stringent regulatory legislation.
The most prominent of the risks for chemical manufacturers are significant market imbalances and unpredictable energy market dynamics. Oversupply could be a particular risk for the North American market between 2018 and 2020, when a large number of new plants are scheduled to go online.
Changing energy market dynamics already have been having an impact on North American chemicals manufacturers. A significant difference in the price of materials derived from North American natural gas and those from crude oil that did not exist a decade ago forced chemical manufacturers to make tough choices regarding retrofitting or closing their high-cost assets that could no longer compete. The billions of dollars of new investment in the North American chemicals market is counting on those energy market dynamics being sustained for the next decade. Should they shift again, North American chemical manufacturers could be facing a similar set of issues.

New chemical production in North America and the Middle East will have a transformative impact on the global market and supply chain. While this will likely result in politically-charged decisions regarding closing unprofitable facilities, the benefits and great risks associated with these massive investments make complex analysis a preferable way to make site placement decisions. With all that lies in the balance, making the right chemical products at the right location for the right market will be crucial for success.
Mark Eramo is vice president, chemical market insights, at IHS Chemical
Posted January 22, 2014

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