North American chemical companies have seen their revenues slip with the plunging crude price, but they aren’t expected to abandon the billions worth of expansions they announced when profits were higher, a new report finds.
As FuelFix.com reports, petrochemical companies have enjoyed deep discounts on the oil-based naptha and natural gas liquids they use to power their plants since the price of oil has collapsed in recent months, but chemicals they manufacture have also been selling cheaper, eroding their margins, according to a new report by Standard & Poor’s Ratings Services.
Ethylene, a key building block for plastics, now fetches 35% less than it did during its peak in the third quarter of last year, the analysis says. In the most recent earnings calls, three major U.S. chemical giants—Dow Chemical Co. LyondellBasell and Westlake Chemical Corp.—all reported weaker margins, a trend they expected to continue, the report finds.
Despite the diminishing profits, chemical companies are expected to continue to follow through with a slate of new expansions announced after the U.S. shale boom flooded the market with vast quantities of cheap natural gas, Standard & Poor’s says.
“Although the weaker outlook has forced companies to adjust their expectations of returns on these investments, we don’t expect significant delays or cancellations of projects already underway,” the report says. “While returns will likely be weaker than initially expected, we believe conditions will remain favorable enough to support this additional capacity, scheduled to come online by 2018.”
The report cautions that the outlook isn’t so optimistic if prices don’t pick up, saying that companies may refrain from making future investments. Still, North American chemical producers continue to remain competitive against their global competitors thanks to their easy access to low-cost feedstock, it says.
