Fitch: North American Chemical Companies Keen to Curb LNG Exports

Fitch Ratings believes operating margins for North American chemical companies might see compression from currently robust levels should natural gas exports rise meaningfully.

However, North America is likely to remain a cost-advantaged production center relative to most other regions, particularly Europe. An alliance of chemical, basic material, and utility companies (Alcoa, American Public Gas Association, Celanese, Dow, Eastman Chemical, Huntsman & Nucor) are opposed to increased liquid natural gas (LNG) exports and are actively lobbying against export permitting. Their costs rise when natural gas prices increase. Eliminating or capping LNG exports would limit consumption and reduce the longer term risk of rising natural gas prices.

Chemical companies see shale gas production and resulting low gas prices as a significant and long-term favorable shift of the cost curve for North American producers. Methane, which comprises most of natural gas, is not only a feedstock for some chemicals (ammonia and methanol) but it provides energy and heat for other chemical processes. Sustained low natural gas prices would enable North American facilities to maintain their cost advantage versus European and Asian chemical producers. While Middle East natural gas prices are lower, there are not as many local consumers of chemical products in the Middle East as there are in North America. Chemical producers in North America can be cost-competitive with Middle East producers when transport is included. Higher natural gas prices would reduce the North American cost advantage.

Furthermore, chemical companies have a number of new capital projects coming online in the next five years. These projects are expensive and payback will likely take multiple years. Reduced margin advantage would shift payback out and reduce returns on capital projects, in turn reducing returns to shareholders.

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LNG World News Staff, April 03, 2013