September 23, 2014
Wider impacts of North American energy on materials demand
By: Paul Bjacek

Besides the obvious petrochemical investments occurring in North America to take advantage of low cost gas, the rapid development of unconventional energy resources is buoying other industrial markets, representing new demand opportunities for the materials (chemicals, metals, forest products and minerals) industries. For instance, the American Chemistry Council has identified over 170 new projects and expansions across six broad industry categories.

New demand from the North America energy “megatrend”
Unsurprisingly, industries which use a significant amount of natural gas or natural gas derived energy/power are strong candidates for North American investment. In chemicals, this is true for light olefins, ammonia and methanol, as well as some of their derivatives. Other basic industries, such as iron & steel, alumina refining and nonferrous smelting, in which energy can be a significant cost factor, are experiencing stronger growth in the United States, 8-20% ahead of US GDP growth (see Figure 1i) since the low point of the recession! Indeed, there have even been expansions announced in steel, copper and aluminium over the past 12 months. Of course some of this is related to other factors, such as automobile production.  In any case, these industries pull through materials in their manufacturing activity and represent areas of strong demand growth.

In addition, the energy industry itself is a large consumer of basic materials, such as steel pipe and oilfield chemicals, among a variety of other industrial machinery and goods.  The industries serving the energy sector are, in turn, pulling through materials, as shown in Figure 2.  These also represent materials demand opportunities.  

Shale metals
Although the oil & gas sector in the US accounts for only 5% of total shipments, this market has provided the greatest returns to steel producers.  Primary steel pipe & tube supplier profit margins have outperformed the rest of the industry by 10% to 22%, post-recession, in a large part due to North American demand. The highly technical nature of energy steel products limits suppliers to a handful, while trade restrictions on Chinese products have reduced the import threat. Producers have invested in the US pipe & tube industry despite curbs on spending in the wider steel industry.

Those steel producers supplying the new energy industry are also benefiting from energy development taking place across the Americas. Canada, Mexico, Venezuela and Brazil account for the vast majority of US line pipe exports, which totalled US $0.8 billion in 2013, a historic high. The skills and expertise developed in supplying the US market will no doubt be applied to other regions. However, this only relates to steel used directly in extraction and supply, there will also be an increase in demand for steel products across the shale-gas value-chain in the form of ancillary buildings and equipment.

Symbiotic relationships in basic materials
In addition to industrial output, the construction of new facilities alone will boost materials demand. For instance, one new North American petrochemical complex was reported to be using approximately 38,000 metric tons of equipment, 3,900 metric tons of cable (mostly copper), 23,000 metric tons of metal structure (mostly steel), 133,000 cubic meters of concrete and 24,000 metric tons of pipe. If this were multiplied by, for the sake of the discussion, ten plants, then the amount of steel would add up to only less than 1 percent of US steel demand, however, it would represent mainly high value/specialty steels. Also, this excludes the infrastructure and transportation equipment needed to serve these new facilities.

A “multiplier” or “cascade” effect occurs with these investments throughout the chemicals and natural resources chain. For example, the metals industry, using many products from mining, including iron ore and other alloy metals, also pulls through significant amounts of chemicals. The chemicals demand multiplier effect occurs in manufacturing the various inputs for these growth industries and includes consumption of various chemicals used in metals-making, such as bases (like soda ash), chlorine and sulfur compounds, acids (nitric, hydrochloric, sulfuric), industrial gases (argon, CO2, hydrogen and other), industrial lubricants, various fluids, cleaners, corrosion preventives and other chemical products. Construction and downstream fabrication industries use metals treating chemicals, concrete additives, welding gasses, coatings, adhesives, metalworking fluids and a plethora of other chemicals.

Strategic planning recommendations
The US shale energy phenomenon could be replicated in Mexico and other geographies. But other megatrends, besides this one in energy, across the globe will have their own multiplier effects. Also, some megatrends can have a negative effect, such as the shift in North American power generation to using natural gas, decreasing domestic coal demand and prices.

Basic materials companies should look beyond the standard categorization of “introductory,” “growth,” “mature,” and “declining”, which fit less well with materials industries, and instead consider an open-minded approach employing analytical methods, subject matter expertise and strategic thinking to identify market opportunities ahead of the curve. A good example of an industry considered to be among the least attractive 2-3 decades ago was agriculture -- now it is considered a strategic growth market by top chemical companies! The same can occur for other basic industries, as needs expand, competitive factors change and new technologies are employed.

i Figures 1 and 2 are a cursory analysis based on US Bureau of Economic Analysis Input-Output tables and gross output data (quantity index, which excludes price movements). The data is for the US and is based on 2007 input-output factors.

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