Commercialization of shale gas points to unprecedentedly bright outlook for U.S. chemical industry

Thursday, Jun 28, 2012

NEW YORK, June 27, 2012 /PRNewswire/ -- The past two years have seen a dramatic change in the outlook for U.S. Chemical companies. In 2010, the industry seemed well rationalized, but with few opportunities for significant revenue growth and – outside of R&D – precious little expansionary investment. However, with the commercialization of shale gas in the U.S., the industry has seen a remarkable turn of fortune, according to a KPMG report, The Future of the U.S. Chemical Industry.

According to KPMG's chemical industry specialists, the outlook for U.S.Chemical companies feels overwhelmingly upbeat. With a new and abundant source of low-cost feedstock, the U.S. market has suddenly transformed to become one of the most advantageous markets for chemical production in the world.

However, according to KPMG, there remain a number of risks on the horizon. The first – and likely most problematic – is that the exponential addition of new capacity in the Chemical industry will lead to an oversupply that outstrips demand within the national market, returning the industry to the cyclicality that was such a problem in the past.  Tied to this are the growth projections for global Chemical sales. While the U.S. economy has returned to growth, overall it remains a mature market which could not absorb all of the announced new capacity.  Similarly, Europe and Japan have seen somewhat sedate growth, while the emerging markets have boomed ahead with China, India and Latin America in the lead.

"Clearly, U.S. Chemical companies will need to place strong focus on developing their supply lines into the new growth economies, and this will require a significant transformation of operating models for U.S. companies who have traditionally been focused on the domestic marketplace," said Mike Shannon, global and U.S. leader of KPMG's chemicals and performance technologies practice. "The opening up of many emerging markets to import growth can be a slow and complex process, and U.S. chemical companies need to take actions today that will guarantee markets for products to be produced in four or five years time."

The miracle of shale gas

According to KPMG's Shannon, "one would be hard pressed to overestimate the impact of the commercialization of shale gas on the U.S. Chemical Industry." At its root, the discovery of abundant reserves of shale gas in the U.S. has driven down the natural gas price and created a massive competitive advantage for U.S. companies.  The cost implications for the U.S. Chemical industry have been impressive. Generally, a ratio of 5-1 between crude oil and gas prices is enough to make the U.S. Chemical environment 'favorable'. At today's prices, the disparity is more like 9-1, creating lasting advantages for U.S. producers.

About KPMG LLP

KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative ("KPMG International.") KPMG International's member firms have 145,000 people, including more than 8,000 partners, in 152 countries.

SOURCE KPMG LLP