Natural Gas Glut Fuels A Chemical Boom

Odds are, you've never heard of ethylene. However, the basic commodity chemical is the foundation to many more complex products such as paint, plastics and glue. What's more exciting, is the price for this basic chemical has skyrocketed about 70% over the last eight months. Overall increasing economic growth in emerging markets has caused surging demand for the commodity. According to analysts, the bellwether for plastics manufacturing, is set to see its utilization rates increase to 90% by 2013. This is up from 84% in 2009. U.S. chemical manufacturers could be the biggest beneficiaries of the surge in ethylene prices. Cheap natural gas prices have given America's chemical industry a huge cost advantage over European rivals. Many European producers use naphtha to produce ethylene, which is made from crude oil. Nat. gas prices are still at roughly $4 per MMBtu. Oil remains well above $90 per barrel. The abundance of cheap shale gas has provided huge operating margins with regards to ethylene production. High global ethylene prices coupled with low feedstock costs have spurred a building frenzy for new production facilities and ‘crackers'. For investors, playing the growth in the most basic of commodity chemicals can be done a few ways. The trio of Dow Chemical DOW, Germany's BASF SE BASFY and Lyondell-Basel Industries NV LYB are three of the biggest producers of ethylene and petro chemicals. Low natural gas prices will help keep margins fat at their U.S. facilities. For those who want to play the ‘cracker' facility build-out, engineering firm Fluor Corp FLR, recently reported that five of its major clients are thinking about re-opening or building new ethylene plants. The construction firm should see a major increase in business as more chemicals in the U.S. take advantage of low nat. gas prices.