The Economist Asia Edition - April 14, 2018

56 The EconomistApril 14th 2018

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1

“T

HIS is what $3bn looks like.” So

beams a manager at Chevron Phil-

lips Chemical (CPC), a petrochemical com-

pany jointly owned by Chevron and Phil-

lips 66, both American oil firms. She

throws open her arms in a figurative em-

brace of a giant cracker (pictured) built by

the firm in Baytown, a gritty part of Hous-

ton. The new plant turns vast quantities of

ethane, which is derived from natural gas,

into ethylene, an important building block

in plastic. Another nearby facility, which

the firm has recently expanded, converts

the ethylene into plastic resin that is sold

worldwide. All told, CPChas spent some

$6bn expanding its chemicals-production

infrastructure around Houston.

A decade ago, this would have been un-

imaginable. Chemicals firms in America,

beaten down by rivals from the Middle

East that enjoyed cheap feedstocks and

others from China feasting on subsidised

capital, had not invested in new local

plants in years. Growth in global demand

for chemicals, once roaring, had slowed

thanks to the global financial crisis. Ameri-

ca had costly workers, ageing capital stock,

pricey feedstocks and sluggish demand.

Some crackers were shut down.

It is astonishing, then, that the CPC

plant is justone of six new megaprojects in

America. According to the American

Chemistry Council (ACC), an industry um-

brella group, over $185bn in new chemical

light the risks of his recent trade initiatives.

Behind the rejuvenation lie two things.

One is a recent wave of what Jason McLinn

of Bain, a consultancy, calls “portfolio re-

shaping”. Commodity chemicals, which

are produced in bulk, and specialty chemi-

cals, such as those used as additives and in-

gredients, do not have much to do with

each other, he says, but chemicals firms

seeking growth in sluggish markets like

America typically developed both. Now,

under pressure from activist investors,

bosses are spinning off non-core business-

es and bulking up in core areas. This is pro-

ducing firms with the gargantuan scale

needed to take on their giant state-spon-

sored international rivals. This week, for

example, news surfaced that American

regulators will approve the $60bn take-

over of Monsanto, an American agro-

chemicals firm, by Germany’s Bayer.

Dow, whose long-standing boss, An-

drew Liveris, stepped down as chairman

this month, is a case in point. By acquiring

DuPont, a local rival, for $130bn last year,

he turned Dow into the world’s biggest

chemicals firm by sales. The next step in

the master plan is to combine the specialty

and agricultural-chemicals arms of the

two firms, and spin each of them out sepa-

rately. What remains will focus on the

automotive, packaging and construction

industries. David Witte ofIHSMarkit, a re-

search firm, believes it will create a pure-

play rival to the biggest firms in the sector.

“I’d rather own a small, subscale,

poorly-run cracker in America than any in

Europe right now,” chuckles Jonas Oxgaard

of Bernstein, an equity-research firm. That

quip alludes to the other enormous edge

that the American chemicals business has

at the moment. The shale revolution is un-

leashing a tidal wave of cheap natural gas

and related liquids that can be used in-

investments has been announced since

2010, with half of those plants already built

or currently under construction (see chart).

The industry now accounts for roughly

half of all investment in American manu-

facturing. With annual shipments of over

$500bn, it is one of America’s largest ex-

port sectors.

This remarkable turnaround in the

American chemicals industry’s fortunes

raises two questions. Why did it happen,

and how sustainable is the boom? The an-

swers point to how clever new ideas are re-

shaping the “old economy”. They also of-

fer clues about the viability of the

industrial renaissance that President Do-

nald Trump wants for America and high-

America’s chemicals industry

Cracking on

BAYTOWN, TEXAS

A once-moribund business has become one of America’s largest exporters. But

politics threatens to get in its way

Business

Also in this section

57 Volkswagen shifts gear

58 Law-firm mergers

58 Rakuten’s struggles

59 Pipelines in Canada

60 The problem with meal kits

60 Shipping and carbon emissions

Schumpeter is away

Shale and hearty

Source: IHS Markit

United States, chemical industry, tonnes m

FORECAST

0

100

200

300

400

0

5

10

15

20

2005 10 15 20 25

New installations Capacity