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The game changer for 2012

By Chemical Engineering |

As we round the corner from 2011 to 2012, economists are painting dimming pictures for global economic recovery. For instance, a report from IHS (Lexington, Mass.; www.ihs.com) chief economist Nariman Behravesh says, “World growth will slow in 2012 — the only question is how much.” Meanwhile, Kevin Swift, chief economist at the American Chemistry Council (ACC; Washington, D.C.; www.americanchemistry.com) puts it this way, “The recovery from the worst recession since the Great Depression has stalled.”

The reasons for the expected slowdown are higher energy prices, the disasters in Japan, the Eurozone crisis, the slowdown in China and the influence of other negative factors, ACC says.

So, while it might seem unlikely that one of the bright spots in economic analysis would fall on capital spending in the chemical process industries (CPI) — particularly in the U.S. — that is precisely what experts at ACC are forecasting. The basis for their prediction is their belief that the investment cycle has reengaged, and their confidence is fueled (at least figuratively, if not literally) by shale gas.

As ACC explains in its Year-End 2011 Situation & Outlook, capital spending cycles generally lag cycles of industrial activity, with profits and operating rates being the leading determinants of spending. So, looking back on 2010 and 2011, improved production and utilization rates, cost containment from earlier cost reduction efforts, low feedstock costs and other raw-material costs (compared to Europe and Northeast Asia) and higher selling prices resulted in a strong recovery of profits. Add that to the new dynamics from shale gas, and there is a possibility that the current upcycle in profits will last longer than recent cyclical upswings, ACC says.

The bottom line is that with improving operating rates and profit margins, and a low cost of capital, increases in new plant and equipment investments in the U.S. are forthcoming. The need to replace existing capital is apparent and will be a driver, ACC says. ACC economists also believe that the industry investment cycle has likely reengaged, and therefore forecast that capital spending in the U.S. CPI will rise 7.3% in 2012 to $31.5 billion, surpassing the most recent peak. Sustaining capital (capital that is required to maintain operations at existing levels) will support investment in the U.S., with the largest proportion of capital spending allocated toward replacement of worn-out plant equipment.

As a recovery strengthens into an expansion in future years, ACC expects that replacement spending will make way for increased spending in capacity additions. Already, with improving competitiveness resulting from developments in shale gas, a reevaluation of the U.S. as a favorable location for investment is occurring. As ACC points out in its report, a number of projects have been announced and discussed, and the dynamics for sustained capital investment are in place.

Strong gains in capital spending by the U.S. CPI are thus expected during the next several years, the result of new investment in petrochemicals and derivatives arising from shale gas developments. In other words, ACC says that “After years of high, volatile natural-gas pries, the new economics of shale gas are a ‘game changer’, creating a competitive advantage for U.S. manufacturers, leading to greater investment and industry growth.”

Look for more on the technical aspects of processing shale gas and its implications for the chemical engineering profession in next month’s news feature.

Rebekkah Marshall

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