An alliance of US and Canadian chemical companies oppose increased natural gas exports and are lobbying against export permitting. Fitch Ratings believes operating margins for these companies might see compression from current robust levels if significant gas exports materialize.
“However, North America is likely to remain a cost-advantaged production center relative to most other regions, particularly Europe,” said Fitch analysts, who noted that operating costs for chemical companies rise when gas prices increase.
Eliminating or capping LNG exports could limit consumption and reduce long-term risk of rising gas prices.
“Chemical companies see shale gas production and resulting low gas prices as a significant and long-term favorable shift of the cost curve for North American producers,” Fitch said. “Sustained low natural gas prices would enable North American facilities to maintain their cost advantage versus European and Asian chemical producers.”
While Middle East gas prices are lower, there are not as many local consumers of chemical products in the Middle East as there are in North America. Chemical producers in North America can be cost-competitive with Middle East producers when transport is included.
Higher gas prices would reduce the North American cost advantage. Chemical companies have a number of projects scheduled to come online in the next 5 years. Payback for these projects will take years, said Fitch analysts. Reduced operating margins could slow payback and reduce returns.