December 17, 2012 | Ed Crooks
Chemical boom hit by construction costs
One consequence of the rising surge of investment in US petrochemical plants looks like being an increase in construction costs.
Sasol of South Africa this month announced plans to build an ethane “cracker” and a plant to produce diesel fuel from natural gas in Louisiana, at a total cost of up to $21bn; a figure about 50 per cent higher than earlier estimates.
It has not yet made a final investment decision on the plants but is already starting purchasing of costly long lead-time equipment such as metal vessels. David Constable, Sasol’s chief executive, said: “Some of the quotes on cracking equipment are totally surprising us.”
He said: “I think a few of the proposed ethane crackers may shake out and not come to fruition. We believe there is a first-mover advantage here, and we think it is very important to be in the first couple of crackers to be built.”
Andrew Liveris, chief executive of Dow Chemical, said recently that building a greenfield cracker, as Royal Dutch Shell is considering in Pennsylvania, required a “huge capital spend”: much greater than for the brownfield capacity expansions that Dow is making.
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The international chemicals industry is undergoing its most profound upheaval for 75 years, according to Kevin Swift of the American Chemistry Council. Not since the years before the second world war, when there was a flood of discoveries including nylon, synthetic rubber, PVC plastic and polystyrene, has there been technological change with such far-reaching consequences.
Data on petrochemical construction costs compiled by IHS Cera, the research group, show some signs of inflation: while price rises in the past 18 months have been strongest in the developing world, costs are falling in Europe but “flat to slightly up” in the US.
However, Anton Ticktin of the Valence Group, the investment bank, said he did not expect rising construction costs to jeopardise the case for chemicals companies to invest in the US. “Capital cost inflation always happens when you have an investment boom,” he said. “But that’s not the main driver of the economics. The cost advantage we are seeing in the US even now is pretty staggering.”