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US processors and suppliers expect growth fueled by shale gas

By: Frank Esposito

November 7, 2013

CHICAGO — Dow Chemical Co. makes resin. Berry Plastics Group Inc. buys resin. But both firms expect to benefit from discoveries of shale gas throughout North America.

Executives with Midland, Mich.-based Dow and Evansville, Ind.-based Berry spoke at the Global Plastics Summit, held Nov. 4-6 in Chicago. Dow ranks as one of the world’s largest plastics and chemicals makers. Berry is North America’s third largest injection molder, fourth largest film and sheet maker and fourth largest thermoformer, according to recent Plastics News rankings.

“A few years ago, we said we expected industry growth to be in the Middle East or in emerging geographies,” Dow’s Greg Jozwiak said. “But starting in 2008, things changed significantly. Now it’s about how plastics can seize these opportunities.”

Dow and other regional resin makers are adding capacity for the first time in many years, since shale-based natural gas can be used to make ethane and then ethylene, a key feedstock for many plastics including polyethylene and PVC.

The “shale gale” is expected to create 485,000 petrochemicals-related construction jobs, as well as 55,000 resin production jobs and 10,000 new plastics manufacturing jobs, added Jozwiak, who serves as North American commercial vice president for Dow’s packaging and specialty plastics business. Shale expansion will lead to new growth in reshoring, materials, processing and finished goods exports, he said.

Outside of resin, these investments are expected to create 60,000 support jobs and 50,000 related jobs in the communities that house the plants. “It’s a major multiplying factor, not the same as from service-type industries,” Jozwiak said. Globally, Dow is adding more than 3 billion pounds of capacity for PE and related products on the U.S. Gulf Coast and almost 3 billion pounds of capacity for those items through a joint venture in the Middle East.

Farmer — Berry’s executive vice president of global purchasing — described the shale boom as “the most exciting thing to happen to the plastics industry in a long time.” He added that increased availability of PE will allow plastic to make inroads into the $170 billion global packaging market. “There’s an opportunity to drive volume,” Farmer said. “Packaging is a huge, huge number and plastic plays in only a small part of that overall number today.”

The shale edge also would allow Berry and other processors to invest in new capacity, he added. Berry had sales of almost $5 billion in its 2012 fiscal year and has made more than 30 acquisitions in the last 15 years.

Jozwiak estimated that PE has 13 percent of the global packaging market, with other plastics holding a 17 percent share. “There’s a very significant addressable market for plastics to substitute because of their light weight and value in food preservation,” he said.

And as expected at an event that featured resin makers and buyers, the topic of pricing arose.

“The people who drive the volume of plastic pellets are consumers,” Berry’s Farmer said. “We have to get the [resin] cost to the point where [the shale advantage] can be passed on to converters and on to their customers.”

According to Farmer, a 10 percent drop in PE prices would allow processors to create 5,500 new, well-paying manufacturing jobs as will as increase PE demand by 800 million pounds per year. “Jobs can be created if we can get low-cost polyethylene into the marketplace,” he said.

Lower resin costs also would allow Berry and other processors to invest more in innovative products such as Versalite, a polypropylene-based packaging material launched by Berry earlier this year. Farmer said that Berry spent $30 million to develop Versalite, which he said “will revolutionize the hot drink cup market.”

Dow’s Jozwiak countered that North American PE prices already are the lowest in the world, which is why a significant amount of PE is still exported from the region. He added that profit margins at the resin producer level are put back into the industry in the form of investments. “We’re putting that money to work,” Jozwiak said.

Jozwiak also detailed a formula for growth for North American plastics manufacturing. He said that reshoring will add 1 percentage point to base PE market growth of 2.5 percent. Material substitution will add another 0.75 percentage point, with finished good exports chipping in another 0.25 for a total growth rate of 4.5 percent.

That level of growth would create a need for another 1.7 billion pounds of PE capacity per year in North America. Each 1 percentage point of PE market growth also creates the need for 28 more plastics processing lines in the region.

“In my 25 years at Dow, the industry has never been this exciting,” Jozwiak said. “Especially when you think that just a few years, people weren’t thinking they’d be investing in North America at all. This is a great opportunity for our industry.”

The Global Plastics Summit was co-hosted by Houston-based consulting firm IHS Chemical and the Society of the Plastics Industry Inc., a Washington-based trade group.