Come Shale, Come All - Global Trade Magazine
  March 13th, 2014 | Written by

Come Shale, Come All

PLASTICS AND CHEMICAL COMPANIES GO WHERE THE GAS IS

Mike Shannon, global leader of chemicals and performance technologies at big-four auditor KPMG, says chemical and plastics companies are eying North America for growth. Attracted by the abundance of shale gas in the U.S.—particularly in Texas, Louisiana and Michigan—numerous big-name companies are setting up shop in this region. “Shale gas has completely reinvigorated the U.S. chemical industry,” Shannon says, “providing [companies] with an abundant supply of cheap feedstock.” It’s a matter of money, he explains.

Recent International Energy Agency projections place the U.S. as the world’s top oil producer by 2015—surpassing Saudi Arabia and Russia—and chemical companies are looking to capitalize on this growth. To Shannon, the influx of chemical companies in the U.S. is more than opportunistic; it’s good business. “Companies [must] think two steps ahead and consider what is going to be an advantageous place to do business now and in five to 10 years from now, as other factors impacting the industry begin to play out,” Shannon says. “When considering location, companies should assess the risk around these potential changes in the global chemicals and plastics industry dynamics as they relate to shale and other feedstock dynamics, resources, population changes and political stability.”

Shannon says the “holy grail” for companies is a site with both cheap feedstock and fast-growing demand, but today’s economy renders such a scenario impossible, which means chemical and plastics companies must weigh the pros and cons of different locations. “It’s a trade-off,” he says. Even so, he recommends that companies pay attention to prospective countries’ GDP growth. Shannon acknowledges that this is less important at the commodity end of the plastics industry—“Feedstock cost is the critical success factor here,” he says—since products can be exported from other locales. But he encourages specialty plastics companies to move as close to the product’s end user as possible.

Moving close to customers is nothing new for Prism Plastics, a Port Huron, Mich.-based plastic injection molder. The company currently boasts three U.S. facilities—two in Michigan and one in Texas—with the most recent one built in 2012. Gerry Phillips, the company’s vice president, says it selected Chesterfield, Mich., as the site of its newest expansion because of its proximity to the center of the automotive world—one of Prism’s core customer bases.

“We’re looking at a fourth facility in 2014 or 2015, and a wide combination of factors will dictate where it ends up, led by our customers’ convenience,” Phillips says. “We may put another facility in Michigan or Texas, or it could be in China or Brazil—we’re ready either way.” Phillips says there’s a lot of rationale behind his seemingly lackadaisical approach. “Our facilities are very modular, so we can build anywhere in the world if the situation called for it.”

Prism benefitted from this flexibility in 2005, when it welcomed its second facility in Harlingen, Texas. Since the company ships 80 percent of its parts from Texas to Mexico, Prism officials initially eyed Mexico for its expansion. After all, they reasoned, Mexican labor was considerably cheaper than labor in Texas. But after performing their due diligence, Phillips and his colleagues decided Texas was a better option for the growing company. “Mexico’s lower water quality and unstable power supply meant additional, ongoing costs for water treatment, tool maintenance and power-generation,” Phillips says, “and having stable materials and electricity are crucial because our facilities run 24/7.” Since Prism can’t afford downtime, Phillips explains that officials are willing to invest more during the construction phase if the ongoing savings will compensate for it. He adds that once Prism identifies the best region for a new facility, officials thoroughly evaluate the preferred location—“working to balance the best fit for our customer with the raw materials we need to be successful: power, water, logistics and people.” Prism values these long-term costs much more than one-time government incentives, Phillips maintains.

KMPG’s Shannon argues that such incentives can be rather enticing, however. He encourages plastics and chemical companies to not only seek out locations with easy access to road, rail and port facilities, but also consider regions offering tax or government incentives. Similarly look for places with easy access to environmental and regulatory permits, Shannon advises, as well as available land on existing chemical sites. “Are there pipeline networks, along with steam, gas, water and all the things needed to develop products?” he asks. If the answer is no, he says, chemical and plastics companies should look elsewhere.

On the other hand, Shannon says companies shouldn’t discount fledgling markets. What matters, he says, is that the market—established or not—is experiencing strong economic growth. “It’s important to consider that many countries may look enticing, but ultimately they may not be business-friendly environments, particularly as they relate to investments.” Also of importance, he says, is the overall ease of doing business in a certain region.

For instance, Shannon asks, how enforceable are contracts? Are companies able to trade across borders? What’s the region’s legal, political and regulatory landscape? And can subsidiaries repatriate cash to the parent company in their domestic markets?

Shannon says chemical and plastics companies should be able to answer all of these questions before relocating or expanding to a different region. After all, he explains, financial incentives matter, but thorough planning goes a long way toward ensuring a bright and successful future.

Spotlight On: Connell Brothers

Connell Brothers’ vice president of North Asia, Azita Owlia, says the company has one principle guiding every business move: be near the customers. Connell Brothers, which operates facilities in 17 Asian-Pacific countries, is currently opening eight new offices across China. Asia is a strategic location for the specialty chemicals marketer and distributer since the continent has seen strong growth in this sector.

“We firmly believe that the Asia-Pacific has been and will continue to be a major growth engine for the chemical industry worldwide,” she says. “And it will remain the most dynamic and exciting region with the presence of the No. 2 and No. 3 economies in the world—namely, China and Japan.”

Myanmar is the latest country on Connell Brothers’ radar. Owlia explains that the company recently opened a new office in the Southeast Asian nation to tap into the food, pharmaceutical and home-care markets—and bring these chemical-based products to Myanmarian consumers. “To remain the No. 1 specialty chemicals distribution company in the Asia-Pacific, we have always been guided by customer needs and a commitment to delivering the best service,” Owlia says. “This means we strive to be where the markets and where our customers are so we can serve both of them better.”