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The World’s Most Profitable Chemistry Lesson

You probably learned about fractional distillation in high school, but I bet your chemistry teacher never told you it could be this profitable.

This simple chemical process – which involves separating chemical compounds by their boiling point – is what’s used to break crude oil and natural gas condensate into chemical byproducts.

What most people don’t realize, though, is that the market for these chemical byproducts is just as big – and profitable – as the markets for traditional natural gas and oil.

Indeed, the U.S. chemicals industry is a $760 billion market, with 96% of all manufactured goods in some way affected by chemistry products

And it’s growing, thanks in large part to fracking.

You see, fracking has been a boon for the chemicals industry, driving down prices for essential manufacturing inputs.

For instance, the price of ethane – the key feedstock in the production of ethylene – has fallen from $0.80 a gallon a year ago to about $0.23 now. As a result, it now only costs about $200 to produce a metric ton of ethylene in the United States, compared to $1,200 in Europe. And ethylene accounts for about 40% of global chemicals trade.

Obviously, this gives U.S. chemicals manufacturers quite an advantage.

In fact, the advantage is so great that the U.S. chemicals industry has posted a relatively strong performance this year, despite the economic malaise in Europe and sluggishness in the United States and China. And it’s expected to do even better in 2013.

According to the American Chemistry Council (ACC), overall U.S. chemicals shipments are expected to grow by 9% over the next two years, rising to a total value of $794 billion in 2013 and $833 billion in 2014. Meanwhile, chemical exports grew by 1.8% in 2012 to $191 billion dollars. And they’re forecast to increase 4.7% in 2013 and another 6.2% in 2014 to $209 billion.

Spurred by these developments, manufacturers have announced more than $90 billion worth of investments in the United States to take advantage of the cheap natural gas prices and low feedstock costs.

Much of that investment is coming from foreign companies looking to level the playing field.

For example, South Africa’s Sasol Ltd. (SSL) recently announced plans to build a $14 billion gas-to-liquids plant in the United States.  And Taiwan’s Formosa Plastics has filed applications for two Texas chemical plants that proposed larger capacities than previously announced.

That means Formosa is now in competition with Dow Chemical (DOW, Exxxon Mobil (XOM), Chevron (CVX) and Phillips 66 (PSX) to build the first new U.S. ethylene plants since 2001.

Royal Dutch Shell (RDS.A, RDS.B), and Braskem of Brazil are considering investments, too.

Even Saudi Basic Industries, which has traditionally benefited from cheap supplies of Middle Eastern oil, is considering an investment in the United States. Saudi Basic, of course, is the biggest petrochemical company on the planet.

Still, U.S companies maintain a distinct advantage over their foreign competitors – one that will continue to drive profits for companies like Exxon and Dow for decades to come.

And “the chase” continues,

Jason Simpkins

Jason Simpkins

, Energy Editor

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