If you want to know where an industry is headed, then just peek
inside a few checkbooks.
If companies are reining in their spending, then they might be
saving pennies for a rainy day. But when an entire sector starts
forking over unusually large amounts for expansion projects, it's
sending a crystal clear signal: Business is looking strong.
I've found one of those signals in an unlikely place...
- On March 28, energy firm
Williams Companies Inc. (NYSE:
announced $320 million in plant upgrades in order to supply Nova
Chemicals with 17,000 barrels of ethane and ethylene a day.
- The very same day,
revealed intentions to jointly develop a world-class ethylene
production plant on the Gulf Coast.
- Then, just a week later,
Westlake Chemical (NYSE:
unveiled an expansion and remodeling plan that will boost output
at its ethane "cracker" facility in Lake Charles, Louisiana, by
hundreds of millions of pounds annually.
- Just two weeks later, Brazil's firm
disclosed plans for an ethylene plant in the United States.
- Not to be outdone,
Dow Chemical (NYSE:
pledged to restart idle ethylene facilities and outlined an
entire series of ambitious petrochemical projects on the
One company upping its spending might be an isolated case. Two or
three making big investments could be coincidental. But when five
major players act in unison, it's no accident -- they're
unmistakably enthusiastic about the future.
As an investor, that message is loud and clear.
A "boring" industry that looks like a great
The production of petrochemicals is rather dull. But we come in
contact with them every day, most commonly in solvents, detergents,
adhesives, lubricants, fibers and plastic.
The most commercially important petrochemical is ethylene, which
goes into everything from plastic bags to milk jugs to PVC pipes.
When you think of the countless packages on supermarket shelves
alone, it's easy to see why global consumption of the petrochemical
exceeds well over 120 million tons annually.
So is demand for plastic containers about to take off? Not really,
although it has been rising at a steady clip. The real reason that
profits are set to boom isn't that prices are going up, it's that
costs are going down. Way down.
You see, petrochemical plants need basic cooking ingredients before
they can turn out finished goods. In Europe and Asia, most plants
use heavy feedstocks that track oil prices, like naphtha. By
contrast, U.S. facilities typically run on light feedstocks derived
from natural gas liquids (NGLs).
The development of massive shale gas reserves in the United States
has pushed natural gas prices through the floor, even as Europe's
Brent crude oil prices have blasted through $120 per barrel.
That "edge" to U.S. producers is big. Investment research firm
Alembic Global Advisors notes ethylene production now costs about
$600 per ton in the United States -- about half the cost of
The domestic petrochemical industry has been in a long slumber. But
falling costs have reawakened the sector. The projects I touched on
earlier will in some cases mark the first round of ethylene
expansion since 1995 -- more than 15 years ago.
Action to Take -->
One of the obvious beneficiaries is the aforementioned Dow
Chemical. Dow has its hands in just about everything, but I'm most
interested in Dow's dominant position in polyethylene, the world's
most commonly used plastic.
Dow's plastics unit alone brings home approximately $10 billion in
annual sales. Nearly three-fourths of that is generated in Europe,
Asia, Latin America and the Middle East. But much of the firm's
manufacturing activity takes place in the U.S. and Canada, home to
abundant low-cost natural gas feedstock.
It shouldn't be a surprise that margins have risen for seven
straight quarters... and
of this "boring" company are up 53% since August. But I think
there's more to come.
: One surprising fuel cost I'm expecting to soar is uranium. Supply
is likely to fall short of demand starting next year. And in the
next 10 years, the uranium market is facing a possible
cumulativedeficit of 500 million pounds.
Get the investment facts here
-- Nathan Slaughter
Disclosure: Neither Nathan Slaughter nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.
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