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Concerns around volatile energy and economic scenarios appears to have caused a collective pause in new chemical industry investment, according to Mark Eramo, Vice President with IHS Chemical who gave a speech at the IHS Chemical World Petrochemical Conference in Houston, the US on March 16.

During 2009-2014, energy and feedstock markets were characterized by high crude prices globally and lower US natural gas prices as a result of shale. The economy, meanwhile, was defined by strong growth in the developing world led by the "BRIC" countries – Brazil, Russia, India, and China.

"Today, those paradigms have been shattered. Crude oil prices have fallen sharply. India's economy is still growing strongly, but Russia and Brazil struggle with recession and China's economy is undergoing a number of changes, the full impact of which are still unknown," said Eramos. "Energy and economic forecasts are two basic pillars that drive decisions about how and where I'm going to invest if I'm running a chemical company. They've changed, and a reassessment of capital spending is underway."

Basic chemical capacity additions will continue to be dominated by China, but its pace will moderate during the next 10 years, according to IHS Chemical. The US will see the second-largest build up of basic chemical capacity between 2015 and 2025 in a shale-driven resurgence. Low-cost feedstocks are bringing back methanol and ethylene capacity into the US, while China is adding significant chlorine, methanol, and propylene capacity through 2025.

The Middle East will continue to add capacity, but expansions have leveled off after a surge in the 2000s. India will also add significant capacity, while Indonesia, Malaysia, and Vietnam will join the top-10 ranking of countries adding basic chemicals capacity.

IHS Chemical forecasts that demand for basic chemicals – ethylene, propylene, methanol, benzene, para-xylene, and chlorine – will grow 4% per year through 2020. Ethylene, propylene, and methanol are expected to grow at faster-than-GDP rates with more modest growth forecast for benzene, chlorine, and para-xylene.

Capacity additions during the next few years are largely set, but delays could have implications for 2020 and beyond. "Board room decisions require higher returns for approval given near term uncertainties," Eramo said. "Risk premiums have gone up, causing some to defer approvals."

Uncertainty is likely to persist until energy markets stabilize and signal more predictable outcomes. "The high level of uncertainty around energy and economic fundamentals present planners with difficult scenarios for identifying the best path forward," he added. "Investment decisions placed 'on hold' could lead to supply limitations in 2020 and beyond. If we have sustained global economic growth and accelerated demand growth along with it, you could see certain sectors facing very tight market conditions."

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