Analysis: Cheap shale gas gives impetus to bioplastics growth

FRANKFURT Fri Dec 7, 2012 10:06am EST

FRANKFURT (Reuters) - Makers of chemicals and plastics from plant matter are emerging as unlikely beneficiaries of the abundance of U.S. shale gas, which is shaking up the global petrochemical industry.

The shale gas boom means energy companies in the United States are boosting their capacity to turn cheap gas into ethylene, a basic hydrocarbon used to make solvents, plastics and detergents.

More complex hydrocarbons derived from crude oil, however, are becoming more expensive and their supply more volatile, adding urgency to a drive by specialty chemical companies to make everyday materials such as synthetic rubber, insulation foam and diaper absorbents from plant matter.

Major chemical companies such as BASF (BASFn.DE), Mitsubishi Chemical (4188.T), Lanxess (LXSG.DE) and Solvay (SOLB.BR) have teamed up with biotech firms to work on new strains of bacteria and fungi that can turn plant material into chemical building blocks.

Morgan Stanley said the global bioplastics market could grow by as much as 40 percent per year on average through 2020 to become a $30 billion industry, in the "bull-case" scenario.

While concern about oil scarcity and consumer demand for renewable products have been long-term drivers of bioplastics research, production of shale gas by hydraulic fracturing (fracking) has added to the investment case.

CRACKING UP

To make the best of the 50 percent plunge in U.S. natural gas prices over the past four years, the U.S. petrochemical industry is building new steam crackers - giant facilities that convert gas into ethylene.

The American Fuel & Petrochemical Manufacturers association cited estimates that ethylene capacity could expand by 30 percent by 2017 and keep on growing.

That puts steam crackers that feed on naphtha, a distillate of more expensive crude oil, at a disadvantage.

Naphtha crackers are by far the main contributors of heavier petrochemicals such as propylene or butadiene, which have more carbon atoms per molecule than ethylene.

But more than half of what naphtha crackers churn out is ethylene. When the product is made more cheaply elsewhere, cracking naphtha becomes a less profitable business.

"A continued shift to ethane cracking will lead to an ongoing shortage of higher carbon chemicals such as propylene or butadiene," Morgan Stanley analysts wrote in a report earlier this year.

"This environment is likely also to be supportive of renewable chemistry economics," they added.

The availability of heavier petrochemical precursors has become a major concern among procurement departments of European specialty chemicals makers.

German synthetic-rubber maker Lanxess, the world's largest consumer of butadiene, is feeling the pinch.

"We expect that butadiene prices will remain volatile at high levels. But one should take into account that higher butadiene prices will encourage alternative technologies," Lanxess Chief Executive Axel Heitmann said.

He added that bio-based materials were a "strategic project for us to have a second source" and also pointed to efforts to develop dedicated butadiene production from natural gas.

Last year, Lanxess secured a stake in U.S. biotech group Gevo (GEVO.O), which is working to ferment sugar into a type of four-carbon alcohol that can be further processed into butadiene.

In 2009 ethylene cost about 70 percent more per metric ton than butadiene, but it has become about 30 percent cheaper than butadiene this year, according to Kepler Capital Markets.

Over the next four years, the main impetus for an increase in bioplastics production will have nothing to do with shale gas. Instead it will be driven by Coca-Cola's (KO.N) aim to switch to a renewable, plant-based bottle from the ethylene that goes into PET plastics.

But over the long-term, the predominant push will be to develop bio-based substitutes for heavier, oil-based feedstocks such as propylene, butadiene or benzene. Almost all of the commercial development projects currently under way - dozens overall - are targeting these substances.

Analysts say that while consumers tend to prefer renewable-labeled goods, they will pay little more than the price of petroleum-based equivalents. That makes production costs relative to the petrochemicals industry the main yardstick.

FOOD VS FUEL

To drive down costs, bioplastics developers are riding the coattails of the booming biofuels industry, relying on enzymes already developed by companies such as Novozymes (NZYMb.CO) and DuPont (DD.N) to break starch into sugars.

These sugars, rather than being fermented into ethanol fuel, can be used to feed microorganisms bred to churn out the chemical building blocks used to produce plastics.

For now, bioplastics makers are hoping to dodge a food-versus-fuel controversy that has troubled the biofuels industry.

The chief executive of BASF, which this year entered an alliance to make superabsorbents for diapers from renewables, has said the farmland acreage claimed is negligible relative to the needs of biofuel production.

Both industries eagerly await advances in the enzymes industry to turn cellulose and wood from agricultural waste into fermentable carbohydrates to defuse the debate.

Steady progress in bioengineering over the past decade has fanned hopes that bioplastics can become cost-competitive with the petrochemicals sector, which had a 50-year head start.

Novozymes, for instance, has had annual productivity gains of 5 to 7 percent over 12 years of making enzymes from ever better strains of bacteria. That could be an indication of future advances in biochemicals, said executive board member Thomas Videbaek.

The flurry of research activity by specialty chemical makers shows a willingness to take that long-term bet.

"It's a trend that will continue for decades. And the big chemical firms are planning decades in advance," Kepler Capital Markets analyst Markus Mayer said.

(editing by Jane Baird)