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Originally fracking dates back to the 1860’s, when the world was just beginning to get a flavour for gas and oil. It was a time when American civil war veteran, Col. Edward A. L. Roberts patented an “exploding torpedo” to help him extract oil and natural gas from the geological formations around Pennsylvania.

But it wasn’t until after the Second World War that fracking was truly advanced as a way of helping the extraction of natural gas. Methods were then further developed during the OPEC oil crisis of the 1970’s, as the rising cost of oil increased research in energy production and made new extraction methods economical.

But it was George P. Mitchell who took fracking to the modern level, earning the title ‘the father of fracking’ when natural gas was successfully tapped from shale deposits in Northern Texas in the 1990’s.

Today, 41 countries have the potential to make use of this resource, although only the US, Canada, Argentina and China are currently extracting shale gas on a commercial basis. The US and Canada are the world leaders in the volume produced and the technology used. Other nations with significant deposits include South Africa, India, Mexico, Ukraine and numerous countries in Europe from Poland to Austria to France.

Many of these countries are close to starting production others are still at the exploration phase, whilst others (such as the UK), face vocal public pressure to prevent production over environmental fears.

That aside, chemical company executives and investors have their eyes are on the US and Canada and the massive competitive advantage producers there are gaining as shale gas production increases. This impact has been outlined by PriceWaterhouseCooper (PWC) in their 2012 report ‘Shale gas: Reshaping the US chemicals industry’ when it made clear the huge difference on costs that had been made, stating, “For chemical companies, the impact of shale gas has been to decrease the costs of both raw materials and energy. The price of US natural gas declined from $12.50/MBTU in 2008 to approximately $3.00/MBTU in 2012, and prices are expected to decline further … as a result of excess inventory.”

This ‘excess inventory’, however, is not stopping expansion, with the 2014 Annual Energy Outlook by the EIA reporting that U.S. shale gas production will grow from 9.7 tcf in 2012 to 19.8 tcf in 2040.

Production is increasing, because shale gas not only provides a new energy resource, but also because it can be used as a valuable feed source for numerous chemical products. For example, a new drill set up near Charleston, South Carolina, is producing natural gas that is particularly high in ethane (up to 8% by volume). A plant built nearby ‘cracks’ the ethane by breaking it down at the molecular level, turning it into ethylene. As Kevin DiGregorio, executive director of the Chemical Alliance Zone in Charleston, says, “Ethylene is used to produce all sorts of things, from the cushions we sit on to the clothes we wear. Everything that’s not wood, or maybe brick, is made with chemicals … [of which] probably 40 to 60 percent of it is made from ethylene,” DiGregorio says. “It’s very, very important to our daily lives.”

What impact this will have on the chemicals industry is not immediately clear, as the development of wholesale shale gas production is still only 20 years old, but it seems that the effect will be significant and will vary from region to region.

Whether a country has access to shale gas or not, and what type and quality the deposits are, will effect industry leaders strategies. In general though, there are thought to be three main responses to a chemicals business, hoping to survive in a shale gas world.

1. Move closer to the shale gas supply. When as much as 70% of a chemical company’s costs are made up of raw materials and energy, companies are frequently relocating to be near a regular and cheap source of shale gas. According to the MiT Technology Review from 2011 to 2014 there were almost 200 new chemical plants and upgrades made in the US as a result of shale gas investment. This included a capital outlay of $124 billion, from firms such as ExxonMobil, Chevron and Dow Chemical.
2. Import shale gas to your plant. Whilst this maybe not the most effective method, it may be a cheaper way to stay competitive than the massive cost of relocating. Naturally, transportation costs of delivering shale gas to the process point would need to be considered, but as a recent study by Stefan Guertzgen, Global Director for Industry Solution (Marketing Chemicals) at SAP notes, “…the fact that companies like (multibillion dollar chemical producer) INEOS continue to import natural gas proves there is still an overall net gain in operating their assets and serving their markets based on shale gas feedstock.”
3. Develop new processes to stay competitive. If relocating and importing shale gas is not possible, then something else must change. If not, then competitors lower feedstock and energy costs will drive prices so low that other firms will not be able to compete.

To avoid this, innovation will be necessary. As Guertzgen explains, “Brazilian-based Braskem, one of the world’s largest producers of thermoplastic resins, has developed an ethylene value chain based on readily available bio-ethanol feedstock. Also, companies in China, as well as Sasol in South Africa, seek competitiveness by leveraging advancements in methanol-to-olefin technology.”

The effect of shale gas on the global chemical industry is so huge, that not responding to its development seems no longer to be an option. As the American Chemistry Council makes clear, “American chemistry relies on abundant, affordable natural gas as a source of energy and as a raw material, or ‘feedstock’, for countless chemical products. The relatively low price of natural gas gives U.S. manufacturers an advantage over competitors in other parts of the world that rely on a more expensive oil-based feedstock.”

But still the future is never certain, and in the world of fossil fuels, that includes supplies.

In his report “Natural Gas as a Chemical Industry Fuel and Feedstock”,  Jeffrey J. Siirola of the Eastman Chemical Company questions the future of gas, stating that “[It] Depends on how long shale gas remains plentiful and whether it is wet or dry. If plentiful and wet, then the existing US ethane-based chemical industry infrastructure will remain worldcompetitive. If plentiful but dry, new  chemistries will emerge, but based on methane steam reforming syngas.”

Either way, it seems that shale gas production may be the biggest game changer in the chemical industry in a generation. Already it is transforming businesses and whole communities in America as investment and profits increase. As PWC states, “Based on industry reports, we estimate that the US chemicals industry has invested $15 billion in ethylene production, increasing capacity by 33%. As these investments take hold, yielding more supply, the United States could become a major, global, low-cost provider of energy and feedstocks to the chemicals industry.”

Guertzgen agrees that not only will this change countries, but businesses will also win and lose based on their ability to react to the ‘shale gas revolution’. As he explains, “Chemical companies that are able to assess the changing landscape and respond with innovative technologies, processes, and products will emerge as the undisputed global leaders.”

If this is true, then the further development of shale gas around the world seems certain to happen, and the ripple effect it will have on the chemicals industry is likely to be more like a tsunami.

It is a good time to make a success of a business in the chemicals industry, where “…Global market volume for chemicals will more than double in the period through 2035.” according to global strategy consultants at Roland Berger. Increasingly, daily life relies more and more on chemicals; from those that preserve our food, dye the plates we eat from, wash the plates we have eaten from and then treat the waste food we didn’t eat. There can be few industries on which modern life depends on more. So why is it so difficult to make a success from something that everyone needs so badly?

The answers to this are manifold, but include low margins, large price fluctuations, ever stricter regulation, complex logistics chains and global competition.

As SAP SE the German business consultants made clear in a recent report, “Companies in the chemical industry are facing fierce competition as they strive to drive sustainable innovation, growth, and profitability – especially after a decade of financial struggle and consolidation. And even though the future looks bright, with the highest forecasted growth rates the industry has seen in more than 20 years, there are still immense challenges.”

To help you deal with these challenges in 500 words or less, here are 5 top tips to making a success of your chemicals business.

1. Use existing assets fully. In the chemicals industry, assets are extremely capital-intensive. To not use those assets to their fullest extent would be a foolhardy business practice. Increasingly, larger and more successful firms are rethinking their plant machinery, creating long-term plans for their replacement, development and improvement.Larger firms are also beginning to value their databases more, seeing them as assets in their own right. Accurate usage of that information can lead to new co-operations in different markets or help find cheaper suppliers from new regions.

2. Sustainability. In an industry with such small margins, it is vital to utilize sustainability to maximise profits. As chemical usage increases, finding raw materials from sustainable sources will help keep costs down. It will also assist in sales, as end users become ever more conscious of buying ‘environmentally friendly’ products.Recycling waste chemicals and by-products will also give secondary revenue streams and/or lower production costs.

3. Prepare for growth. The best chemical businesses appreciate the importance of exploring new regions and markets. They are continually looking for ways to expand, by either widening their product base (perhaps by combining core-business products with other chemicals to make new products) or by moving up or down the supply ladder.It can also be useful to consider alternative uses for your products, as this can bring in customers from previously unexpected areas.

4. Supply chain flexibility. As the chemicals market is very volatile, with frequent and sometimes seemingly erratic price changes, it is important to be able to react quickly should circumstances change.This is particularly relevant as the industry is a very global one, with suppliers and end users often continents apart. Natural and political affairs can change the situation overnight, be it a natural disaster, change in legislation or a trade embargo. Being able to quickly source from new suppliers, switch to alternative materials and use different delivery systems will enable you to stay ahead of the competition.

5. Maintain talent and knowledge. Perhaps more so than most industries, the people who make up the staff in your company are a key asset. The chemicals industry is naturally technical and frequently specialised. Knowledge gained by your team is worth developing and paying a premium for to retain, as understanding your product, your markets and your contact information of potential customers and suppliers can prove the difference in making the next deal.

Clearly these five points are a simplified guideline to a complex business. Frequently it is a good idea to watch how the more successful companies operate, and then structure a business model based on their practices.

However, as these larger firms often have economies of scale in both sales and manufacturing, the smaller business must use size to its advantage by being quicker to adapt to market changes and economic conditions. It may also allow for greater specialisation, as smaller businesses can focus on the many market niches that the industry has.

Despite all these problems and the numerous unforeseeable events that will rock the industry, there is a great deal of certainty in building a business in an industry that is certain to be needed.

The UK chemicals industry is in good shape. It is a key part of the British economy, as the British Government itself acknowledges. According to the UK’s Ministry of Trade and Investment, the industry, “…provides direct employment for 214,000 people and supports several hundred thousand additional jobs throughout the economy. The industry spends in excess of £2 billion per year on new capital investment.”

The UK’s Chemicals Industry Association (the CIA) agrees, claiming the industry to be very healthy, stating, “There is much to be positive about the UK’s chemical and pharmaceutical sectors; the UK ranks 10^th globally and 4^th in Europe as a producer of chemicals and pharmaceuticals, and the industry can present a set of impressive figures, including an annual turnover of nearly £60bn.”

And yet there are problems.

Energy

The first of which is the price and supply of energy. Indeed, the UK is currently heading towards the possibility of closing factories down this winter, as energy supply might outstrip demand.

The problems have been caused by an aging generation of nuclear power stations that at present are limping on until a new breed is built. The even older generation of coal fired power stations are being hurriedly decommissioned as the UK attempts to meet its carbon emissions reduction targets, whilst gas fired power stations are turned on (assuming that Russia does start to bulldoze the pipeline from Siberia, like so much European cheese!).

As any Adam Smith knows, problems with supply and demand affect price. So it is in the UK, where the government’s Department for Energy and Climate Change, notes the high price of UK electricity in comparison to other nations in the International Energy Agency as follows; “In 2014, average UK industrial electricity prices including taxes were the fifth highest in the IEA, fourth highest in the G7, and were 28 per cent above the IEA median.”

To make matters worse, the comparison is made among nations that already have higher than world average electricity prices. The International Energy Agency being made up of 29 member states from generally free market, democratic states (Turkey, the U.S., New Zealand, Slovakia, South Korea etc), but does not include regions where energy is not a problem, such as the Middle East (with its oil) or China (with its state funded hydro-electric and cheap coal).

A recent CIA report noted that savings will be needed in future if it is to remain competitive, as “Even though the chemical sector has made 35% energy efficiency savings over the past 15-20 years, many of the ‘low-hanging fruit’ have now been picked and further savings will be more costly and disruptive to implement.”

That said, the energy crisis is beginning to see the light at the end of the tunnel, with Scott Phillips, vice president and senior analyst at Moody’s ratings agency claiming, “”We believe that widely expected [energy] tightness will be short-lived as energy efficiency gains, the roll out of offshore wind power [begins] and the return of mothballed gas plants will keep prices in check. Our view is that power prices will stay around current levels, or £48-53 per megawatt hour, through the end of the decade.”

Supply

So maybe energy will not be a major problem for the UK’s chemicals industry, but maybe supply of chemicals will. As a conference held at The University of Nottingham in 2013 observed, “A strong and robust chemical industry is reliant on its supply chain, in particular the ability to use local sources of chemicals.  Transporting and importing chemicals, particularly on large scales, is expensive and runs into regulatory difficulties.” As the post conference report goes on to note, “[there are] Already certain key chemicals, e.g. chlorine, [that] have only one supplier in the UK, whereas others such as ethylene oxide are absent entirely. ‘Onshoring’ the supply chain by reinstating the gaps and strengthening the weaker blocks in the chemical ‘building set’ should be a priority for the industry.”

This is a curious point, and one that sees how success breeds success. Having a profitable mining industry can help support a profitable chemicals raw supply industry, which funds industrial infrastructure, thus enabling a profitable chemical processing industry, encouraging R&D and a chemicals educated population, and so on. Whether ‘reinstating the gaps’ means greater UK investment or making closer ties with supplies in Europe remains to be seen. Especially as the UK has an uncertain position in the EU, whilst the government is focusing instead on easing trade restrictions, lowering taxes and is taking its part in the TTIP trade talks with North America.

Regulation

The UK often prides itself on having a robust yet fair approach to regulation, although inspections are on the increase as the public become more uncertain of the safety of some processes and products.

It is hoped by some that REACH, Europe’s standardising of chemicals regulation and policy, will help to alleviate some of the burden and double control of production and storage, but others are far more sceptical about the effectiveness of European bureaucracy.

That said, at present  the UK is ranked top within Europe and sixth globally for ‘ease of doing business’ according to a recent World Bank report, and certainly the government is keen to be seen as welcoming to business and investment. It frequently attempts to structure a very business friendly tax regime, as Callum Fuller, finanical reporter at Incisive Media says, “George Osborne [the Finance Minister] cut corporation tax by a further percentage point to 20% and introduced a variety of reliefs for small and medium sized business and the creative industries in March’s Budget. Significant progress has also been made with the introduction of revised controlled foreign company rules, tax breaks for R&D investments, and the patent box, which allows companies to pay a 10% rate on profits made from patented products.”

All this because the government knows the importance of the chemicals industry to the British economy. This especially true, as the manufacturing sector has been in decline since for generations and currently has an £81 billion trade deficit (against the chemicals industry’s £6 billion trade surplus).

The UK’s chemical sector adds £20 billion in value to the economy, a figure which the CIA hopes will double by 2030. A plausible target given that the Ministry of Trade and Investment states that, “It [the chemicals industry] has been growing rapidly at 5 per cent per annum over recent years.”

This is focused on the speciality chemicals sector which makes up 60% of trade, compared to 44% in the U.S. and 40% in Germany.

Attitude

Perhaps the best course of action for an improved chemicals industry in the UK is positivity, and a sense of focusing on how a chemicals industry can help the economy as a whole. To this end the industry is keen on self-promotion and support, for example starting a campaign called ‘Chemistry: We Mean Business’ which was formed “… to highlight why continued support for and investment in the chemistry sector is both necessary and beneficial for the UK economy.”

This positivity is a theme brought up at a recent meeting of the Chemicals Industries Association, which noted that government ministers did not want to hear a long list of ‘I wants’ and a lot of complaining about what government should or shouldn’t be doing to help business in this sector. Instead, it decided to focus on what the industry does provide and show how further support is a positive investment in the economy as whole, benefiting state coffers as well as local populations, at the same time as providing strategic resources.

It is hoped that such an approach will show not an industry that needs support, but one where the arguments and benefits of support are self-evident as a win-win situation. Given that the benefits are clear and the profits made in a stable economy real, then the future looks positive.

As the CIA makes clear, “The next few years may be rocky, but there are plenty of reasons to be optimistic about the future of chemistry in the UK.”