In Standard & Poor’s view, the profitability of commodity chemicals production is highly correlated
to energy and raw materials prices because these costs often make up the majority of a chemical
company’s production cost base, and competitive advantage is largely based on a company’s ability
to maintain low costs of production.
Under each of the EIA’s scenarios, WRI notes that energy
price changes due to policy vary - in some cases substantially. EIA’s modeling of
cap-and-trade legislation projects higher demand for natural gas and lower demand for petroleum
products and coal as the economy responds to the price on GHG emissions and shifts away from
Under the three EIA scenarios, natural gas prices drive energy-related costs for the 13 subsectors.
In the three scenarios, natural gas well-head prices are 4% to 25% higher relative to no policy, while coal, LPG, and residual fuel oil prices are lower relative to no policy in 2016 (2% to 8%
lower, see figure). This increase/decrease is magnified depending on carbon price projections in
each of the scenarios. Companies with fundamental dependencies on natural gas for feedstock and
fuel, such as nitrogenous fertilizer companies, and companies that use basic chemicals derived from
natural gas (such as commodity petrochemical companies) are likely to see cost increases under
the EIA’s scenarios. Across the economy, companies dependent on coal and petroleum products
are likely to switch (depending on the nature of products and ability to deploy capital) to natural
gas to reduce compliance costs, so it is also likely that natural gas will feature more prominently
in many chemicals companies’ cost structures.