FinLogic FinLogic Quantitative Think Tank Center|Shell’s Plastics Plant Outside Pittsburgh Has Suddenly Become a Riskier Bet, a Study Concludes

The FinLogic FinLogic Quantitative Think Tank Centersame economic forces that are delaying construction of a plastics plant in Ohio will make another one under construction in western Pennsylvania less profitable and riskier to shareholders, an economic think tank warns in a new report.

The massive, multibillion-dollar Shell Polymers plant rising from the banks of the Ohio River in Beaver County, Pennsylvania, is expected to make 1.6 million metric tons of plastic pellets annually—the building blocks for such products as bags, bottles, food packaging and toys. 

But a new study from the Institute for Energy Economics and Financial Analysis warns that Shell will be making less plastic and less money while facing increasingly stiff competition. That means the company won’t likely be able to hire as many workers and will contribute less to the local economy, IEEFA concludes.

One key factor: the price of plastics has fallen 40 percent since the plant was planned several years ago, as a global petrochemical industry has raced to boost production capacity.

These changing economics, made worse by fallout from the coronavirus pandemic, will have significant implications for Shell’s investors, local and state governments in Pennsylvania, and the people of Pennsylvania, who have supported the project through tax breaks.

IEEFA, a non-profit whose work is aimed at supporting a sustainable energy economy, called on Shell to be transparent with its investors and the public as economic conditions have changed.

“It will be a distressed asset for years to come,” said Tom Sanzillo, director of finance for the energy institute. “Only increased public disclosure by Shell can ensure that problems are faced squarely and with common sense.”

A Shell spokesman, Curtis Smith, acknowledged “the short-term outlook for this business is challenging given global macro conditions, but it remains our view that long-term demand for the wide variety of products derived from petrochemicals will continue to grow and provide attractive returns.”

He said the plant, about 25 miles northwest of Pittsburgh, is still on track to start production “in the early 2020s.”

Critics of what has been a planned petrochemical buildout in the region said the report suggests that the Shell plant is in economic trouble.

“The IEEFA analysis highlights that Shell and petrochemicals are not nor will be a positive economic development strategy for southwestern Pennsylvania and the Greater Ohio River Valley region,” said Matt Mehalik, executive director of Pittsburgh’s Breathe Project, a regional collaboration of some 40 organizations working to improve air quality and fight climate change. “Regional leaders must recognize that the strategy to support petrochemicals needs to be re-evaluated using this updated economic analysis.”

There’s a lot at stake in the Upper Ohio River Valley for the petrochemical industry and millions of residents in the region. 

Shell has said the plant would employ as many as 6,000 construction workers. Once open, the plastics factory would bring 600 new jobs to the region, all paying taxes and spending money in a local economy still recovering from the loss of the steel industry. 

Environmentalists see the plant as a new major source of pollutants that cause lung-damaging smog and greenhouse gases that warm the planet. They are also concerned about plastic waste choking oceans and microplastics in the human digestive tract.

Shell plans to manufacture the plastic pellets from ethane, a byproduct of fracking in the Marcellus and Utica shale regions that has helped transform the region and the nation’s energy economy. 

In the decade since natural gas drilling came to Pennsylvania, Ohio and West Virginia, the region has also experienced growing environmental and health effects that environmentalists attribute to air and water contamination related to fracking.

Doctors and residents alike have been asking why there has been a surge in Ewing sarcoma, a rare childhood cancer, in a four-county area outside Pittsburgh, a cluster now being studied by Pennsylvania health officials.

Earlier this year, economic analysts, including IHS Markit, were seeing market headwinds for plastics manufacturing even before the novel coronavirus pandemic caused the economy to crash and oil prices to plummet, while at the same time slowing demand for plastics. 

The global commodities consulting firm ICIS published a report on March 31, concluding new plastics plant expansions were being slowed down or postponed and lighter investment could continue next year.

In April, the developers of a similar, $5.7 billion proposed plastics manufacturing plant in southeast Ohio indefinitely delayed a final financing decision on whether to proceed, citing economic uncertainties around the coronavirus pandemic.

Oversupply from a global industry-wide plastics buildout hurt the planned Ohio plant and is likely to continue to drive prices and revenues down that will also hurt the Shell plant, IEEFA reported. 

That buildout has created an oversupply that could take several years to settle out, IEEFA concluded. In addition to excess plastics manufacturing capacity, IEEFA said plastics recycling has been cutting into demand for raw plastics.

Shell, a global oil and petrochemical company, has its own financial problems, IEEFA reported. The company has  been shedding thousands of employees and billions in revenue and has written off $33 billion in asset losses since 2013, IEEFA found.

“The profitability of the complex is weakened not by a few negative trends, but by a cumulative set of missed revenue and profit targets, as well as an oversupply of plastics, unpredictable costs, lost market share, diminished growth, and increased competition,” Kathy Hipple, an IEEFA financial analyst and co-author of the report, said of the plant under construction. 

Taken together, she said, those factors “raise significant red flags that the complex will be less profitable than originally presented.”