2 Chemical Companies With a Great Advantage

Chemical companies in the United States that utilize natural gas liquids, or NGLs, as feedstock to create their products have been experiencing tremendous margin growth over the past couple of years. What makes this even more lucrative for companies like Westlake Chemical Corporation (NYS: WLK) and LyonDellBasell Industries (NYS: LYB) is that their international peers aren't enjoying the same margin expansion.

Because NGLs, such as ethane, are regionally priced, and the products they create after going through a process known as "cracking," which involves intense heat and pressure, are priced on a global level, competitive advantages can be established based on the company's location. Westlake and LyonDellBasell currently operate with $0.20 per pound advantage in the price they pay for their ethylene feedstock versus competitors in Europe and Asia. This has translated into gross margin increases for both companies of more than 87% since fiscal 2009.

These margins are predicted to remain wide until 2015-2016, when more meaningful ethylene production is expected to come on board. Until then, the supply growth of natural gas is expected to continue to outpace the demand for ethane, leaving U.S. chemical companies in a great position. NGL pipelines being built by companies like Enterprise Product Partners (NYS: EPD) could equate to even more benefits for ethylene producers. For these reasons, Dow Chemical (NYS: DOW) is beginning to convert many of its processes to ethane use.

These next few years could prove lucrative for these chemical companies, and possibly for a diversified, long-term investment portfolio if one of these companies is included.

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Taylor Muckerman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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