The unprecedented destruction wrought by Hurricane Harvey will impact the US economy in ways may not be immediately apparent. Until recently, coverage of the storm's impact has focused on property damage and the impact on the energy industry. But in a story published Friday, Bloomberg explains the devastating impact the storm has had on Texas’s chemicals industry, which is already causing supply-chain headaches for American manufacturers who're struggling to source the chemicals required to produce plastics and other components used in everything from milk jugs to car parts.
Indeed, if Texas's chemicals plants are closed for an extended period, production at a potentially huge number of American manufacturers to grind to a halt.
More than 60% of the US’s production capacity for ethylene – one of the most important chemical building blocks for American manufacturers – has been taken offline by the storm, a development that could ripple across the US manufacturing industry.
“Texas alone produces nearly three quarters of the country’s supply of one of the most basic chemical building blocks. Ethylene is the foundation for making plastics essential to U.S. consumer and industrial goods, feeding into car parts used by Detroit and diapers sold by Wal-Mart Stores Inc.
With Harvey’s floods shutting down almost all the state’s plants, 61 percent of U.S. ethylene capacity has been closed, according to PetroChemWire.”
Ethylene, the gas given off by fruit as it ripens, occurs naturally, but it’s also a crucial product of the $3.5 trillion global chemical industry, with factories pumping out 146 million tons last year. Processing plants turn the chemical into polyethylene, the world’s most common plastic, which is used in garbage bags and food packaging. When transformed into ethylene glycol, it’s the antifreeze that keeps engines and airplane wings from freezing in winter. It’s used to make polyester for both textiles and water bottles. Ethylene is an ingredient in vinyl products such as PVC pipes, life-saving medical devices and sneaker soles. It helps combat global warming with polystyrene foam insulation and lighter, fuel-saving plastic auto parts. It’s used to make the synthetic rubber found in tires. It’s even an ingredient in house paints and chewing gum.
Ethylene and its derivatives account for about 40 percent of global chemical sales, according to Hassan Ahmed, an analyst at Alembic Global Advisors. And the Gulf Coast is a crucial player in the global market: US production accounts for one of every five tons on the market. International ethylene plants were running nearly full out to meet rising demand before Harvey.
And while Gulf Coast chemical plants are designed to withstand hurricane-force winds and floods, the “1-in-1,000-year flooding” unleashed by Harvey has forced many to shut down. The damage to the region’s chemicals industry is perhaps best embodied by the Arkema plant in Crosby, TX, which experienced two explosions Thursday that the company said it was powerless to prevent.
Another analyst quoted by Bloomberg said he hasn’t seen anything like this in his 18 years of following chemical stocks.
“Ethylene producers hit by the storm along the Texas Gulf Coast include LyondellBasell Industries NV at the southern end in Corpus Christi, Exxon Mobil Corp. in Baytown outside Houston, and Chevron Phillips Chemical Co. in Port Arthur by the Louisiana border.
‘The combination of Harvey’s path, duration and rainfall total is wreaking havoc with the supply side of the U.S. chemicals industry on an unprecedented scale,’ said Kevin McCarthy, an equity analyst at Vertical Research Partners. ‘We certainly haven’t seen anything quite like it in our 18 years of following chemical stocks on Wall Street.’”
Adding to the difficulties for American manufacturers, more than 60% of production capacity for polypropylene, another widely used chemical, has been taken offline. Chemical and plastics buyers can’t operate for long without replenishing their inventory, and some producers are already telling customers that they won’t be able to meet their contractual supply obligations because of the storm. According to Bloomberg, Formosa Plastics Corp., which shut its Point Comfort, Texas, ethylene and plastics plants ahead of the storm, said Aug. 30 that it won’t be able to meet commitments for polyethylene, polypropylene and PVC.
These supply-chain disruptions have contributed to the drop in demand for natural gas, which is used by plastics makers during the refining process.
“With so much chemical production in the region out of commission, demand for natural gas has plummeted. Producers such as Dow Chemical Co. use gas as a raw material for ethylene and also to power their massive cracking furnaces and other equipment. Added to the impact from widespread electricity outages, demand for gas fell by more than 5 billion cubic feet a day, according to Citigroup Inc. That’s equal to nearly 8 percent of the country’s normal consumption this time of year.”
Meanwhile, demand for ethane and butane, gases necessary for the production of ethylene and other chemicals, have fallen about 90 percent because of plant closures, according to PetroChemWire.
Because of the complexity of chemical manufacturers’ infrastructure the need to carefully assess damages – or potentially risk an Arkema-style disaster – could forestall plant reopenings for weeks, if not months. What’s worse, companies won’t know for sure whether their plants were damaged until they try to restart them, perhaps only then finding that flood waters have ruined a key piece of equipment.
“No one right now has a very good handle on the full extent of the damage,” Ahmed said.
And even if producers manage to get their plants online sooner than anticipated, other logistical challenges – like damaged train tracks – could prevent them from delivering their products to buyers.
According to IHS, polypropylene producers could face an average delay of two weeks to ship their product via rail because of the storm. Some buyers are seeking supplies outside the US in case of an extended disruption.
Already, the economic damage wrought by Harvey has surpassed even the direst forecasts. If US manufacturers are forced to halt production on such a wide range of products for an extended period, maybe Goldman and Citi’s projections that the storm will negativelly impact GDP during the third and fourth quarter might actually be conservative.
via http://ift.tt/2gxnf6t Tyler Durden