Harvey Causing "Unprecedented" Disruptions To Supplies Of "Essential" Chemicals

Tyler Durden's picture

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.
 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
ET's picture

Rising consumer prices and higher federal and private debt will make Gold and Silver soar to Pluto.

Add unanticipated deficit spending from War and Gold and Silver will go outside the Solar System.

38BWD22's picture

 

 

All over the USA (and much of the world) NO ONE wants to hold inventory anymore.

 

EDIT:

Palladium (a catalyst) is up $43 per oz today.  Platinum is used in refineries and chemical plants, I do not know if Pd (a PM with similar chemical properties to Pt) is, but Pd up $43 is a huge move for a traded physical commodity.

 

The Cooler King's picture

I've got one word 4 u...

 

PLASTICS!

Déjà view's picture

No deposit...no return...

Strip mine mountain of trash for plastic off U.S. 90 between I-610 & Sam Houston East...probably highest point in Harris County...

tmosley's picture

Fantasy from a delusional retard who thinks stamp collections are the best way to move value across borders.

therover's picture

Ever watch the movie The Accountant ?

What did he take when he was bugging out of his Panamerica Airstream ? A fucking collectible. That ain't fiction brother.

 

 

Jack's Raging Bile Duct's picture

You better hope not. PMs are insurance and a store of value--not a lottery ticket. It's like a firearm. Great to have, but better to avoid situations when you'll need to use it.

VWAndy's picture

BS this country is not set up like Bloomturd suggests in this.

Murderin' Murphy's picture

I work for a third party logistics company that handles the transportation for the largest chem. company in the world. I'm in the railroad transportation department and currently things are fucked. Embargos won't be lifted until the end of next week, the earliest. The KCS railroad alone has over 6,000 rail cars on hold in an around Houston. 

jamesmmu's picture

BREAKING:  Mike Cernovich’s Sources: President Trump Cut Off From Outside Contacts – John Bolton Turned Away.

http://investmentwatchblog.com/breaking-mike-cernovichs-sources-presiden...

marathonman's picture

Gasoline availability is already a bit spotty.  If gasoline hits over $3/gallon - the recession will begin in earnest despite the broken windows from Hurrican Harvey.

dark pools of soros's picture

there is so much shit in stores that aint selling we can go 10 years without new stuff before we run out... where is all the crap from the closed Sears and Kmarts?

GotAFriendInBen's picture

Gas skyrocketing

Everything else to follow

Harvey's giving the inflation Fed  wants and a whole lot  more

Harvey for Fed Chair

Didn't print a single nickel

 


The Cooler King's picture

COSTCO gasoline $2.13 a gallon ~ Monday (bought 72 gallons)

TODAY ~ $2.45 a gallon

Nobody For President's picture

$3.03 a gallon to $3.13 overnite in N CA boonies...

(We're always pretty much the highest in lower 48 CONUS.)

20-20 Hindsight's picture

Is this the bleak swan that no one saw coming?

insanelysane's picture

No.  The economy is not supported by manufacturing.  This is like when you go and pull all the paper currency out of your pocket and some change falls out and drops down a drain.

Herodotus's picture

We can easily import the needed chemicals from Russia.

metanoic's picture

As long as Pakistan can still get the chemicals they need to process all the opium coming out of Afghanistan there's no problem.

Horse Pizzle's picture

Milk jugs and tampon inserters.

behind the curtain's picture

Less plastic .. why is this a problem again?

insanelysane's picture

Why do I think that capitalism is going to solve this "problem."

NickPeeMe's picture

Ridiculous. that would be like me paying Trumptards to stop being stupid. They would take the money but remain stupid. Is it possible anybody thinks this works?

Nobody For President's picture

So this means the market tanks, right?

 

Handful of Dust's picture

USPS is just getting cranked up in the Houston area. Massive delays. I bought some stuff from Amazon Prime and it was delayed several extra days since it went thru Houston.

 

 

Cardinal Fang's picture

I'm in the northeast and the railroad tank cars on the local freight line came to a stop at a place I have never seen them stop. Just halted in the middle of the line.

As I was contemplating this, a vision of a dispatcher trying frantically to figure out where to send the commodity in another direction to the highest bidder.

My guess is that it is going to be tough shit for the Canadians, that train ain't heading north any more.

hardcleareye's picture

This should be interesting to watch unfold.....

As I was reading this article I was hearing Joe Tainter's boring voice describe....Collapse of Complex Systems/Societies????

 

https://www.youtube.com/watch?v=G0R09YzyuCI