Ethylene production halt to impact multiple industries
As the Gulf Coast continues its recovery in the wake of Hurricane Harvey, the depth of its effects continue to manifest.
With Texas producing almost three-quarters of the U.S’s supply of ethylene—considered one of the world’s most important petrochemicals—it is becoming increasingly evident that Hurricane Harvey’s effects will be felt across the nation.
Ethylene is a ubiquitous chemical, with its byproducts being used in the production of everything from diapers, car parts, garbage bags, and food packaging, textiles, and antifreeze.
It’s is a diverse chemical ingredient that is even used on medical devices and sneaker soles.
A Ubiquitous Petrochemical
Ethylene is a key component to the $3.5 trillion global chemical industry, with 146 million tons produced in 2016 alone.
It’s easily one of the most basic chemicals in the U.S., as it is the main ingredient for making plastics essential to the country’s industrial goods.
This petrochemical and its byproducts account for 40 percent of global chemical sales, and the U.S. produces one of every five tons on the market.
Ethylene plants around the world were nearly running out to meet the rising demand that came in anticipation of Harvey.
“So any little hiccup—and this is much beyond a hiccup—will dramatically tighten supply-demand balances,” said Hassan Ahmed, Co-founder and Head of Research at Alembic Global Advisors.
An Unexpected Rare Commodity
Texas shutting down all of its plants has led to 61 percent of U.S. ethylene capacity closing and has forced the chemical industry into unknown territory.
An estimate of 300,000 tons of ethylene production has been lost due to Harvey.
Unfortunately, such a shortage is expected to happen soon considering producers can only be offline for two weeks before using up all of their inventory.
Impacting Supply Chain Flow
Additionally, the effects of the sudden deficit of ethylene and its byproduct have begun to spread.
“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, Partner at Vertical Research Partners.
Many producers have had no other option but to inform their customers that they will not be able to meet their contractual supply obligations due to the storm curtailing the production of other plastic materials that source from ethylene.
Formosa Plastics Corporation, for example, shut down its ethylene and plastics plants in Point Comfort, Texas before the storm.
As of August 30, they announced that they would be unable to meet their contractual commitments for PVC, polypropylene, and polyethylene.
With train tracks flooded, rail shipping has been constrained. This means polypropylene producers are looking to face an average delay of two weeks to ship their product by rail.
Companies in need of supply have begun seeking outside the U.S. to prepare for a potential extended disruption.
Chaos Across Industries
“No one right now has a very good handle on the full extent of the damage,” added Ahmed.
While it may be too early to know how much damage the hurricane caused to plants along the Gulf Coast, its impact on other industries can already be seen.
Demand for natural gas has dropped because of the high amount of chemical production being shut down for an uncertain amount of time.
Producers like Dow Chemical Company source from natural gas to fuel its cracking furnaces and other equipment. The company also use natural gas for its production of ethylene.
In the wake of Harvey, demand for gas curtailed by over five billion cubic feet per day, which is equal to almost eight percent of the country’s average consumption by this time of year.
Demand for ethane and butane—two key materials used to make ethylene—has also dropped by about 90 percent as a result of plant closures.
If manufacturers plan on searching outside the U.S. to prevent even longer delays in throughput, they should prepare to spend more as markets outside the country have spiked their polyethylene prices in anticipation of the looming shortage.
The climb in polyethylene prices will likely cause a ripple effect of spiking prices leading back to the consumer.
Recovering after Harvey
The process of manufacturing ethylene is complex and requires a safe environment. Plants also need to be carefully evaluated for damages. With them still being shut down it could take weeks before they fully recover.
Even then, logistics will need to be worked out to transition the flow of supply back to normal while avoiding a bottleneck supply chain.
Nonetheless, efforts to recover in the weeks after Harvey continue across the Gulf Coast. Time is the biggest component of this process as much work lies ahead before plants can get back to pre-Harvey levels.
