Ethylene is a colorless, flammable gas is arguably the most important
petrochemical on the planet -- and much of it comes from the hurricane-stricken
Gulf Coast. Ethylene is one of the big reasons the damage
wrought by Hurricane Harvey in the chemical communities along
the Gulf of Mexico is likely to ripple through U.S. manufacturing of essential
items from milk jugs to mattresses.
“Ethylene
really is the major petrochemical that impacts the entire industry,” said
Chirag Kothari, an analyst at consultant Nexant.
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. Production
may not return to pre-storm levels until November,
according to Jefferies.
Ethylene occurs naturally -- it’s the
gas given off by fruit as it ripens. But it also lies at the heart of the $3.5
trillion global chemical industry, with factories pumping out 146 million tons
last year, Kothari said Thursday.
Processing plants
turn the chemical into polyethylene, the world’s most common
plastic that’s 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, and it becomes the polyester used in
textiles and water bottles.
Ethylene is an
ingredient in vinyl products such as PVC pipes used to bring water to homes,
life-saving medical devices and cushy sneaker soles. It helps combat global
warming with polystyrene foam insulation and lighter, fuel-saving plastic auto
parts. It helps commuters get to work safely when made into synthetic
rubber found in tires. It’s even an ingredient in house paints and chewing gum.
Man makes the chemical by starting with
oil or natural gas, then steam heating it to 1,500 degrees Fahrenheit (816
Celsius) inside massive furnaces that crack apart the molecular bonds. The
resulting ethylene gas is separated from co-products such as propylene, and
then piped to other production units for conversion to a vast array of
products.
Ethylene
and its derivatives account for about 40 percent of global chemical sales, said Hassan Ahmed, an analyst at
Alembic Global Advisors. The U.S. accounts for one of every five tons on the
market, and ethylene
plants globally were running nearly full out to meet rising demand before
Harvey, he said.
“So any little hiccup -- and this is
much beyond a hiccup -- will dramatically tighten supply-demand balances,’’
Ahmed said Thursday.
While Gulf Coast
chemical plants are designed to withstand hurricane-force winds and floods,
Harvey has thrust the industry into uncharted territory. 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.”
The sudden dearth of ethylene and other
materials is being felt up and down the supply chain. More than half of the country’s capacity for
making polyethylene plastic has been shut down in the past week. More than 60
percent of production of polypropylene -- another plastic, has been curtailed.
Chemical and plastics buyers can
operate about only two weeks before exhausting their inventories,
Jefferies analyst Laurence Alexander said in a note. Many producers are already
telling customers that they won’t be able to meet their contractual supply
obligations because of the storm.
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.
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.
Demand
for other key raw materials used to make ethylene, such as ethane and butane,
have fallen about 90 percent because of plant closures, according to PetroChemWire.
Given
the complexity of the ethylene manufacturing process, and the need to carefully
assess damages to ensure safe restarts, it may take many more weeks for
production to reach pre-Harvey levels, IHS Markit said in a report Thursday.
Jefferies analysts expect much of the lost petrochemical production will return
in October with the remainder starting up the following month.
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, Ahmed
said.
“No
one right now has a very good handle on the full extent of the damage,” Ahmed
said.
Even
if most of the chemical industry gets back on its feet in the coming weeks,
logistical challenges could still stymie the flow of supplies to customers and
create supply chain bottlenecks. Rail shipping has been constrained by train
tracks damaged by flooding or still under water.
Polypropylene
producers could face an average delay of two weeks to ship their product via
rail because of the storm, according to IHS. Some resin buyers are seeking
supplies outside the U.S. in case of an extended disruption, the consultancy
said.
Prices
for ethylene-derived products, meanwhile, have begun to show signs of the
looming shortage. Polyethylene prices globally have begun to climb on the
expectation that U.S. exports will be slashed, IHS said.
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