FocusRita: Aftermath to intensify commodity chem tightness

26 September 2005 22:56  [Source: ICIS news]

NEW YORK (ICIS news)--While Hurricane Rita was relatively mild compared to Katrina, it will further intensify restriction of commodity chemical supplies and add another blow to industry profitability in the third quarter, analysts said on Monday.

 

However, the resulting tighter market may provide a boon to earnings in the fourth quarter and beyond, they said.

 

“As Rita hit the US Gulf Coast as a category 4 hurricane, a majority of US ethylene production capacity was shuttered in preparation. As a result, Rita-related ethylene supply disruption appears to be greater than Katrina-related ethylene disruption,” said Banc of America Securities analyst Kevin McCarthy. “Resultant scarcity of supply should allow ethylene producers to hike prices and expand margins sequentially in the fourth quarter of 2005.”

 

“While Rita spared chemical and energy facilities in the Gulf Coast from further significant damage, the numerous precautionary shutdowns will exacerbate an already tight North American ethylene/polyethylene market,” said Merrill Lynch analyst Donald Carson “Given the number of Katrina-related outages, Rita shutdowns and continued transportation issues, domestic ethylene/polyethylene markets should remain sold out  heading into the fourth quarter.”

 

The September ethylene contract recently settled up 5 cents to 45.5 cents/pound ($1,002.82 or Euro830.51/tonne) while spot ethylene activity has risen to as high as 59 cents. One producer has nominated an increase of 10 cents for October to 56 cents.

 

 “With ethane-based ethylene production costs at around 44 cents/pound, producers need to sharply raise prices to restore margins,” Carson said.

 

“With 13% of North American ethylene down even before Rita, this latest blow pushes ethylene into a sold out position, a significant positive for petrochemical companies,” said Deutsche Bank Securities analyst David Begleiter.

 

While 60 to 70% of US ethylene capacity was taken off line in preparation for the storm, only about 18% fell in Rita’s path near the Texas-Louisiana border.

 

The chloralkali chain will also feel the impact of Rita. Hardest hit Lake Charles, Louisiana is home to 10% of EDC (ethylene dichloride) capacity, 11% of VCM (vinyl chloride monomer) capacity and 9% of chloralkali capacity, noted Begleiter.

By: Joseph Chang
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