The greater frequency of extreme weather events presents a huge challenge for chemicals companies.
This is the first time in the history of record keeping that two Category 4 or higher hurricanes, Harvey and Irma, have struck the U.S. mainland in the same year.
“That is extraordinary by itself,” Dr Joel N. Myers, AccuWeather founder, president and chairman, said.
“And also unprecedented is that this particular storm, Irma, has sustained intensity for the longest period of time of any hurricane or typhoon in any ocean of the world since the satellite era began,” Myers said.
Lost chemicals sales
The total cost of both hurricanes is being estimated by AccuWeather at $290bn, a number that seems likely to go higher.
It is commonly argued that economic losses from any natural disaster will eventually be cancelled out by rebuilding work. GDP growth always strengthens after natural disasters, when the rebuilding work starts.
But GDP doesn’t take into account the loss of output caused by a building being knocked down, a window being broken or an uninsured home or car being submerged in water. If natural disasters were a net benefit for an economy then it would make sense to constantly blow-up buildings and get people to rebuild them. This would be the solution for every recession.
Take flood insurance and Hurricane Harvey as an example of the damage that natural disasters cause to economic output. Across the most flood-affected counties of Texas, as few as 12% of homeowners and a maximum of 42% of homeowners had flood insurance as of August 2016 (see the chart below):
Many of those who have lost their homes to the hurricane will have to devote their savings, or borrow money, to rebuild their homes. This will reduce their ability to spend on all the other things made from chemicals and polymers. Plus there is of course no guarantee that for those with home insurance, insurance companies will meet the full costs of replacement.
Chemicals companies which sell in the Hurricane Harvey region will as a result lose many millions of dollars in sales. And if as it seems likely extreme weather events occur more and more frequently, companies need to anticipate many more lost sales.
At one stage last week, Hurricane Harvey had shut down some 46% of US ethylene capacity and 36% of the country’s polyethylene (PE) capacity. But at last week’s 10th ICIS World Purchasing Conference in Boston, the US, which I attended, delegates said that refineries and chemicals plants had come on-stream a lot quicker than many people had expected.
There are too major reasons for this. Firstly, most of the plants suffered flood and not wind damage. Flood damage is a lot easier to recover from than the structural damage caused by high winds. And secondly, many refinery and chemicals companies were prepared for this disaster because the companies involved had prior experience, as they were affected by Hurricane Katrina in 2005.
But natural disasters may in the future lead to more severe supply disruptions. What if, for example, a future hurricane that hits the US Gulf Coast region causes major structural damage to chemicals plants?
The impact on pricing
Chemicals pricing has risen in the aftermath of Hurricane Harvey, and this has been the case globally and not just in the US. Asian PE and polyvinyl chloride prices were, for example, assessed higher by ICIS pricing for the week ending 8 September, partly as a result of the hurricane.
Uncertainty over pricing is another problem created by severe weather events. The Asian paraylene (PX) market serves as a good illustration of this. Lack of clarity over US production levels post-Hurricane Harvey has left Asian traders unsure over whether to take advantage of open arbitrage. It takes 45 days to ship PX from Asia to the US.
In both energy and chemicals markets, the supply shortages, price spikes and pricing volatility that will result from more frequent episodes of extreme weather are likely to cost billions of dollars.
We have historical evidence for this. Andrew Weissman, US attorney and energy markets expert, told last week’s purchasing conference that higher natural gas and electricity prices cost US companies up and down these two value chains some $250bn during the 2014 US polar vortex. The vortex involved extremely low temperatures and severe winter storms in early and late 2014.
Weissman added that attempts are being made to build extreme weather events into energy price forecasts in the US. But he admitted that this task was so complex it may not be successful.
It could instead be better to focus resources on accurately mapping to a very-localised level the impact of hurricanes, floods and winter storms. Action plans can then be built around these maps.
This is what companies such as the US-based Weather Decision Technologies (WDT) do. In this blog post, WDT details how, ahead of Hurricane Harvey, it advised oil and gas companies on moving offshore equipment, cruise liners on how to reposition their vessels and events companies on which events to cancel.
Damage to productivity
There is also the psychological effects on productivity. Anyone who has lost their home or even worse a relative or friend might not be at work for some time, and if they are at work they will not be at their best. That is assuming that they can get to work because of flooded roads and railways.
The human factor will have big implications for chemicals companies as they try to get plants back on-stream that have been shut down by hurricanes or flood. If key operations managers are not at work, restarting plants is going to be hard if not impossible.
There are then the longer term psychological effects of the trauma caused by these disasters. Chemicals companies will need to invest more in counselling and other forms of employee support to get productivity back to normal.
A higher price on carbon
Another risk is that chemicals companies are increasingly blamed by politicians and the public for greenhouse gas emissions that are thought by many scientists to be behind changes in our climate – and climate change includes more extreme weather events.
This could result in global carbon tariffs or a global carbon trading that change the competitive landscape for the chemicals industry. Smaller, less efficient companies may well struggle to survive.
There is a good argument to be made that chemicals companies are on balance good for societies and economies. How convincingly each company makes this argument could be a new form of competitive advantage.