170910012158-hurricane-irma-john-hines-intv-00002804By John Richardson

The greater frequency of extreme weather events presents a huge challenge for chemicals companies.

Take Hurricane Harvey and Hurricane Irma as the most obvious current examples. Weather forecasting service AccuWeather writes in this article:

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):

Insurance-Aug17

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.

Supply disruptions

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.

PREVIOUS POST

China's War On Air Pollution Causes Major Chemicals Shortages

05/09/2017

By John Richardson CHINA is quite literally going to war against air pollution a...

Learn more
NEXT POST

China And Aramco IPO: Win, Wins From A Closer Relationship

13/09/2017

By John Richardson NO SMOKE without fire? Perhaps, as there more and more report...

Learn more
More posts
BASF’s shocking Q2 results should have been no shock at all
09/07/2019

y John Richardson NOBODY should be surprised by the BASF results for Q1 2019 where, on a year-on-yea...

Read
Multiple trade disputes and the risks for the US PE industry
03/07/2019

By John Richardson FALLING out with a trading partner as big as China is problematic enough. But the...

Read
China PE overstocking at nearly a million tonnes as demand weakens, competition intensifies
02/07/2019

By John Richardson MEASURING petrochemicals and polymer inventory levels in China with any reasonabl...

Read
China petrochemicals recovery on G20 trade war progress will be shortlived
30/06/2019

By John Richardson China petrochemical and polymer price spreads over naphtha feedstock costs will r...

Read
President Trump’s Vietnam warning threatens more polyethylene disruptions
27/06/2019

Just to stress  that, as always, what follows are my own personal views and not those of ICIS By Jo...

Read
US LLDPE imports and the impact on European petrochemicals
26/06/2019

  By John Richardson EUROPEAN linear-low density polyethylene (LLDPE) markets have yet to feel ...

Read
Southeast Asia PE spreads further underline weak demand, but trade talks promise rebound
25/06/2019

By John Richardson THE GOOD news today is that the US and China have agreed to resume trade talks. P...

Read
Global polyethylene: Supply is not the problem, it is demand
24/06/2019

By John Richardson WHEN people talk about supply it is very often because it is much easier to quant...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more