Hurricane Harvey Economic Risks Increase As Cost Estimates Soar

China, Company Strategy, Economics, Fibre Intermediates, Oil & Gas, Olefins, Polyolefins, Styrenics, US

1024px-Texas_Army_National_Guard_Hurricane_Harvey_ResponseBy John Richardson

AGAIN, it’s the human cost that of course matters the most – and let’s hope it doesn’t keep on climbing. As of earlier today, the number of lives lost as a result of Hurricane Harvey had risen to 44. My sympathies and thoughts go out to all the families involved.

But chemicals and other companies have to also think about the economic impact. The top line is that according to Accuweather, the US weather forecasting service, the cost of Hurricane Harvey will “reach $190 billion, or one percent of the nation’s gross domestic product (GDP), countering the expected growth in the economy for the rest of this year”. This would make it the most costly natural disaster in US history.

What is also crucial to grasp is the very possibly flawed economic logic behind widespread arguments that Hurricane Harvey will in the long run actually boost the US economy. The thinking goes that all the rebuilding work will eventually add to GDP. But as economist Caroline Baum writes in this article, quoting a 19th century French economist:

In Chapter I, “The Broken Window,” Bastiat relates the story of a shopkeeper, whose son accidentally breaks a store window. The shopkeeper has to pay six francs to the glazier to replace it. The glazier now has six francs to spend on something else. And so on.

What is unseen is what the shopkeeper would have done with the six francs if he didn’t have to replace the window.

She also makes what seems to me a solid argument that a demand-side response to the disaster might actually make things worse. If the Fed were to say delay its next interest-rate rise this might add to inflationary pressures created by the supply shortages resulting from the hurricane.  One of the most notable supply shortages is in gasoline as one third of US refining capacity has been affected by Hurricane Harvey.

The contagion effect

I really hope I am wrong on this, but, as I discussed on Wednesday, companies need to plan for a contagion effect. You need to build scenarios where the following occurs:

  • The economic damage caused by Hurricane Harvey combines with a failure by the Trump administration to achieve meaningful tax reform and infrastructure spending by the end of this year. The understandable distraction of having to deal with Hurricane Harvey helps derail the White House efforts. The end-result is that overvalued global stock markets suffer steep declines.
  • This occurs as consensus is reached that China has entered a new lending slowdown. China’s credit cycles have a huge bearing on global economic growth. The data from China is already telling us that Beijing has launched a major new cycle of credit tightening. This adds to equity-market sell-offs. Oil markets, which have already weakened because of Hurricane Harvey, decline much further as China is the world’s most important source of incremental demand growth.

Chemicals and polymers pricing has of course already started to go because of the short term because of the loss of US Gulf Coast supply.  As ICIS news writes:

Harvey and its aftermath will take out an estimated 46% of total US ethylene capacity and 36% of polyethylene (PE) capacity offline for an uncertain period of time, according to Kevin McCarthy, analyst at Vertical Research.

Asian pricing of styrene monomer and mono-ethylene has surged on anticipation of tighter supply resulting from the hurricane.

Specifically in the China PE market this week, sentiment and so pricing has picked up on the anticipation that new US PE supply will be delayed by the hurricane. It had been though that supply from the new cracker complexes would start arriving in China in Q4 this year. But now the expectation is that this will be pushed back into 2018.

But higher chemicals pricing might well not be sustainable if my worst-case scenario comes true: Hurricane Harvey being the catalyst for a new global recession.

As I said, I very much hope I am wrong. But putting the right planning and systems in place that take into account this worst-case scenario would, I think, make a lot of sense for chemicals companies.

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