INSIGHT: Prolonged US chemical plant shutdowns squeeze tight markets

Author: Al Greenwood

2020/09/11

HOUSTON (ICIS)--Power outages caused by Hurricane Laura could delay start-ups at chemical plants until the end of September, long enough to squeeze several markets that are already tight.

Chemical companies began shutting down their plants along the Gulf Coast in the days before Laura made landfall on 27 August.

Laura's eye wall, the most damaging part of a hurricane, passed directly over Lake Charles, Louisiana, which is home to several chemical and polymer plants, said Entergy, the region's main power distributor.

All nine transmission lines that deliver power into Lake Charles and southwestern Louisiana were knocked out of service, Entergy said.

Given Entergy's timeline to restore power, LyondellBasell and Westlake each said that it could be late September before they could begin restarting their plants.

Another issue that could delay start-ups is manpower, said Brian Pruett, senior vice president covering polyethylene (PE) and polypropylene (PP) at Chemical Data (CDI), which is now part of ICIS.

Many plant employees cannot return to work, Pruett said.

WHAT'S IN LAKE CHARLES
Lake Charles is a petrochemical hub, containing two complexes owned by Westlake and Sasol as well as a refinery and other chemical plants.

Lake Charles makes ethylene, a building block used to make PE and monoethylene glycol (MEG). PE is a plastic used in packaging, and it was already in high demand because of the coronavirus.

MEG is used to make polyethylene terephthalate (PET), another plastic used to make packaging and beverage bottles.

Plants in Lake Charles also make propylene, a building block used to make polypropylene (PP), a plastic used to make packaging and durable goods.

Lake Charles plants make caustic soda and chlorine as well as ethylene dichloride (EDC) and vinyl chloride monomer (VCM). These chlorine derivatives are used to make polyvinyl chloride (PVC), a plastic used in construction.

Lake Charles does not make any PVC, but it ships feedstock to other plants in the US that make the plastic. Similarly, plants in Lake Charles ship MEG to those that make PET.

PE AND PP
Supplies of PE and PP were tight even before Hurricane Laura made landfall, Pruett said.

From April to July, inventories of PE fell by 565m lb (256,000 metric tonnes), he said. From June to July, PP inventories fell by 200m lb.

These are significant reductions, Pruett said. He estimates that inventories for both plastics stand at 5-6 days below normal.

"With not enough PE or PP supply to satisfy demand prior to Hurricane Laura, these markets have just become extremely tight," Pruett said.

As Hurricane Laura approached Louisiana, Pruett said that 10-15% of US PE and PP production shut down as a precaution.

Many of these plants escaped damage and are starting up.

Still, that leaves about 5-6% of PE and PP capacity that will remain down in Lake Charles for more than a month, Pruett said.

Even when power is restored, workers returning to the plants could find more extensive damage, which could keep plants down for even longer, Pruett said.

So far, Westlake, Sasol, INEOS and Chevron Phillips Chemical have declared force majeure on PE.

INEOS and Chevron Phillips do not have PE plants in Lake Charles. Chevron Phillips had shut down its plants in preparation for the storm. INEOS said hurricane preparation forced it to declare force majeure, although it did not explain how.

US export prices for PE have risen as a result of the disruptions from Laura.

For PP, INEOS and LyondellBasell declared force majeure.

CAUSTIC SODA AND PVC
Prior to Laura, caustic soda producers have lowered operating rates because of weak demand for the material, said Bill Bowen, a pricing editor at ICIS.

Caustic soda is used to produce alumina and other products for which demand has dropped because of the coronavirus.

Chlorine is produced in the same plants as caustic soda. Demand for some chlorine derivatives has also been weak because of the coronavirus, he said.

The one exception has been PVC.

Homeowners in the US took on do it yourself (DIY) projects, which caused a spike in demand for PVC, Bowen said. Demand in the US is so high, two producers, Formosa and Westlake, have eliminated exports so they can focus on the domestic market.

Hurricane Laura knocked out power at several plants that make feedstock used to produce PVC. Westlake's plants in Lake Charles provide feedstock for its PVC plants in Kentucky, Mississippi and eastern Louisiana.

Westlake declared force majeure on PVC and VCM, market sources confirmed.

These come on top of forces majeure that Formosa Plastics has declared on PVC before Laura on resin from its plants in Baton Rouge, Louisiana, and Point Comfort, Texas.

US producers and traders are discussing September spot export business at sharply higher prices, according to market sources.

MEG AND PET
MEG was already having supply issues before the hurricane because of outages.

Hurricane Laura caused even more units to shut down.

Lotte and Sasol declared force majeure on MEG. Both have plants in Lake Charles.

Indorama Ventures also declared force majeure on MEG.

In all, one-third of US MEG capacity was under force majeure in the days after the hurricane.

Spot prices for MEG have since surged.

The disruptions to MEG production are limiting supplies of the feedstock for PET companies. Because of those restrictions, DAK Americas has declared force majeure on PET, market sources said.

Before the hurricane, prices for PET in the US had been falling even amid strong demand for food packaging. Sources had said that demand would remain high through the end of September or even into October, longer than in previous years.

Additional reporting by Bill Bowen, Zachary Moore, Antoinette Smith, Luly Stephens

Insight by Al Greenwood

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