NEW YORK (ICIS)--Earnings warnings from US-based coatings companies Sherwin-Williams and PPG are shining a brighter spotlight on raw material cost inflation and supply chain challenges, especially following the impact of Hurricane Ida.
Any hope for a return to normal seasonality by Q4 2021 in many product chains has been dashed by the additional supply constraints as companies struggle to start up plants.
“All we've seen since winter storm Uri [in mid-February] was a scramble to rebuild inventories, and the consensus was that would be complete in the third or fourth quarter. Well, this is another hit, so it’s probably going to be into 2022 before things begin to return to normal,” said Kevin Swift, chief economist at the American Chemistry Council (ACC) on an ICIS podcast.
COATINGS AND SPECIALTIES TAKE
This will hit coatings and other specialty chemicals companies harder, as they source many different raw materials for the products they formulate and sell versus commodity chemicals companies, which rely on a few select feedstocks.
“Although it has yet to be fully quantified, we think Hurricane Ida likely made a difficult supply situation worse - there appears little slack in the petrochemical supply chain,” said Laurence Alexander, analyst at Jefferies, after the PPG announcement.
“We think companies such as Avient, Axalta, BASF, DuPont, 3M, Quaker Chemical, Sherwin-Williams, Trinseo and Valvoline will also likely be constrained by similar supply chain issues,” he added.
On the coatings raw materials side, as of 8 September, 58% of methylene diphenyl diisocyanate (MDI), 35% of isopropanol (IPA), 23% of n-butanol (NBA) and 23% of glycol ethers capacity in the US remained offline in the wake of Ida, according to the ICIS Live Disruptions Tracker.
Butanediol (BDO), which is used to make polyurethane surface coatings, among many other products, also has 57% of US capacity offline.
Less impacted is key coatings raw material acrylic acid with 9% of capacity offline, and titanium dioxide (TiO2) which was not directly impacted by Ida.
|US plant status relevant to coatings as of 8 Sep|
|BASF||Geismar, Louisiana||BDO, EO, isocyanates, polyols||Expected Restart|
|BASF||Geismar, Louisiana||BDO||Expected Restart||Declares FM|
|BASF||Geismar, Louisiana||Isocyanates, polyols||Expected Restart||Declares FM|
|Dow||Plaquemine, Louisiana||Ethylene, propylene, benzene, toluene, EO, glycol ethers, PE, PG, PO||Expected Restart|
|Dow||Taft, Louisiana||Ethylene, propylene, acetic acid, acrylic acid, acrylates, ethanolamines, EO, glycol ethers, LLDPE, oxo-alcohols||Shutdown|
|ExxonMobil||Baton Rouge, Louisiana||Ethylene, propylene, BD, benzene, toluene, IPA, PA, plasticizers, PE, PP, base oils||Restart|
|Rubicon||Geismar, Louisiana||MDI, polyether polyols, aniline, nitrobenzene||Shutdown|
|Shell||Geismar, Louisiana||EO, EG, glycol ethers, linear alcohols, linear olefins||Shutdown|
While raw material supply constraints from Ida will limit coatings production, demand is unlikely to wane and may even accelerate in the short term on rebuilding efforts following the storm, which not only hit Louisiana, but caused damage all along its path to the northeast US.
Weather forecasting service AccuWeather estimates $95bn in damage and economic loss from Ida, just under the $105bn-115bn in damage from Hurricane Rita in 2005. It would be the seventh costliest hurricane in terms of economic impact.
Sherwin-Williams, the world’s largest coatings company with over $18bn in 2020 sales, on 8 September lowered Q3 sales guidance to be up or down by a low-single digit percentage over the year-ago period, versus prior guidance of up by a mid-to-high single-digit percentage.
Sherwin-Williams CEO John Morikis cited “persistent and industry-wide raw material availability issues” not improving as anticipated, hindering the company’s ability to fully meet strong demand across professional architectural and industrial coatings.
The company expects raw material availability, including from the impact of Ida, to negatively impact Q3 sales in the high-single digit percentage range. This compares with prior guidance of less than the 3.5% negative impact experienced in Q2.
"At the same time, our total cost basket, including raw materials, transportation and labour, continues to move upward,” said Morikis.
In response, the company announced a surcharge of 4% in its Americas Group, effective 20 September through year end, on top of significant pricing actions already taken.
For those watching inflation gauges, the commodity chemicals price increases from Ida will clearly flow through all the way to specialties and end products.
PPG CITES WORSENING SUPPLY
PPG on 7 September announced it expects Q3 sales will be $225m-275m lower versus expectations at the start of Q3, citing increasing disruptions in commodity supplies, reductions in customer production due to shortages of parts such as semiconductors (impacting auto, appliances) and continuing logistics challenges worldwide.
On top of that, raw material inflation is trending higher than previously expected on the order of $60m-70m. Ida could bring additional supply chain effects, it noted.
PPG is also implementing price increases to offset elevated raw material costs and is seeking further hikes. It sees overall price increases of around 5% in Q3. The company also withdrew earnings guidance for Q3 and Q4.
Jefferies analyst Alexander slashed his 2021 earnings per share (EPS) estimate on PPG from $8.50 to $6.70 but pointed out that “with underlying fundamental demand trends likely intact and price increases underway, we expect a sharp recovery in earnings power in 2022”.
Insight article by Joseph Chang
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