Clarification: Re-casts, replacing original ICIS petrochemical index chart with a modified version
By Nigel Davis
LONDON (ICIS)--Chemical producers began restarting production units in Texas and Louisiana earlier in September, following the devastating flooding caused by Hurricane Harvey.
Recovery from the hurricanes may appear to be progressing quickly, to some extent based on lessons learned in the past, but it is clear that it will take time for operations to get back to normal and for operating rates to climb to the levels they reached before the storm hit.
ICIS has been working with clients trying to assess the likely impact in both the short and the longer term. Its analysis indicates that Harvey related costs will be a burden on companies for months to come with severe knock-on effects down multiple supply chains.
Tragically, lives have been lost; homes and businesses have been hit hard. Tens of thousands of vehicles have been wrecked and cost estimates related to Harvey – and to Hurricane Irma in Florida – have risen sharply.
Chemical plants are designed to weather major storms and to cope with rising water levels but full re-starts will not be immediate. The output from facilities operating at high rates before the storm is likely to be hardest hit. The damage at construction sites needs to be fully assessed.
ICIS has heard that wind damage is minimal but cleanup is needed from dirt and debris washed into sites.
The number of refineries shut down due to Harvey closely parallels Hurricane Rita in September 2005, which makes it the closest indicator of what we might expect.
At that time, prices immediately increased in September and went even higher in October before beginning to decline over the next 8 to 30 months.
The wide recovery range was likely to be due to a number of factors, says ICIS senior consultant James Ray.
Production plants that were running at a capacity utilisation rate of 70% can recover much faster than those that were running at 95%. And product with 30% exports recover faster than products with virtually none because exports can be suspended until output catches up. Products where the US is heavily dependent on imports are impacted less.
So the perfect “storm” for extended supply issues after a hurricane is a product like polypropylene (PP) with high utilisation and minimal if any exports and imports.
Products where capacity utilisation was low and exports/imports higher will recover quickly.
The ICIS Purchasing Advisory Service is working with clients to help identify high-risk products and implement strategies to help mitigate current supply issues as well as future risk, says Ray.
There are many issues at play as the re-starts take hold and output is ramped up.
Those companies with plants under construction have the option of moving personnel to help with re-starts.
Those with no on-going major cap ex projects do not and are finding it hard to find contracting staff.
The delay to construction projects could be one to two months, Ray suggests.
The chart shows how the US ICIS Petrochemical Index (IPEX) – which represents a basket of 12 petrochemicals and polymer prices weighted for capacity – moved much higher immediately after hurricanes Katrina and Rita in August and the remainder of 2005. It is shown relative to a normalised index from Brent.
The IPEX, which is calculated from a January 1993 = 100 base, in normal times tends to track crude oil. But in these abnormal circumstances, the correlation between petrochemical prices and crude clearly broke and did not resume for many months.
The broken relationship after Rita is believed to be the best proxy we have for the likely impact of Harvey and to represent what is expected to be the true, meaningful impact of the hurricane on upstream petrochemical prices. In 2005, it did not apply to all chemicals and the same will be true in 2017 and 2018.
But export/import and other situations have changed. Methanol recovered quickly in 2005, for instance, at a time when US imports accounted for about 80% of demand. That is not the case today.
Propylene and polypropylene market dynamics are also very different.
Customers of the petrochemical industry will be impacted by availability and price. Some will have built – or will be seeking to build – strategic inventories. Or they will do so in the future.
Some will be looking to reformulate depending component chemicals costs and availability.
The potential impact of Harvey is significant for some who may also be looking for alternative sources of supply or the sort of relationships that will allow for them should weather-related shutdowns have such an impact in future.
ExxonMobil said on Thursday that its Baytown and Beaumont refineries had begun producing fuels at reduced rates and that its crude oil and refined product pipelines in other parts of Texas had restarted following Harvey.
The company said it was “working to restore” chemical and lubricants manufacturing operations with Baytown chemicals, Mont Belvieu plastics and Beaumont polyethylene plants back to normal.
The Baytown cracker was said to be operating at reduced rates.
“Because of our extensive planning and preparation efforts, we were able to protect the infrastructure of our manufacturing plants and are well positioned to resume operations at sites impacted by the storm in a timely fashion,” ExxonMobil Chemical Company president, Neil Chapman, said.
Also on Thursday, Dow (DowDuPont Materials Science) said that its new 1.5m tonne/year cracker and ELITE PE production plant in Freeport, Texas had started up.
“Both units will continue to ramp up through the third quarter and are expected to reach full rates in the fourth quarter of 2017,” it said.
“As we ramp these units to full production, we continue to solidify our early-mover advantage while significantly increasing our integration and growing our US production capacity,” said Jim Fitterling, chief operating officer for DowDuPont Materials Science.
Dow plans to add a further 500,000 tonnes of ethylene capacity to the Freeport cracker making it the world’s largest.
“Measured by total investment per metric ton of capacity, this new ethylene unit represents the least capital-intensive ethylene investment in the region,” it said.
Meanwhile, Chevron Phillips Chemical said that it had successfully commissioned and begun start-up of its new PE units at Old Ocean in Texas.
The company’s Baytown site, the location for its new ethane cracker, was flooded during the storm. Construction of the cracker is expected to be completed in the first quarter of next year and full production likely during the second quarter.