From diapers to tires, Hurricane Harvey plays havoc with US industry

September 5, 2017

Few people care about ethylene. Many have probably never heard of it.

As it turns out, this colorless, flammable gas is arguably the world’s most important petrochemical – with worldwide production exceeding more than 150 million tons – more than any other organic compound. Unfortunately, much of the US manufacture of ethylene is situated in the hurricane-stricken Gulf Coast.

Ethylene is the foundation for making plastics essential to US consumer and industrial goods, feeding into car parts used by Detroit and diapers sold by Wal-Mart Stores.  With Harvey’s floods shutting down almost all the state’s plants, 61 per cent of US ethylene capacity has been closed, according to PetroChemWire.

“Ethylene really is the major petrochemical that impacts the entire industry,” said Chirag Kothari, an analyst at consultant Nexant.

Harvey first made landfall near Corpus Christi as a category 4 hurricane late on Aug. 25 before moving east, soaking the Houston area with as much as 132 cm of rain. Five days later it picked up more water from the Gulf of Mexico and headed to Louisiana.

The Gulf Coast is home to 25{bfa08a400c7550404055ff04715e84c9172815d33c25eb3b84e230636ecdc007} of U.S. refinery capacity and more than half the country’s production of a number of downstream chemicals. Many of those plants were taken off-line due to the storm. The two largest refineries in the country – Saudi Aramco in Port Arthur and Exxon Mobil in Baytown were shut down. Chevron, Royal Dutch Shell, Valero Energy, Citgo Petroleum, and Flint Hills Resources also shut refineries, including some with on-site chemical units.

Closures affected a wide swath of the Gulf’s basic and intermediate chemical plants from Corpus Christi to the Louisiana border. Dow Chemical, Ineos, Invista, Ascend Performance Materials, Oxychem, and Formosa Plastics were among those reporting site shutdowns. LyondellBasell and Huntsman each shut down six sites. As the week wore on, Covestro, Linde, and TPC group also reported taking plants off-line.

Texas alone produces nearly three quarters of the country’s supply of one of the most basic chemical building blocks.

Ethylene is the foundation for making plastics essential to goods from car parts to nappies.

Ethylene is an ingredient in vinyl products such as PVC pipes, life-saving medical devices and sneaker soles. It is used to make polystyrene foam insulation, car parts, synthetic rubber for tyres, even in house paint and chewing gum.

Ethylene and its derivatives account for about 40 per cent of global chemical sales, said Hassan Ahmed, an analyst at Alembic Global Advisers. Before Harvey, ethylene plants globally were running at nearly full speed to meet rising demand, he said.

“So any little hiccup — and this is much beyond a hiccup — will dramatically tighten supply-demand balances,” Ahmed said.

Kevin McCarthy, an equity analyst at Vertical Research Partners, said, “the combination of Harvey’s path, duration and rainfall total is wreaking havoc with the supply side of the US chemicals industry on an unprecedented scale.

“We certainly haven’t seen anything quite like it in our 18 years of following chemical stocks on Wall Street.”

The sudden dearth of ethylene and other materials is being felt up and down the supply chain. More than half of the US’ capacity for making polyethylene plastic has been shut down in the past week. More than 60 per cent of production of polypropylene — another plastic — has been curtailed.

With so much chemical production in the region out of commission, demand for natural gas has plummeted. Producers such as Dow Chemical use gas as a raw material for ethylene and also to power their cracking furnaces and other equipment. With widespread electricity outages also reducing gas use, demand for gas fell by nearly 8 per cent of the country’s normal consumption at this time of year.

Given the complexity of the ethylene manufacturing process, and the need to carefully assess damage to ensure safe restarts, it may take many more weeks for production to reach pre-Harvey levels, IHS Markit said in a report.

Companies won’t know for sure whether their plants were damaged until they try to restart them, perhaps only then finding that flood waters have ruined a key piece of equipment, Ahmed said.

“No one right now has a very good handle on the full extent of the damage.” Bloomberg