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The road to recovery: Plastics supply after Hurricane Harvey

HOUSTON, September 11, 2017 (PCW) -- Hurricane Harvey was just getting started when it roared ashore at 10 pm on a Friday night near Rockport, Texas. It would spend the next five days on a meandering, destructive tour of the Texas Gulf Coast, drenching some areas with more than 50 inches of rainfall before finally accelerating to golf cart speed and exiting to the northeast. In its wake, it left a petrochemical industry in recovery mode, and a plastics industry grappling with the prospect of resin shortages.

The days since the storm have shown that polymer plants along the coast mostly escaped significant damage. In the PE market, approximately 19 billion pounds/year (or 53 million pounds/day) of capacity was taken offline because of the storm. Almost three-quarters of that capacity was restarted or in the process of restarting two weeks after landfall. One exception to the rapid recovery in PE capacity appears to be Chevron Phillips’ Cedar Bayou facility. The site experienced damaging floods as the nearby bayou crested several feet above what is considered a 500-year flood event. The plant is not expected to restart until at least November; it includes a major HDPE blow mold unit and several other units that are important sources of roto-molding and coating grades.

Supply Allocations

The immediate impact of the PE outages has been supply allocations - mostly set at 50-100% of historical volume - and higher spot prices. In specific cases where suppliers’ inventories are in worse shape, the allocations have been steeper. In the secondary market, wide spec material has been transacting at an average of 10-12 cents/lb (cpp) above pre-storm pricing, and there have been reports of producers hoarding “anything that melts” to help their prime customers through the supply crunch. Tight supply also gave PE suppliers the leverage to implement a 3 cpp increase for August, and more suppliers announced their intention to implement an addition 4 cpp increase either in mid-September or on October 1.

The outlook for PE is still coming into focus (there may be unknown problems that surface as producers throttle up their plants) but producers will spend much of September and October refilling their supply lines. Traders don’t expect to see much, if any, incremental resin before November, but December could bring a dramatically different supply balance as the weight of new plant startups is felt.

More than 3.5 million metric tons/year (7.7 billion pounds/year) of new Gulf Coast PE capacity is scheduled to come online by the end of 2017, and preliminary indications are that those startup schedules have been put off by only a matter of a few weeks. Also, NOVA is expected to wrap up major maintenance outages at its Joffre and Sarnia facilities by the end of October, and a small burst of imported resin could hit the warehouses in mid-October. Of course, that’s little comfort to procurement managers scrambling to find spare truckloads in the immediate aftermath.

Monomer Availability

One factor that does not appear to be of immediate concern for the PE market is monomer availability. While ethylene spot prices have jumped by more than 10 cpp since late July, ending the week of September 8 at 30.25 cpp, US ethylene prices remain well below international markets, and the recent run-up in ethylene prices began before Harvey’s landfall. Construction delays of new ethylene plants appear to be a bigger factor than storm-related problems at existing ones.

Turning to the PP market, there has been speculation that Harvey-related supply disruptions could linger for longer than PE. Unlike the PE industry, PP producers have no near-term supply expansions waiting in the wings, and a greater percentage of North American PP capacity was affected by Hurricane Harvey – an estimated 60% of PP capacity versus 40% for PE. On the other hand, no PP plant damage of significance has been reported, and all but a few units were restarted two weeks after Harvey’s landfall.

Propylene Supply Balance

A couple of PP suppliers have set supply allocations at 70%. Monomer supply could prove to be the main concern for the PP market. As of September 8, average polymer grade propylene spot prices were up 7 cpp from the prior month and could move higher from there; September refinery grade propylene prices have jumped as much as 11 cpp. Storm-related refinery outages could worsen a propylene supply balance that was already challenged by ongoing propane dehydrogenation (PDH) plant outages, and the general favoring of ethane for steam cracking (which yields much less byproduct propylene than cracking heavier natural gas liquids such as propane).

Additionally, a steady stream of propylene export fixtures scheduled from the Gulf has also been vying for this limited supply. If recent history is any guide, the volatility in propylene prices will crimp PP demand and invite the importation of both resin and finished goods.

Minimal PS Impact

It might be an overstatement to say that Hurricane Harvey was a non-event for the PS market, but supply impacts have been minimal as no plants were in the storm’s path. Upstream, styrene monomer units at Bayport and Texas City ran without incident during the storm, and Channelview production was restarting. As a result, concerns about monomer availability appear to be fading already. Styrene monomer spot prices peaked at 60 cpp after the storm, before pulling back into the upper 50s cpp as of September 8.

In the PVC market, some vinyl chloride monomer (VCM) production in Texas was still shut down two weeks after Harvey’s landfall, and PVC plants were running at reduced rates. However, no major PVC/VCM plant damage was reported. PVC suppliers have announced 5 cpp price increases, effective October 1. Arkema said this week there was no timeline for restarting its Crosby, Texas facility that produces organic peroxide, used in the polymerization of PVC. Arkema is the second-largest US organic peroxide producer, and the loss of this facility was expected to restrict PVC production going forward. At the same time, the outlook for PVC plumbing and conduit demand was strong because of rebuilding from Hurricanes Harvey and Irma.

Railroads in and around the areas affected by Hurricane Harvey have made major strides in their recovery in the two weeks since the storm. Union Pacific, which operates many of the rail lines in southeast Texas, said it had 2,440 miles of track affected at the height of the storm. That number had been reduced to 420 miles as of September 8. Much like the petrochemical industry, the rail infrastructure suffered minor damage, except for a few key bridges that will require more time to repair. -- David Barry

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