Winter storm impact may exceed Hurricane Harvey’s but US chemicals earnings to rise
Author: Joseph Chang
NEW YORK (ICIS)–The severe winter storm and ultra-low temperatures on the US Gulf Coast put a deep freeze on the nation’s petrochemicals sector with multiple crackers and refineries shutting down amid already tight markets.
While it will take weeks for many of the plants to restart, the impact on supply will be felt for months to come with ripple effects across the globe, tightening key markets even further.
Yet as was the case with Hurricane Harvey, the earnings impact on US chemicals producers is likely to be a net positive with higher margins ultimately outweighing the temporary loss of volumes.
As of 19 February, close to 70% of US ethylene capacity is offline because of the winter storm and freezing temperatures, along with over 80% of propylene capacity, including splitters, noted Kim Haberkost, director of olefins at Chemical Data (CDI), which is part of ICIS.
Propylene had been especially tight even before the storm, with spot prices hitting record highs.
Downstream, around 90% of polypropylene (PP) capacity is impacted, while estimates for high density polyethylene (HDPE) are near 80%.
“We will know more this weekend as things are supposed to thaw out, giving producers a chance to evaluate and restart,” said Brian Pruett, senior vice president, PE and PP, at CDI.
“Given the tightness and low inventories prior to the deep freeze, this one might be equivalent to Hurricane Harvey, and maybe even the back-to-back Rita/Katrina hurricanes in 2005,” he added.
“I expect this storm to affect supplies from our industry worse than Hurricane Harvey,” a US PE trader said.
He expects plant disruptions to last around six months amid a shortage of parts needed to repair and replace equipment.
Another source expects PP tightness to last through the first half of the year.
“Covid has already disrupted many different global supply chain components. And given that Covid is a global issue, the combined impact with the US Gulf Coast storm could end up being worse than that of Harvey,” said James Ray, ICIS vice president of consulting – Americas.
About 42% of US base oil refining capacity is confirmed offline with ExxonMobil in Baytown, Texas, and Motiva in Port Arthur, Texas, shut due to weather and HollyFrontier in Tulsa, Oklahoma, and Calumet in Shreveport, Louisiana, shut for maintenance.
“This may be worse than Harvey because all Gulf Coast refineries are impacted,” a base oils source said.
REFINERIES HOLD KEY TO PROPYLENE
How fast refineries can start up will be key in alleviating the extreme shortage in US propylene as they account for around 55% of supply. Propylene inventories started the year at 17-year lows and fell further even before the winter storm.
More than 20 US refineries were shut down or faced production and feedstock issues, according to sources, with many saying there will be weeks of repairs before many can restart.
Already there are reports of widespread equipment damage. The refineries that can restart should be starting the process next week.
Early estimates for refinery outages are 5.5m bbl/day of capacity offline.
“What we don’t know yet is how much damage is done, but the situation with refineries does not bode well for propylene. There is much more upside for pricing in the short term,” said Haberkost.
“The assumption is that some of these units will be down for longer than others because of burst pipes and damaged equipment,” she added.
And then there’s another scenario where above-ground ethylene and propylene pipelines could have leaks or failures, further delaying start-ups, she noted.
“Propylene prices are already so high, but we are projecting increases for February and March. April prices will likely come down or else demand will be driven away,” said Haberkost.
“With what we know today, ethylene prices are forecast to also decline in April, but they could come down as early as March if crackers successfully restart in the next week,” she added.
In intermediates, 100% of US capacity is offline for epichlorohydrin (ECH), propylene oxide (PO), tertiary butyl alcohol (TBA) and toluene di-isocyanate (TDI), while about 85% of EG (ethylene glycol) capacity is impacted, 88% of propylene glycols and 73% of acrylonitrile (ACN).
Plant inspections at certain intermediates units have found multiple cracked pipes that will impact the timing of restarts, sources said.
One EG producer said it expects overall Louisiana chemicals plants to come back online before those in Texas due to fewer power issues.
“A lot of supply chains were still trying to recover after impacts from Q4 so this current round of force majeures is tough to endure,” said a butanediol (BDO) buyer in the polyurethanes sector.
Nylon 6 producer AdvanSix is taking down operating rates and pulling forward planned maintenance to deal with the supply disruptions in raw material cumene, which is also downstream of propylene.
“All North American producers of cumene have declared force majeure… Given the evolving nature of the situation, we have elected to… de-rate our plants and proactively think about how we minimise disruption,” said AdvanSix CEO Erin Kane, on the company’s Q4 earnings conference call on 19 February.
Planned maintenance that would have taken place predominantly in March will be pulled forward to the back half of February, she said.
“It gives us time to assess the situation and gain some clarity on what’s going to happen,” said Kane.
The earnings impact for chemicals companies will be significant, but not necessarily negative looking out through 2021. Volume losses from shutdowns will likely be outweighed later by prolonged tightness of markets, leading to margin gains.
“At this point for the commodity guys, we view it as a potential Q1 earnings negative but pretty bullish for Q2 and delaying the expected return to balanced conditions – more than making up for the volume impact,” said Frank Mitsch, analyst at Fermium Research.
Indeed, US chemicals stocks, particularly those of commodity producers, continued to rally sharply through 19 February. Companies posting notable gains on 19 February included Dow, LyondellBasell, Olin and Trinseo.
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“We would also remind investors that this level of shutdowns is similar to what we saw during Hurricane Harvey – a period of strong outperformance for US chemical equities,” said Hassan Ahmed, analyst at Alembic Global Advisors.
“I personally think it will be a Hurricane Harvey-like situation, where the commodity-chemical names will end up benefitting from these outages – the lost earnings from lower volumes will be more than offset by pricing gains. However, specialties may take a hit,” he added.
Stock price gains have been more muted for coatings and specialty chemicals players as they will be exposed to higher raw material cost headwinds. Yet these impacts are likely to be temporary while end market demand should be robust.
“We think the coatings guys will be seeing raw materials inflation and near-term impacted demand as we progress over the next few months, but overall, this is a transitory event for them. That is, the world is not coming to an end as the bad weather is transitory. We believe the fundamental demand continues to be strong across many end markets,” said Mitsch.
RESTART AND RECOVERY ESTIMATES VARY
Estimates of restarts vary widely. A clearer picture should emerge by early next week as companies assess potential damage to equipment as the US Gulf Coast emerges from the deep freeze.
One olefins producer noted the best case scenario for restart is about a week and the worst case is several weeks, depending on how controlled the shutdowns were.
Some aromatics producers expect to restart some facilities in the next few days. Barring any complications, production could begin in the next 10-14 days, they noted.
Chlor-vinyls producers, being large consumers of electricity, are now providing their cogeneration to the public grid.
Chlor-vinyls and polyolefins producer Formosa Plastics USA, whose sites at Point Comfort, Texas and Baton Rouge, Louisiana continue to be shut down or operating at reduced capacity, said on 18 February that it is prioritising the restart of its utility plans to support power needs for local communities.
“Any power and steam production from natural gas will be directed toward electrical support for the community and the safety of our complex until the current weather emergency subsides,” said Formosa Plastics USA in a statement.
While Hurricanes typically take out a narrow swathe of production along the coast, the deep freeze has disrupted operations from Corpus Christi, Texas to Pascagoula, Mississippi.
To conduct repairs, marshal feedstocks, including air, nitrogen and other inputs and to balance the production chain, the most optimistic timeline for recovery is mid-March. More typical estimates are mid-April and later, chlor-vinyls sources said.
“People will be scrambling for the next four to six weeks to get things back to some semblance of normal,” a chemicals distributor said. https://dataviz.icis.com/views/PlantsimpactedbycoldweatherinUS/overallgraphic?:embed=y&:showVizHome=no&:host_url=https%3A%2F%2Fdataviz.icis.com%2F&:embed_code_version=3&:tabs=no&:toolbar=yes&:display_spinner=no&:showAppBanner=false&:display_count=n&:origin=viz_share_link&:loadOrderID=0
Additional reporting by Zachary Moore, Michael Sims, Bill Bowen, Antoinette Smith, Amanda Hay, Deniz Koray, Alex Snodgrass and Al Greenwood
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