Post Hurricane Season 2008
Effect of Hurricane Season 2008 on US Petrochemical Markets
Hurricanes are nothing new to petrochemical and plastic resin asset owners. They are a consideration when making any investment in the US Gulf Coast, and hurricane season is a fundamental that is seen in many balance sheets during they third quarter of the calendar year.
Combined with the volatility that we have seen in the past few years, however, hurricanes in the 21st century can define a company’s third quarter– or fourth quarter — balance sheet.
The hurricane season of 2005 that brought Katrina and Rita ashore in Louisiana, Mississippi, Alabama and Texas won’t be forgotten soon, and preparations for the August/September storm season has been stringent ever since.
In 2005, chemical and energy markets were largely caught off-guard as to the catastrophic effect of the storm’s landfalls. Historical price spikes were seen in the base chemical markets. Crude oil futures shot to $70/bbl. Natural gas liquids (the feedstock for chemical markets) also spiked, with spot ethane jumping from 65 cents to 85 cents per gallon. Spot ethylene prices soared to 75 cents per pound, a price that has not been reached since. Ethylene and polyethylene prices saw monthly contract prices ensue unlike any ever seen – up to 10 cents per pound in a single month.
Most industry conferences in 2006 featured topics like “Lessons Learned from Katrina and Rita” … yet hurricane seasons in 2006 and 2007 were relatively quiet.
In 2008, Gustav was the first storm to pound US chemical plants, and the quick follow of Ike was reminiscent of the Katrina/Rita one-two punch.
But the economic landscape in 2008 was far different than it was in 2005. Let’s look at where the olefins and resin markets were as the 2008 hurricane season began in June.
While the markets kept an eye on storms in June and July, the price of crude oil was the real focus of manufacturers the world over. On June 1, crude oil was $127 per barrel. Natural gas was just shy of $12 per million BTUs. Ethane, one of the primary raw materials for ethylene, was $1.12 per gallon. Spot ethylene was trading at just over 60 cents per pound. June ethylene contract prices had not yet been agreed but May had settled at 65.5 cents. Spot polyethylene prices were between 70 and 80 cents, depending on the grade. Their contract prices were also not yet agreed for June. Ethylene and polyethylene contracts are frequently decided at the end of each month.
A month later, on July 1, crude oil futures were $140, natural gas was above $13 and ethane was $1.38. Spot ethylene was trading at 69 cents and spot resin prices had risen to between 80 and 90 cents. As we know, crude would ultimately reach $147 two weeks later. By this time, June ethylene contract prices were agreed at 70.5 cents and June polyethylene contract prices had also all risen 5 cents per pound.
The effect of these rising prices was depressing demand in most chemical markets, most noticeably in the inability for US resin sellers to export from the US. Domestic contract order volumes and basic spot market activity, however, stayed relatively brisk, as buyers are typically plentiful in a rising market.
And then crude prices turned around in mid-July. By August 1, crude was back down to $125, natural gas was below $10, ethane was $1.23, and spot ethylene was trading at 53 cents. Resin markets were slower to react. Buyers fled the spot market, and sellers stayed at their July price offer levels between the mid-80s and low 90s-cent range. Demand for US resin was suffering not only abroad, but right here at home. Leveraging the effect of the historical run-up in July prices during the first half of the month, July ethylene contract prices were agreed to increase a further 4 cents to 74.5 cents and resin buyers were billed for a 7-cent increase.
August was a difficult month for the ethylene and polyethylene markets. The energy and natural gas liquids markets were falling each day. Ethylene and polyethylene spot prices were in the control of the few buyers that ventured out into the markets and overall demand was depressed. Inventory was building in the chain.
At the end of August, crude oil was close to $120, natural gas was slightly above $8, ethane was $1.11 and spot ethylene was trading at 54 cents.
It was in this environment that the chemical markets received the news at the end of August that a hurricane named Gustav was headed towards the US Gulf coast and would likely make landfall in Louisiana near New Orleans.
A hurricane pointed towards either Louisiana or Texas is particularly sensitive news to companies that operate ethylene plants, known as steam crackers. Unlike refineries, of which there are more than 600 throughout the US (although the US Gulf states are home to a large portion of them), nearly all of the nation’s 42 ethylene plants are in either Texas or Louisiana. These 42 plants are near plastic resin production sites and large railcar yards that deliver nearly all of US-produced polyethylene to either ports for export or to the hundreds of resin processing plants scattered throughout the US.
Gustav made landfall on September 1st. It shut 17 of these 42 ethylene plants, which represented 38 percent of US ethylene production. Much like oil on the New York Mercantile Exchange, when ethylene began trading again, its downward trend resumed. Liquidity was low. The aftermath of Gustav for ethylene and polyethylene markets was the opposite of that seen two years earlier in 2005.
Two weeks later, Ike hit the Texas coast and closed many of the ethylene and polyethylene plants that didn’t close when Gustav hit. As the Louisiana plants struggled to restart, Texas shut theirs. When Ike made landfall in the early morning hours of Saturday September 13, more than 70 percent of US ethylene production was shut.
Unlike the Katrina/Rita experience, most plants shut well ahead of the storm’s landfall. With the exception of some sites in the Texas areas of Beaumont, Port Arthur and Orange, no one sustained significant damage.
The downward trend continued for energy. On September 15, the first business day after Ike’s landfall, the crude market dropped more than $5 to close at $95 and natural gas was unchanged at slightly above $7. Ethane slid to 71 cents. However, supply/demand trumped costs for ethylene and it traded nearly 10 cents higher than it did before Ike’s landfall. Resin buying slowed.
August contract prices for ethylene and polyethylene had not settled at the end of August, as many prepared for Gustav. Negotiations were further delayed with the approach of Ike. August ethylene contracts did not settle until October, and September settled along with them.
Early October saw some volatility in the crude market, but prices were largely range-bound in the $93 to $98 range. Ethane was around 65 cents per gallon. Spot ethylene was back to trading in the low 50s and spot polyethylene prices were largely back to 70 to 80 cents per pound range. August contracts were finally agreed for ethylene at a dramatic 8-cent decrease – the first drop the contract had seen since February – and September ethylene contracts price were simultaneously agreed to drop a further 3 ½ cents, bringing contracts to 63 cents. Polyethylene contract prices were mostly agreed to stay flat in August and drop 7 cents in September.
Gustav was over. Ethylene and polyethylene plants in Louisiana were all back and the state’s rail hub and ports were running normally. Some Texas plants were still closed by Ike, but the majority had restarted and the state’s ports and rail systems were again operational.
As we near the end of October, Ike – and hurricane season — is nearly over. And the bear market has resumed its course.
The second week in October that has brought us to new market lows – crude oil at $77, nat gas at $6.50 and spot ethylene at 42 cents. Ethylene demand was deemed to be so poor that ethane traded as low as 33 cents per gallon. Spot polyethylene trade all but stopped.
The timing of the storms made for a high-priced end to the third quarter. For ethylene and polyethylene producers, that meant that the fourth quarter began with high levels of high-priced inventory and a sharply falling market.
For buyers of polyethylene and PE-related finished goods, however, the fourth quarter will likely be the first price break they have seen in 2008.
Can the new lows seen in the upstream markets jump-start polyethylene demand in these last 10 weeks of the year to run down inventories, increase production rates and ultimately restore margins enough to erase the pain of the record high prices seen in the third quarter?
The result of the Hurricane Season of 2008 was to delay this recovery in the chain from August until October. The balance sheets of 3rd quarter will reveal the effects of record-high energy prices and will start to show the impact of this year’s hurricane season. The 4th quarter balance sheets will tell the rest of the story.
The PetroChem Wire is a daily newsletter serving the petrochemical industry. It counts every major chemical and refining company among its subscribers, as well as many major manufacturing concerns, global conglomerates, industry consultants, equity analysts and government agencies.
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The PetroChem Wire is a daily newsletter serving the petrochemical industry. It counts every major chemical and refining company among its subscribers, as well as many major manufacturing concerns, global conglomerates, industry consultants, equity analysts and government agencies.
Contact:
Kathy Hall, Executive Editor
+1 720 480 6288
kathy@petrochemwire.com
www.petrochemwire.com
Copyright 2008