Harvey's Made the World's Most Important Chemical a Rare Commodity
1
September, 2017
Few
Americans care about ethylene. Many have probably never heard of it.
As
it turns out, this colorless, flammable gas is arguably the most
important petrochemical on the planet -- and much of it comes from
the hurricane-stricken Gulf Coast. Ethylene is one of the big reasons
the damage wrought by Hurricane Harvey in the chemical communities
along the Gulf is likely to ripple through U.S. manufacturing of
essential items from milk jugs to mattresses.
“Ethylene
really is the major petrochemical that impacts the entire industry,”
said Chirag Kothari, an analyst at consultant Nexant.
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 U.S. consumer and
industrial goods, feeding into car parts used by Detroit and diapers
sold by Wal-Mart Stores Inc.
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With
Harvey’s floods shutting down almost all the state’s plants, 61
percent of U.S. ethylene capacity has been closed, according to
PetroChemWire.
Ethylene
occurs naturally -- it’s the gas given off by fruit as it ripens.
But it also lies at the heart of the $3.5 trillion global chemical
industry, with factories pumping out 146 million tons last year,
Kothari said Thursday.
Processing
plants turn the chemical into polyethylene, the world’s most common
plastic that’s used in garbage bags and food packaging. When
transformed into ethylene glycol, it’s the antifreeze that keeps
engines and airplane wings from freezing in winter, and it also
becomes the polyester used in textiles and water bottles.
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Ethylene
is an ingredient in vinyl products such as PVC pipes used to bring
water to homes, life-saving medical devices and cushy sneaker soles.
It helps combat global warming with polystyrene foam insulation and
lighter, fuel-saving plastic auto parts . It helps commuters get to
work safely when made into synthetic rubber found in tires. It’s
even an ingredient in house paints and chewing gum.
Man
makes the chemical by starting with oil or natural gas, then steam
heating it to 1,500 degrees Fahrenheit (816 Celsius) inside massive
furnaces that crack apart the molecular bonds. The resulting ethylene
gas is separated from co-products such as propylene, and then piped
to other production units for conversion to a vast array of products.
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Ethylene
and its derivatives account for about 40 percent of global chemical
sales, said Hassan Ahmed, an analyst at Alembic Global Advisors. The
U.S. accounts for one of every five tons on the market, and ethylene
plants globally were running nearly full out to meet rising demand
before Harvey, he said.
“So
any little hiccup -- and this is much beyond a hiccup -- will
dramatically tighten supply-demand balances,’’ Ahmed said
Thursday.
While
Gulf Coast chemical plants are designed to withstand hurricane-force
winds and floods, Harvey has thrust the industry into uncharted
territory. Ethylene producers hit by the storm along the Texas Gulf
Coast include LyondellBasell Industries NV at the southern end in
Corpus Christi, Exxon Mobil Corp. in Baytown outside Houston, and
Chevron Phillips Chemical Co. in Port Arthur by the Louisiana border.
Market
Havoc
“The
combination of Harvey’s path, duration and rainfall total is
wreaking havoc with the supply side of the U.S. chemicals industry on
an unprecedented scale,” said Kevin McCarthy, an equity analyst at
Vertical Research Partners. “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 country’s capacity for
making polyethylene plastic has been shut down in the past week. More
than 60 percent of production of polypropylene -- another plastic,
has been curtailed.
Chemical
and plastics buyers can continue operating only so long without
replenishing their inventory, Ahmed said. Many producers are already
telling customers that they won’t be able to meet their contractual
supply obligations because of the storm.
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