Will Hurricane Ida Put a Dent on Chemical Industry's Q3 Earnings?
Hurricane Ida that barreled into Louisiana with a devastating force on Aug 29 left behind widespread destruction across the U.S. Gulf Coast and the Northeast. The Category 4 hurricane caused significant damage to critical industries in the Gulf Coast area with chemicals being among the hardest hit.
Ida dealt another blow to the supply chain, which was already weakened by the coronavirus pandemic. It came at a time when the chemical industry is recovering from the effects of a spike in raw material and supply chain costs, resulting from the devastating winter storm in the U.S. Gulf Coast — the biggest refining and petrochemical production hub in North America.
A number of chemical companies idled their plants in advance of the storm. Huntsman Corporation HUN said that all units at its Geismar, LA manufacturing facility were shutdown systematically and safely before Ida made landfall. The Geismar site is involved in the production of Huntsman's Polyurethanes and Performance Products divisions. Westlake Chemical Corporation WLK also shut its facilities in Louisiana ahead of Ida's landfall. Dow Inc. DOW also safely shut down its manufacturing operations in Plaquemine and St. Charles. BASF SE BASFY idled its methylene diphenyl diisocycanate and butanediol plants in Geismar.
Ida Exacerbates Supply-Chain Crisis
Chemical producers are grappling with raw material cost inflation as well as higher supply chain and logistics costs. Supply chain disruptions due to coronavirus and weather-related events have led to a significant rise in raw material costs. Higher input costs partly due to the impacts from the winter storm Uri weighed on the margins of chemical companies during the first half of 2021.
Extreme weather across Texas and Louisiana and power outages disrupted the supply of feedstocks. The shutdown of ethylene plants across the United States affected the availability of ethylene — a major raw material used in the production of several industrial chemicals and plastic products, including polyethene and polyvinyl chloride. The deep freeze across the U.S. Gulf Coast took roughly three-fourth of the U.S. ethylene capacity offline. U.S. Gulf Coast is home to roughly 20% of the world’s ethylene production. The winter storm curbed chemical production in the U.S. Gulf Coast and other parts of the country due to raw material and supply chain disruptions.
Supply tightness continues for a number of key raw materials including several resins, natural gas, propylene, butadiene and glass fiber. The lingering impacts of supply chain and logistic bottlenecks, exacerbated by the recent unfavorable weather events globally and the resurgence of coronavirus infections, are expected to reflect in the September quarter.
The supply crunch is compounded by the disruptions associated with Ida. Force majeures and plant shutdowns associated with Ida are expected to have further squeezed the supply of raw materials including ethylene and propylene and push up their prices, the impacts of which are likely to be felt on chemical companies’ third-quarter results. According to IHS Markit, six facilities producing ethylene were affected by Ida accounting for roughly 16% of U.S. ethylene capacity.
Nevertheless, actions to raise the selling prices of chemical products to counter the cost inflation and tightness in the supply chain, productivity improvement measures and operational efficiency improvement are likely to help the chemical industry in sustaining margins in the third quarter. Demand strength across key markets including automotive and construction should also drive volumes.
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Westlake Chemical Corporation (WLK): Free Stock Analysis Report
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