From nappies to tyres, Harvey plays havoc with US industry

Flood waters from Hurricane Harvey are troubling US businesses. Photo / Luke Sharrett

Flooding in Texas, home to a vast chemical industry. Picture / Bloomberg

Few Americans care about ethylene. Many have probably never heard of it.

As it turns out, this colourless, flammable gas is arguably the most important petrochemical on the planet -- and much of it comes from the hurricane-stricken US Gulf Coast.

Ethylene is one of the big reasons the damage wrought by Hurricane Harvey is likely to ripple through US manufacturing of essential items.

"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 goods from car parts to nappies.

With Harvey shutting down almost all the state's plants, 61 per cent of US 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 US$3.5 trillion ($4.9t) global chemical industry.

Processing plants turn the chemical into polyethylene, the world's most common plastic, used in rubbish bags and food packaging. When transformed into ethylene glycol, it's the antifreeze that keeps engines and aircraft wings from freezing, and it also becomes the polyester used in textiles and water bottles.

Ethylene is an ingredient in vinyl products such as PVC pipes, life-saving medical devices and sneaker soles. It is used to make polystyrene foam insulation, car parts, synthetic rubber for tyres, even in house paint and chewing gum.

Man makes the chemical by starting with oil or natural gas, then steam heating it inside massive furnaces.

Ethylene and its derivatives account for about 40 per cent of global chemical sales, said Hassan Ahmed, an analyst at Alembic Global Advisers. Before Harvey, ethylene plants globally were running at nearly full speed to meet rising demand, he said.

"So any little hiccup -- and this is much beyond a hiccup -- will dramatically tighten supply-demand balances," Ahmed said.

Kevin McCarthy, an equity analyst at Vertical Research Partners, said, "the combination of Harvey's path, duration and rainfall total is wreaking havoc with the supply side of the US chemicals industry on an unprecedented scale.

"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 US' capacity for making polyethylene plastic has been shut down in the past week. More than 60 per cent of production of polypropylene -- another plastic -- has been curtailed.

With so much chemical production in the region out of commission, demand for natural gas has plummeted. Producers such as Dow Chemical use gas as a raw material for ethylene and also to power their cracking furnaces and other equipment. With widespread electricity outages also reducing gas use, demand for gas fell by nearly 8 per cent of the country's normal consumption at this time of year.

Given the complexity of the ethylene manufacturing process, and the need to carefully assess damage to ensure safe restarts, it may take many more weeks for production to reach pre-Harvey levels, IHS Markit said in a report.

Companies won't know for sure whether their plants were damaged until they try to restart them, perhaps only then finding that flood waters have ruined a key piece of equipment, Ahmed said.

"No one right now has a very good handle on the full extent of the damage." Bloomberg