By Shell Polymers on Mar 05, 2021
In addition to leaving nearly 3.5 million Texans without heat and water in below-freezing temperatures, this abnormal event disrupted polyethylene (PE) supply chains throughout the nation. That's because southern Texas is the epicenter of U.S. petrochemical production, with nearly 70% of ethylene and propylene stemming from the region.1 In fact, the storm prompted the shutdown of the Houston Ship Channel, the second-largest petrochemical port in the world, and the Corpus Christi port.2
Shutdowns caused by lost power, frozen pipes, and other weather-related issues in Louisiana and Texas affected 95% of America’s critical ethylene feedstock production and brought supply chains to a halt.3 At the height of the storm in mid-February, converters struggled to get a hold of the necessary resin to keep up with contracts. Converters whose sole supply of resin came from Texas-based plants found it especially challenging to move their supply chain forward.
Unfortunately, even as power comes back on and temperatures get warmer, plants will still require time to restart, assess potential damage, and get operations safely running at full capacity after unscheduled downtime.
What Does This Mean For the Polyethylene Industry?
According to Wood Mackenzie, the Texas region is “familiar with hurricane activity causing disruption…[but] the nature and operational impact of the unseasonably cold temperatures has been a surprise to many market participants."4 Due to the impact, Research firm ICIS of Houston estimated that plant shutdowns put outages for linear low density polyethylene (LLDPE) at 54%, low-density polyethylene (LDPE) at 51%, and high density polyethylene (HDPE) at 42%.5
Disruptions to polyethylene supply create a ripple effect across the industry. As a result of unplanned downtime, everyone from resin suppliers to brand owners can experience changes like:
- Fluctuations in resin prices per pound
- Interrupted resin availability
- Supply chain communication challenges
Plant Shutdowns Impact Resin Prices
Plastics News reports that North American PE prices through November were up a net of 14 cents per pound in 2020.6 Prices fell 5 cents in April 2020 amid pandemic-related uncertainty, but have increased 19 cents since the initial dip. According to Mike Burns, PE market analyst at Resin Technology Inc., the 2020 price increase is the largest increase for PE resin in the region since 2009. During a recent Plastics News webinar covering the PE and PP market, Burns also shared that the Texas weather impact has solidified a 7-cent increase that PE makers were seeking for February.7
On a related note, converters in the area were seeing higher prices in other mission-critical operations as a result of the shutdowns, such as freight costs, which make navigating higher resin prices with lower production capacity more challenging.8
Supply Reliability Affects Converters and Consumers
In the polypropylene market, supplies have already been tight even before the Texas ice storms, Plastics News reports. EVP of M. Holland Co., Marc Fern, told Plastics News that without access to essential components like propylene, polymer suppliers can’t produce resin pellets and converters can’t create their products.9
With PP and PE resin suppliers struggling to protect their plants from the icy weather, many declared a force majeure on their contract. This clause is a staple in supplier-converter contracts, protecting each party in the event that factors outside their control prevent them from performing contractual obligations.10 This includes suppliers providing resin to its customers, and converters providing end-products to brand owners.
While a force majeure declaration is outside of anyone’s control, it still majorly impacts the overall supply chain, with consumers feeling the brunt of it as they pass empty grocery store shelves. As it often goes, when it rains, it pours, and these events happen when converters and consumers need those products most.
Consider the COVID-19 pandemic. It skyrocketed the need for household cleaning chemicals and the containers that they come in. With capacity restrictions and other pandemic-related regulations slowing down production and supply chains, consumers struggled to get a hold of necessary products to battle the virus. When Hurricane Harvey hit, many plastic corps had to operate under force majeure, since it took plants time to come back online, consult inspections, and restart equipment, contributing to a nationwide price spike.11
Events like COVID-19, Hurricane Harvey, and the winter storms often highlight supply chain vulnerabilities and the need for more dynamic supply chains with sophisticated risk management.
Collaboration Across the Supply Chain Is Key
Open collaboration and supply chain integration has become increasingly important as digital maturity improves. When plants are fully operational, sharing data across the supply chain can play a crucial role in improving existing vendor relationships, supply chain transparency, and developing stronger partnerships. In the aftermath of a rare event like the Texas winter storms, supply chain collaboration, especially on a human-to-human level, becomes even more important.
When equipment goes down, those account relationships with project managers, technical service, and customer experience teams can make the difference between a rough and smooth re-start. Stakeholders across the supply chain can also help each other brainstorm creative ways to mend some of the damage done to equipment and get operations back to full capacity.
Key Takeaways from the Texas Winter Storms and the Importance of Risk Mitigation in Supply Chains
Although unexpected weather can have a short-term (several months) impact on the supply chain, there's also a long-term trend cycles to consider. McKinsey explains that “any given company can expect a shutdown lasting a month or so every 3.7 years.”12 In the petrochemical industry, McKinsey reports that up to 35% of the chemical industry’s annual EBITDA could be at risk because of supply-chain disruptions.13
While these incidents are inevitable, we can take learnings from them to improve operations and better processes. Here are a few insights that our team took from the experience to help converters build more resilient supply chains:
1. Keep the Human Touch
First and foremost, this storm, and almost any natural disaster, reinforces the importance of human-to-human relationships in supply chains. The Fourth Industrial Revolution has ushered in a new era of labor where more human tasks are automated, and people collaborate more closely with machines. While this is a critical step to improving productivity and freeing the workforce for more strategic business objectives, technology can, and will, falter in situations like these.
Having trusted people throughout a supply chain that not only understand every facet of the business but also know points-of-contact on a personal level is invaluable. These relationships are irreplaceable, as they can be a friendly voice that helps provide personalized solutions and a creative mind to help get operations back on track.
2. Implement Strategic Technology
Chemical companies will need to build more flexible supply chains to quickly adjust to evolving conditions. Insight-driven logistics, or the use of analytics tools to develop a deep understanding of external supply chain factors and transportation options across multiple providers, can help identify trends and improve forecasting.14
AI is also useful to analyze past data and current activity to efficiently manage production schedules and help plastics converters predict weather, environment changes, maintenance needs, supply shortages, and market demands.15 This data plays a major role in helping companies prepare for disruptions, mitigate unplanned equipment downtime, and restart operations following a force majeure event.
3. Prepare for Long-Term Effects
When Hurricane Harvey initially hit, the plastics industry didn’t see shortages and price spikes right away as many suppliers burned through emergency inventories to get by. As far as two months after the storm, that’s when companies started to feel the effects on PE, PS, PET, and PP resin prices. This increase stemmed from plastics processing facilities along the Gulf Coast getting severely damaged and still working to bring their operations back to normal production levels. 16
When asked about the recent winter storms, Charles A. Sholtis, CEO of a Texas-based molding company shared with Plastics News that, “We are being impacted by FedEx not being able to deliver. The pandemic, cold vortex, wildfires, resin shortages, price increases, port delays from overseas ... we are seeing it all over the last 12 months!"17 These types of events aren’t a one-and-done experience. The effects can last months, assuming more disruption doesn’t inhibit recovery.
Building a diverse, resilient supply chain mitigates risk in the polyethylene industry. At the end of the day, technology and data can only help remedy the situation to a certain extent. It takes everyone coming together and working together to rebuild what was damaged. With many of our own staff personally impacted by the storm, the Shell team wanted to be part of that collaborative effort. That’s why Shell is proud to support relief efforts toward the winter storm in Texas—and are donating $500,000 to help Houstonians recover and rebuild.18