U.S. winter storm disrupted 15% of global olefins market, threatened PET and polyester

Global olefins and polyester markets may feel for weeks the consequences of a storm that brought freezing temperatures for several days to areas not used to extended harsh winter weather conditions including Texan natural gas production areas and petrochemical hubs in the Gulf Coast.

Image courtesy of Lorenzo Cafaro/Pixabay

The winter weather paralyzed a significant part of the U.S. petrochemical production and disrupted 15% of the global olefins market, according to a Wood Mackenzie Feb. 19 report. As for polyesters the most affected products are key intermediaries paraxylene and monethylene glycol, according to another analysis report a day earlier.

“The concentration of the winter storm has been particularly pronounced in Texas, which geographically represents the workhorse of the U.S. olefins industry,” said Patrick Kirby, principal analyst at Wood Mackenzie, a consulting and research organization.

Power outages, and rationing, as well as water supply disruptions, affected much of Texas and Louisiana, extending west and south to areas of the northeast Mexico. Disruptions started on Feb. 17 and lasted at least four days. Access to feedstock became an issue as natural gas wellhead production froze off, according to the Wood Mackenzie report from Feb. 18.

The shortages led in many cases to force majeure declarations that have increased support for price hike announcements, particularly as they built on top of price increase dynamics already in place well before the storm.

Markets caught by surprise

The region is familiar with hurricanes causing disruption during the warmer months. “However, the nature and operational impact of the unseasonably cold temperatures has been a surprise to many market participants,” Kirby said.

“This is a significant impact to one of the world’s largest concentrations of olefins capacities, just under 20% of the global total, and tops recent disruption seen in August 2020 from Hurricane Laura,” Kirby said.

Genscape, a Wood Mackenzie’s sister company, said on Feb. 19 that over 80% of U.S. olefins capacity was offline at the time. The capacity that managed to stay online was most likely running at reduced rates, or otherwise impacted by related supply-chain disruption.

The weather event curbed highway travel, as icy roads made truck deliveries dangerous. There were fuel shortages with vehicles creating lines at stations. It also affected distribution of multiple products, including food supplies, to stores.

Freezing temperatures combined with a lack of heating killed about 32 people in Texas alone, according to a Washington Post report on Feb. 21.

Impact to be felt globally, possibly for weeks

“U.S. olefins industry capacity has been in expansion mode over the last several years, facilitated by shale gas economics. The recent disruption is therefore impacting a larger base of U.S. and global olefins supply,” Kirby said.

“Upstream and downstream disruptions will likely result in a staggered and complex capacity restart” in the days after the weather normalizes, potentially extending the emergency from days to weeks before market continuity and stability returns, Kirby added.

“Unplanned U.S. outages have combined with a strong consumption backdrop with the return of China from the Lunar New Year, seasonally higher demand patterns in Q2, and recovery in global demand moving through the evolution of the coronavirus pandemic,” Kirby said.

“For regions that are able to step up to meet the call on olefins and derivatives supply through the near-term, such as the Middle East and other locations, the opportunity and rewards are likely to be high,” he added.
Impact on polyester supply

Salmon Lee, Wood Mackenzie’s head of polyesters research, said in the Feb. 18 report that capacities in states affected by the weather event for paraxylene (PX) and monoethylene glycol (MEG), two important building blocks for polyester production, total 3.4 million tonnes and 4.99 million tonnes, respectively.

“PTA (purified terephthalic acid) plants in the U.S. are located outside the disaster zone and were still running. However, this may change if paraxylene supply dries up amid the outage,” Lee said on Feb. 18.

“For now, U.S. polyester production is also reported to be business-as-usual. But again, uncertainty prevails in the raw material sector if either paraxylene, PTA and/or MEG supply runs dry. The status of polyester plants could change very quickly,” he added at the time.

Significant price impacts

“Spot prices of paraxylene, PTA and MEG are already rising sharply in response to the escalation in crude prices, as well as concerns of an acute supply shortage for polyester feedstocks,” Lee said.

“The impact on PET and polyester fiber pricing will likely be significant,” he said.

Genscape estimated on Feb. 17 that about 45% of the total U.S. paraxylene capacity was offline.

The current MEG capacity in the U.S. accounts for 10% of global capacity so the current weather situation will have global ramifications, the Wood Mackenzie report projected.

“Disruptions in raw material availability will have a significant impact on production and subsequently on (polyethylene terephthalate) PET resin availability as the North American PET resin market was already tight,” Lee said.

Prices were on the rise before the storm

Markets for many petrochemical products were already tight and trending higher well before the storm.

“We exited the fourth quarter with increasing strength which is carried over into the first quarter. The ISM manufacturing new orders index is trending at its highest level in 10 years,” said Howard Ungerleider, president and chief financial officer at Dow, in comments made on January 28 during the fourth quarter earnings discussion, according to a Motley Fool transcript.

“We entered the year with good pricing momentum, continued solid demand” driven by ongoing strength in polyethylene and polyurethane, he said. Dow officials expected these dynamics to be sustained at least through March, he added.

“The industrial intermediates and infrastructure segment will continue to benefit from strong consumer durables demand, supported by automotive and housing sectors and improvement in industrial end markets,” he said in late January.

These trends, combined with “supply limitations and low inventories, should support pricing uplift,” he added at the time.

By Renzo Pipoli