Rita Could Threaten Chemicals as Well as Oil
Fri Sep 23, 2005 6:06 PM ET
NEW YORK (Reuters) - The impending strike of Hurricane Rita on the Texas coast poses as much of a risk to chemical output as it does to oil production and refining, analysts say, threatening shortages of key chemicals in coming days and weeks.
Credit Suisse First Boston (CSFB), in a research note Thursday, estimated 72 percent of all U.S. production capacity for ethylene was in the potential strike area of Rita. Ethylene -- derived from increasingly expensive natural gas as U.S. supplies diminish -- is a crucial component in plastics and other chemicals.
"About 72 percent of U.S. ethylene capacity is in the (risk area, while 26 percent of U.S. refinery capacity is there," said CSFB analyst William Young.
Rita is set to arrive while the industry and the region are still suffering from the effects of Hurricane Katrina. Chemical industry experts estimated earlier this month that Katrina shut or cut production at plants responsible for a fifth of the nation's ethylene capacity.
The devastating effects of Katrina on the Gulf of Mexico also pushed natural gas prices to record highs. Rita has only made the situation worse, as October natural gas futures rallied in electronic trading to $13.42 per million British thermal units on Thursday, which was a new contract high. Prices eased on Friday, but remained extremely high.
Dow Chemical Co. last week called energy prices a "severe threat" to the chemical business, as it said it would seek price increases for all its products. DuPont has also said it would seek price increases.
There are also direct costs. Chemicals maker Cytec Industries Inc. said the impact of Katrina is expected to reduce pretax earnings up to $10 million, or 16 cents a share.
This includes lost production at the company's New Orleans Fortier facility that makes chemicals for plastics, fibers and water. The company will also get hit with extra labor costs, repairs and start-up costs.
As a precaution for Rita, companies are shutting plants before the storm. Lyondell Chemical Co. has closed all 12 of its plants, most of them chemical, in the region that will potentially be affected when the Category 3 storm makes landfall sometime early Saturday.
Dow, the largest U.S. chemical maker, said it completely shut all plants in the Freeport and Houston, Texas, areas early Friday.
Sites include Freeport, Texas, a massive plant with 5 percent of North American's ethylene production capacity. Shutdowns also include Deer Park, Clear Lake and LaPorte, as well as the Union Carbide facilities in Texas City and Seadrift and the Dow Haltermann site in Houston.
The harm to output, however, could lift prices for certain chemicals, eventually boosting the bottom line for some producers.
Ethylene, for example, will be helped by the two storms as lost production could further reduce low inventories of the key chemical, used in garbage bags, pipes, cosmetics and paints," said Frank Mitsch, an analyst with Fulcrum Global Partners.
"Even if Hurricane Rita won't cause major damage, producers in the impacted areas have already shut down production," he said in note published Friday. "We estimate (about) 70 percent of U.S. ethylene capacity is affected and at least one week of production would be lost due to the precautious shut ins."
He sees Canadian-based NOVA Chemical Corp. benefiting from tighter supplies since production of its ethylene and related products are outside the U.S. Gulf.
That tightness could lift profits across the industry as the hurricane damage recedes.
"We believe this will drive continued upward momentum in selling prices ... and margin expansion in Q4," said Deutsche Bank analyst David Begleiter.
"(The fourth-quarter) now looks far better than the hurricane-decimated Q3," he said, adding that supplies in the first half of 2006 would likely be tight as well.
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