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February 19, 2014
Natural Disasters – Preparing for the unexpected
By: Paul Bjacek
Unpredictable forces, unpredictable business
 Figure 2
By 2013, natural disasters have increased by almost 2.25 times the level of 1980 (see Figure 11), mostly driven by severe weather.2 Although climate cycles can be cyclical, in recent years they have had a significant impact on the basic materials business. For instance:

  • During hurricanes Katrina and Rita (August and September, 2005), 20-30% of US aromatics capacity was affected; total organic chemical shipments dropped 20%; and 5% of US refining capacity was shut down.

  • Droughts have caused temporary closings of nuclear power plants in Australia, France, Germany, Romania and Spain over recent years.

  • In 2010-11, coal mines in Queensland, Australia were shut down due to devastating floods.

  • The March 2011, the Tohoku 9.0 magnitude earthquake and tsunami that struck northern Japan disrupted supply in the markets for electronic chemicals, automotive coatings and other chemical products .3 Approximately 30% of Japan’s petrochemicals production was shut down, and several paper mills and glass production plants were closed. The disruption to industrial production impacted global mineral markets as well.4

  • Hurricane Sandy (October 2012) caused numerous shutdowns and supply line disruptions, with some chemical facilities remaining closed afterwards.

  • In 2012, the US went through the worst drought in 60 years, adversely affecting the corn yield and quality for the year. Irrigation for ethanol crops and steam for solar energy also depend on water. Naturally, fertilizer and pesticides markets were impacted as well.

Natural disasters are always an unknown with regards to timing, duration and impact. For example, the US Department of Agriculture (USDA) had projected a record crop of 14.8bn bushels for the 2012 harvest, before the drought5. The final production level reached only 10.8bn bushels,
 

Regarding petrochemicals, ethylene crackers are typically situated in coastal areas (see Figure 2), which happen to be among the most susceptible geographies to weather-related disasters. Even a one day outage of an ethylene cracker in the US Gulf Coast would represent a loss for $3.5 million in revenue (using 4Q13 performance) on first order (ethylene and co-products, excluding derivative units) products alone6. 

image

Also, there are many steel plants in Asia located along coasts and/or earthquake zones (see steel plant maps here7). Aside from the devastating effects on human lives, unplanned disruptions to factories, supporting infrastructure and data centers can have substantial impacts on production, customer service, supply chain and financial stability.
 
Business continuity management needed
Companies can no longer avoid or ignore the need for fit-for-purpose disaster planning and business continuity measures. Our research of past natural disasters and their aftermaths reveals some critical measures chemicals and natural resources companies should take, including:

  • Employing cloud computing solutions, especially as globalization and centralization of business operations are leading to more assets exposed to localized events.

  • For North American operators, taking advantage of current higher profitability levels brought about by low cost gas to fortify assets and create more flexible supply chains.

  • Developing relationships with other producers for alternate supplies to continue the flow of goods to customers.

  • Actively engaging in the development of infrastructure around plants, particularly pipeline, road and rail.

  • Assessing and mitigating electrical power dependence, since power supply outages were a major issue in post-hurricane recoveries.

  • Having capabilities and plans for communications management with local communities, press, employees, suppliers, customers and other relevant entities.

  • Developing and practicing disaster exercises and contingency plans. These should include management, employees and external emergency groups.

  • Planning in advance the fate of assets in the event of a natural disaster. Some companies turned natural disasters into opportunities to shut down or improve poor performing assets.

With a growing number of unpredictable natural disasters, it is clear that basic materials companies must have robust supply chain structures, disaster plans (including contingencies) and financial flexibility to sustain these events.
 

Thank you also to Patricia Faust, Khayyam Jahangir, Segran Pillay and Manish Sharma for input to this blog.

1 Source: Munich Re, NatCatSERVICE (2014)
2 Source: Munich Re, NatCatSERVICE (2014)
3 Chemical Engineering Progress, http://www.aiche.org/cep/, Copyright American Institute of Chemical Engineers 2011.
4 Industrial Minerals, Apr 2011, Issue No 523, p 8-9 and Website: http://www.mineralnet.co.uk
5 ICIS News, 03 January 2014
6 Based on Accenture Research calculations based on ICIS Consulting data (NatCatService)
7 Steelonthenet.com

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