As petrochemical projects ramp up or start up in 2017 and 2018 across the globe, disruptions are still likely in construction and the distribution of final products. We were among the first to warn about this in our 2013 study, Preparing for a Changing Petrochemical Supply Landscape, and in our 2014 report, Exploiting Big Bang Disruption in the Chemicals Industry. Chemical companies that fail to proactively take measures and collaborate with logistics providers and government officials will likely feel the most impact of disruption.
Source: Accenture Research analysis of Capital IQ data of 58 companies worldwide; cash based on data from 28 integrated oil and gas companies.
The problem could intensify as the economic bases for new investment remain attractive with further energy development in the United States (US), and the prospects look positive for higher economic growth over the next few years. As outlined in a past blog,1 integrated oil companies tend to shift capital towards more economically appealing areas in their portfolios during oil price downturns.
Figure 1 shows the return on sales (RoS) for each major petro-sector: oil and gas, refining and petrochemicals. Petrochemicals have outperformed the other two sectors over the past two years. The figure also shows the significant cash levels of integrated oil companies. It would not be surprising, therefore, to see more projects in refining and petrochemicals announced in the near term, particularly for North America.
Unfortunately, the chemical industry is in a weak position with respect to its buying power with suppliers of goods and services that are critical to starting up plants and distributing rising output. Figure 2 shows the importance of chemical manufacturing to its service suppliers in the Texas region. Particularly crucial to smooth plant building and operations are labor, construction and truck transportation. However, the chemical industry only accounts for four to six percent of the business of those suppliers. Water transportation (barge, tanker, container shipping, etc.) is higher, but chemicals still only account for 11 percent of water transportation revenue. Also, the relatively low share of the labor pool can impact the level of government support. Therefore, the industry needs to work particularly hard in getting the attention of these entities to help ensure that appropriate investments (in infrastructure, equipment, packaging capacity, storage yards, etc.) and policies are put in place to accommodate the new, massive levels of capacity.
The first potential disruption is related to construction and engineering itself, with the plethora of projects now occurring across the globe, as shown in Figure 3, which covers 79 top petrochemicals and polymers, by capacity volume. North America trails just behind China and the rest of Asia in the amount of total new petrochemical capacity under construction. This is burdening engineering firms, equipment providers and machinery suppliers as they struggle to meet orders. Delays in engineering tend to impact construction performance and timing.
Source: Accenture Research analysis of capacity changes (additions/shutdowns) for 79 major petrochemicals and polymers, worldwide, from ICIS Consulting Supply and Demand database, including speculative changes.
Let’s turn to North America, for example. Texas accounts for 70 percent of US ethylene capacity and most of planned new capacity. A recent survey of general contractors in Texas found that 59 percent of survey respondents indicated they are having a hard time filling craft worker positions, with 68 percent seeing the problem increasing.2 On top of this, one of their biggest concerns after worker shortages includes worker quality (43 percent of responses), with 55 percent saying that inexperienced skilled labor and the workforce shortage are major factors impacting the health and safety of their workers.3
Indeed, some delays and/or cost increases have already occurred, related to weather, infrastructure and utility issues, mechanical issues, labor cost increases, underestimates of material needs, worker training and safety. Some reports indicate there can be huge delays on just the roads to get on and off plant construction sites—a detriment in competing for the precious few numbers of skilled workers.
The export disruption will, conservatively, mean an extra 230,000 TEU4 of containers of polyethylene resin pellets leaving the US every year by 2018, as mentioned in a previous blog. This figure will increase beyond 255,000 as more capacity comes online after 2018.5
Much progress has been made in improving logistics around Port Houston, such as the Port Terminal Rail Association members’ $82 million investment in maintenance and expansion over the last six years.6
However, Port Houston is the only major US port lacking a transportation corridor for manufacturers to get fully-loaded containers directly to the port.7 In other words, containers are being filled with less resin than they can hold due to road weight restrictions. Existing roads need to move from truck weight capacities of 84,000 pounds to capacities of more than 95,000 pounds. On the flip side, fully-loaded containers may restrict the TEU numbers that a container ship can carry (as it may reach its tonnage limit before reaching its container number limit).
Other logistics concerns include container availability, rail and port congestion, trucker shortages and waiting times at port.8
Carriers (ships) can bring more containers to the Houston area; however, the main source for US Gulf Coast containers is Latin America, and there is a cost associated with moving containers to Houston, which would factor into total freight cost. Container lines also need assurance of the amount and timing of container shipments to properly serve the industry.
Disruptions associated with tendering chemical tankers around the Houston Ship Channel, potentially high transit levels through the Panama Canal and further hydrocarbon gas (LNG, LPG, ethane, propane) exports may also occur. And Houston’s reputation for high levels of fog around the ship channel will not help.
Chemical companies need to take action now. And, there are several ways they can mitigate disruption, including:
For more on our view of supply chain disruption in chemicals, see our latest thinking: “Chemical industry: Navigating US supply chain disruptions.”