From paints to plastics, a chemical shortage ignites prices

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In an economy hit by the coronavirus, shortages and rising prices have affected everything from wood to computer chips.

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Now, they’re cutting one of the dumbest but most important links in the global manufacturing supply chain: the plastic shrapnel that goes into a vast universe of products ranging from cereal bags to medical devices, automotive interiors to bicycle helmets .

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Like other manufacturers, petrochemical companies have been shaken by the pandemic and how consumers and businesses have reacted to it. Yet petrochemicals, which are made from oil, have run into one problem after all: a strange winter freeze in Texas. Lightning strike in Louisiana. Hurricanes along the Gulf Coast.

Everyone has conspired to disrupt production and raise prices.

“One thing is not wrong,” said Jeremy Paffford, US managing editor at Independent Commodity Intelligence Services (ICIS), which analyzes energy and chemical markets. It gets resolved, then something else happens. And it has been like this ever since the pandemic started.

The price of polyvinyl chloride, or PVC, used for pipes, medical equipment, credit cards, vinyl records, and more, has gone up 70%. The price of epoxy resins used for coatings, adhesives and paints has gone up by 170%. Ethylene — arguably the world’s most important chemical, used in everything from food packaging to antifreeze to polyester — has risen 43%, according to ICIS data.

The crux of the problem has become a familiar one in the 18 months since the pandemic ignited a brief but brutal recession: As the economy nearly plunged into paralysis, petrochemical producers, like manufacturers of all kinds, slashed production. So they were caught flat-footed when the unexpected happened: The economy quickly bounced back, and consumers, flush with cash from government relief aid and thrift reserves, began spending with astonishing speed and vigor.

Suddenly, companies were scrambling to procure raw materials and parts to meet the growing orders. Panic buying made shortages worse as companies rushed to stock up while they could.

“It’s such a strange scenario,” said Hassan Ahmed, chemical analyst at Alembic Global Advisors, a research firm. “Inventory is low, and supply is short. Demand will exceed supply growth. “

Against a backdrop of tight supply and rising demand came a series of events that influenced what Pafford termed as Murphy’s Law: Whatever could go wrong, he did. In 2020, Hurricanes Laura and Zeta affected Louisiana, a center for petrochemical production.

Then, in February, a winter storm hit Texas, which hit several oil refining and chemical manufacturing facilities. Millions of homes and businesses lost electricity and heat, including chemical plants. The pipes froze. More than 100 people died.

A July lightning strike temporarily closed a plant in Lake Charles, Louisiana, that makes polypropylene, which is used in consumer packaging and auto manufacturing.

When Hurricane Ida struck the Gulf Coast in August, industry was beginning to recover, once again damaging refineries and chemical plants. As if that weren’t enough, Tropical Storm Nicolas caused flooding.

“Some of these downstream petrochemical plants in the Gulf Coast regions are still closed by Hurricane Ida,” said Bridget Budhal, a professor of plastics engineering at the University of Massachusetts-Lowell.

“Anything related to base chemicals — they’ve had a hell of a year,” said Tom Derry, CEO of the Institute for Supply Management.

“This has been the toughest year for logistics and supply chain managers,” Pafford said. “They always say that the most stressful job in the world is being an air traffic controller at any airport… I dare say that being a supply chain manager – or worse – this year.”

Ford Motor Company, hampered by an industry-wide shortage of computer chips, is now running short of other parts, some of them based on petrochemicals.

“I think we, as business leaders, should expect continued supply chain challenges for the foreseeable future,” CEO Jim Farley said in an interview with The Associated Press.

The shortage is slowing production at two major paint manufacturers, Sherwin-Williams and PPG. Both have raised prices and lowered their sales guidance, saying the outlook for excess supply remains bleak.

Although Sherwin-Williams reported strong profits in the second quarter, it said raw material shortages cut sales for the period by 3.5%. CEO John Morikis said Sherwin-Williams raised prices in the US by 7% in August and an additional 4% this month. He said further increase is possible next year.

The chemical shortage, combined with the $75 a barrel US benchmark crude oil prices have nearly doubled over the past year, means higher prices for many goods.

“The consumer has to pay,” said Bill Selesky, a chemicals analyst at Argus Research, who suggested that many homes armed with cash from government aid and built-up savings would be willing to pay higher prices.

Meanwhile, there is no improvement in the supply problem. A WS Jenks & Sons hardware store in Washington, DC is receiving only 20% to 30% of the paint it needs to meet customer demand without backorders. In normal times, the rate is usually 90%, says purchasing director Billy Womack.

“No one is happy about it,” Womack said. “There’s a lot of ‘I’m sorry’ out there.”

The shortfall is most commonly felt by large contractors who require the same color paint for multiple apartment complexes and other major projects. Individual homeowners can generally be more flexible.

Duval Paint & Decorating, with three stores in the Jacksonville, Florida, area, is scrambling to fill orders, especially for large contractors who need a lot of paint, said John Cornell, a sales clerk who works with stores. Orders for paint.

“We’re struggling,” Cornell said. “Sometimes you have to grab products and sit on them for weeks or even months so that we have them when the work starts.”

Andrew Moore, a clerk at Ricciardi Brothers in Philadelphia, said the store is running short of the lower grade paints that larger contractors use, although there is a substantial supply of higher grades. Demand is so high that the store has had a record year, with sales increasing 20% ​​over the previous year. Moore said prices have gone up as much as 15% for some brands.

Problems in the petrochemical supply chain are compounded by shortages of labor and shipping containers, and by overcrowded ports. Some Asian ports have been closed due to the COVID-19 outbreak. In the United States, ports such as the port in Long Beach, California are struggling with a backlog of ships waiting to unload.

“I think it’s going to be a really long one because there are so many factors at play here,” said Caitlin Vovak, a management professor at the University of Notre Dame. “And it’s across the board in so many products.”

It is also forcing manufacturers to rethink some of their practices. For decades, companies moved production to China to capitalize on lower labor costs. He also kept expenses down while keeping inventory to a minimum. Using a “just-in-time” strategy, they only purchased the materials needed to fill orders. But as the recession and recovery showed, keeping inventory threadbare carries risks.

“Supply chains have changed forever,” said Bindiya Vakil, CEO of supply chain consultancy Resilink.

He added that the old management philosophy was to “get everything at the lowest possible price point … the work we’re doing right now is the result of those decisions. Companies have lost hundreds of millions of dollars, in some cases billions of dollars (excluded). went) into profits because their supply chain has failed.

The petrochemical experience will teach companies to monitor the shortest links in their supply chain, the lawyer said. That said, it’s always easier to just track down the big-ticket items — engines, say, or electronics.

But ordinary plastics are also important. Imagine trying to market breakfast cereals without cheap plastic bags to hold corn flakes or wheat bran.

“You can’t just dump cereal into cardboard and ship it,” says the lawyer. “Plastic bags are the actual (product) and an important component just like cardboard and everything else. But supply chain practitioners have traditionally not considered it as important. And nowadays plastic is ubiquitous.”

Analysts expect the petrochemical crisis to last well into 2022.

“You really have to put COVID in the rearview mirror for this logistics situation to return to normal,” Pafford said. “You can’t just throw more ships and more containers on the water. …we have to load them. If the ports are going to be closed because of the COVID lockdown – good luck.”

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Wiseman reported from Washington, Crischer from Detroit.

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