There can be few fields of human endeavour in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.
J. K. Galbraith.
With
most Americans off celebrating their Labor Day long weekend, south Texas and Louisiana
residents excepted, this weekend we take
a look at Harvey’s impact and wonder if hurricane Irma is next for the USA’s
Atlantic coast.
Below,
will ethylene be a big drag on the US economy, and if so, by how much and for
how long?
Harvey’s Made the World’s Most Important Chemical a Rare Commodity
By Jack Kaskey 1 September 2017, 05:00 GMT+1 Few Americans care about ethylene. Many have probably never heard of it.As it turns out, this colorless, flammable gas is arguably the most important petrochemical on the planet -- and much of it comes from the hurricane-stricken Gulf Coast. Ethylene is one of the big reasons the damage wrought by Hurricane Harvey in the chemical communities along the Gulf is likely to ripple through U.S. manufacturing of essential items from milk jugs to mattresses.
“Ethylene really is the major petrochemical that impacts the entire industry,” said Chirag Kothari, an analyst at consultant Nexant.
Texas alone produces nearly three quarters of the country’s supply of one of the most basic chemical building blocks. Ethylene is the foundation for making plastics essential to U.S. consumer and industrial goods, feeding into car parts used by Detroit and diapers sold by Wal-Mart Stores Inc.
With Harvey’s floods shutting down almost all the state’s plants, 61 percent of U.S. ethylene capacity has been closed, according to PetroChemWire.
Ethylene occurs naturally -- it’s the gas given off by fruit as it ripens. But it also lies at the heart of the $3.5 trillion global chemical industry, with factories pumping out 146 million tons last year, Kothari said Thursday.
Processing plants turn the chemical into polyethylene, the world’s most common plastic that’s used in garbage bags and food packaging. When transformed into ethylene glycol, it’s the antifreeze that keeps engines and airplane wings from freezing in winter, and it also becomes the polyester used in textiles and water bottles.
Ethylene is an ingredient in vinyl products such as PVC pipes used to bring water to homes, life-saving medical devices and cushy sneaker soles. It helps combat global warming with polystyrene foam insulation and lighter, fuel-saving plastic auto parts. It helps commuters get to work safely when made into synthetic rubber found in tires. It’s even an ingredient in house paints and chewing gum.
Man makes the chemical by starting with oil or natural gas, then steam heating it to 1,500 degrees Fahrenheit (816 Celsius) inside massive furnaces that crack apart the molecular bonds. The resulting ethylene gas is separated from co-products such as propylene, and then piped to other production units for conversion to a vast array of products.
Ethylene and its derivatives account for about 40 percent of global chemical sales, said Hassan Ahmed, an analyst at Alembic Global Advisors. The U.S. accounts for one of every five tons on the market, and ethylene plants globally were running nearly full out to meet rising demand before Harvey, he said.
“So any little hiccup -- and this is much beyond a hiccup -- will dramatically tighten supply-demand balances,’’ Ahmed said Thursday.
While Gulf Coast chemical plants are designed to withstand hurricane-force winds and floods, Harvey has thrust the industry into uncharted territory. Ethylene producers hit by the storm along the Texas Gulf Coast include LyondellBasell Industries NV at the southern end in Corpus Christi, Exxon Mobil Corp. in Baytown outside Houston, and Chevron Phillips Chemical Co. in Port Arthur by the Louisiana border.
Market Havoc
“The combination of Harvey’s path, duration and rainfall total is wreaking havoc with the supply side of the U.S. chemicals industry on an unprecedented scale,” said Kevin McCarthy, an equity analyst at Vertical Research Partners. “We certainly haven’t seen anything quite like it in our 18 years of following chemical stocks on Wall Street.”The sudden dearth of ethylene and other materials is being felt up and down the supply chain. More than half of the country’s capacity for making polyethylene plastic has been shut down in the past week. More than 60 percent of production of polypropylene -- another plastic, has been curtailed.
Chemical and plastics buyers can continue operating only so long without replenishing their inventory, Ahmed said. Many producers are already telling customers that they won’t be able to meet their contractual supply obligations because of the storm.
Missing Commitments
Formosa Plastics Corp., which shut its Point Comfort, Texas, ethylene and plastics plants ahead of the storm, said Aug. 30 that it won’t be able to meet commitments for polyethylene, polypropylene and PVC.With so much chemical production in the region out of commission, demand for natural gas has plummeted. Producers such as Dow Chemical Co. use gas as a raw material for ethylene and also to power their massive cracking furnaces and other equipment. Added to the impact from widespread electricity outages, demand for gas fell by more than 5 billion cubic feet a day, according to Citigroup Inc. That’s equal to nearly 8 percent of the country’s normal consumption this time of year.
Demand for other key raw materials used to make ethylene, such as ethane and butane, have fallen about 90 percent because of plant closures, according to PetroChemWire.
Given the complexity of the ethylene manufacturing process, and the need to carefully assess damages to ensure safe restarts, it may take many more weeks for production to reach pre-Harvey levels, IHS Markit said in a report Thursday.
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Texas Explosions Show Chemical Industry Pushed to Its Limits
By Jack Kaskey and Ania Nussbaum
31 August 2017, 10:28 GMT+1 31 August 2017, 21:07 GMT+1
In its devastatingly slow crawl up the industrial Gulf
Coast, Hurricane Harvey is proving to be the biggest test yet of the safety and
vulnerabilities of the U.S. chemicals industry.
A Houston-area chemical plant was hit by explosions overnight after floods caused by Harvey knocked out power supplies needed to refrigerate volatile peroxides. Fifteen police officers were treated at the hospital for smoke irritation from the plant. Earlier evacuations of the site and surrounding community prevented more serious injuries. The plant is owned by French chemical company Arkema SA.
The remaining chemicals will eventually burn up in the fire, Richard Rennard, a company president, told reporters Thursday.
---- The incident underscored the risks confronting the industry after dozens of chemical plants shut down in the path of the storm from South Texas to Louisiana, knocking out more than half of U.S. production of some of the most-used chemicals and plastics.
With its
crucial access to ports for shipping and receiving, the Gulf Coast is the
epicenter of the nation’s chemical industry, where many of the materials
indispensable to modern society are produced. The plants provide the basic
building blocks for making everything from cars and computers to household
furnishings and appliances.
The
massive industrial centers also deal with complex chemical processes that pose
hazards from lethal explosions to toxic spills when things go wrong. The danger
is greatest when plants are shutting down and starting up.
“That is
when bad things happen,” said Ramanan Krishnamoorti, the chief energy officer
at the University of Houston.
More
In
other hurricane news, the USA is nervously watching hurricane Irma in the
Atlantic.
Why the Hurricane Irma Forecast for the U.S. Is Still Uncertain and Difficult
By Jonathan Erdman Sep 1
2017 05:00 PM EDT
Hurricane Irma will be a formidable hurricane for days to come in the Atlantic
Basin, but its future impact in the U.S. remains unknown.Given the record-setting, catastrophic flooding, storm surge and wind damage from Hurricane Harvey, it's understandable why Irma is making U.S. East Coast and Gulf Coast residents unnerved.
You may wonder why we can't yet nail down anything specific on Irma's future potential impact in the U.S. Wouldn't that help people prepare?
First, we'll explore why that is. Then we'll go over some atmospheric patterns typically in place that increase East Coast hurricane risk.
The Current Forecast 'Cone'
The National Hurricane Center issues forecast advisories four times daily for each active Atlantic or eastern Pacific tropical depression, storm or hurricane. These are five-day forecasts for the center of circulation.It's usually a cone shape, instead of just a single line, because there is uncertainty in the track forecast that grows with time. For brevity, we're just going to consider track forecasts, not intensity forecasts, although they can be intertwined.
According to NHC statistics, the average error in a five-day forecast path of the center in 2016 was about 194 miles. While NHC track forecasts have improved over the years, this is still a sizable error at five days, roughly the distance between Miami and Cape Canaveral, or from midtown Manhattan to Martha's Vineyard.
A basic tenet of numerical weather prediction is that small errors grow with time. If the five-day track error is already almost 200 miles, imagine what a 10-plus-day track error would be.
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In
business news, has the global recovery from the financial crisis of 2008-2009
already peaked? In truth it’s too early to say, but it does seem to be stalling
or stalled. With our central banks all but out of ammo and ideas, and a debt
mountain that far exceeds 2008, what comes next in Q4 17 and H1 18, could
easily turn into a nasty, unexpected return of deflation.
"The modern mind dislikes gold because it blurts out unpleasant truths."
Joseph Schumpeter
World's Biggest Wealth Fund Reveals Bleak View on Global Trade
By Sveinung Sleire and Mikael Holter
1 September 2017, 00:00 GMT+1 1 September 2017, 07:04 GMT+1
The man
running the world’s biggest sovereign wealth fund says there’s every indication
that global trade is suffering from something more serious than a temporary
slowdown.
Yngve
Slyngstad, chief executive officer of Norges Bank Investment Management, as the
fund is known, says the heyday of cross-border trade is probably behind us.
“The
question investors are asking themselves is if the easy wins already have been
made,” Slyngstad said in an Aug. 29 interview from his office on the top floor
of Norway’s central bank in Oslo. “The global supply chains have in a way had a
one-time gain primarily through outsourcing of multinationals to China.”
Norway’s
wealth fund owns 1.3 percent of globally listed stocks, spread out over almost
80 countries. And with interest rates at record lows, the investor has cut its
long-term return expectations to about 3 percent from 4 percent, even after
winning approval from parliament to raise its share of equities to 70 percent
from 60 percent.
Slyngstad,
who became CEO in 2008 just as the global economy was sinking into the worst
crisis since the Great Depression, noted that back then the fund rode out the
turmoil by dumping bonds and buying stocks.
“I don’t
expect that we will act differently in any similar crisis in the future,” he
said.
---- “Is there also a political situation that could make it more challenging?” Slyngstad said. “Time will tell, but there’s of course a risk on the horizon.” He says the wealth fund’s extremely long-term investment timeline allows it to look past the noise coming from governments that come and go.
The fund
will probably stay over-weighted in Europe, where it’s more of an active
investor. But the only two economies that really matter are the U.S. and China,
Slyngstad said. In November, he’ll head to China for an annual research trip to
inform the fund’s investments.
More
We close for the weekend with all you
need to know about the history of credit. An interesting timeline graphic, well
worth clicking through. Time to bring back the Usury laws.
The History of Consumer Credit in One Giant Infographic
Jeff Desjardins on August 29, 2017 at 11:27 am
Consumer credit may seem like a fairly new invention – but it’s actually
been around for more than 5,000 years!In fact, many millennia before the credit score became ubiquitous, there is historical evidence that cultures around the world were borrowing for various reasons. From the writings in Hammurabi’s Code to the exchanges documented by the Ancient Romans, we know that credit was used for purposes such as getting enough silver to buy a property or for agricultural loans made to farmers.
Consumer Credit: 3,500 B.C. to Today
In today’s infographic from Equifax, we look at the long history of consumer credit – everything from the earliest writings of antiquity to the modern credit boom that started in the 20th century.
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Jamie Dimon, CEO of JP Morgan Chase
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