STAMFORD, CT – Vertical Research Partners chemicals analyst Kevin McCarthy offers insight into the continued impact of Hurricane Harvey on the chemicals sector. He says, in part, "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."
According to McCarthy, he hasn’t seen anything quite like it in his 18 years of following chemical stocks on Wall Street. At the industry level, consensus EPS for the third quarter of 2017 is expected to trend lower on weaker volumes, followed by potential for partial recovery in the fourth quarter, aided by higher selling prices. From a stock price perspective, McCarthy expects commodity chemical producers to fare better than specialty chemical peers as a group. The extent of damage to both assets and infrastructure remains highly uncertain at this stage; logistics capability is arguably the biggest wild card in assessing the likely trajectory of recovery. Finally, despite supply constraints, the global ethylene cycle view remains intact, i.e. looking beyond short-term price hikes, McCarthy still sees increasing length of supply in 2018 followed by a cyclical trough in 2019 – for context, ethylene cycle periods are typically 7-10 years in duration. McCarthy also points out that as disruptive as it is, even Hurricane Harvey will prove to be a transitory event as it relates to chemical stocks.
News of new plant outages continues to be reported. The rainfall associated with the storm is projected to be much worse than predicted this time last week. With Harvey hitting land again today into Thursday, there is an ongoing risk that outages will grow in number.
More than half of U.S. ethylene capacity is offline. Vertical Research Partners received word that DuPont has taken down production at its Orange, Texas, olefins complex; Flint Hills was shutting its Port Arthur, Texas, facility; and ExxonMobil was throttling back at Beaumont, Texas. The company expects price hikes as the storm ends and visibility improves. Nearly one-third of U.S. crude oil refining capacity lies in the “cone” of Harvey’s potential path.
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