From paints to plastics, a chemical shortage ignites prices

In an economy turned upside down by the coronavirus, bottlenecks and price spikes have hit everything from lumber to computer chips. Not even toilet paper came out.

Now they are cutting into one of the most humble yet most important links in the global manufacturing supply chain: the plastic pellets that flow into a vast universe of products that range from grain bags to medical devices, car interiors and bicycle helmets.

Like other manufacturers, petrochemical companies have been rocked by the pandemic and the response from consumers and businesses. But petrochemicals made from oil are also gradually having their own problems: a freak winter frost in Texas, a lightning strike in Louisiana and hurricanes along the Gulf Coast.

Everyone has conspired to disrupt production and raise prices.

“There’s nothing wrong,” said Jeremy Pafford, managing editor for America for Independent Commodity Intelligence Services, which analyzes energy and chemicals markets. “It’s kind of a whack-a-mole – something goes wrong, it gets sorted out, and then something else happens. And that’s been the case since the beginning of the pandemic. “

The price of polyvinyl chloride, or PVC, which is used in pipes, medical equipment, credit cards, records, and more, has increased by 70%. The price of epoxy resins used in coatings, adhesives, and paints has increased 170%. Ethylene – arguably the most important chemical in the world, used in everything from food packaging to antifreeze to polyester – is up 43%, according to Independent Commodity Intelligence Services.

Brad Seaton shops in the bread and cereal aisle at the Tom Thumb grocery store on Custer Parkway in Richardson. (Ben Torres / special article)

The root of the problem has become known in the 18 months since the pandemic sparked a brief but brutal recession: when the economy almost paralyzed, petrochemical manufacturers and manufacturers of all kinds cut production. So they got caught on the wrong foot when the unexpected happened: the economy recovered quickly, and consumers, filled with money from government aid and savings, resumed their spending with astonishing speed and energy.

All of a sudden, companies were scrambling to source raw materials and parts to meet the growing orders. Panic buying exacerbated the shortages as companies rushed to restock while they could.

“It’s such a bizarre scenario,” said Hassan Ahmed, chemical analyst at Alembic Global Advisors, a research company. “The stocks are meager and the supply is low. Demand will outstrip supply growth. “

Against a backdrop of scarce supplies and rising demand, a number of events came about that seemed like Murphy’s Law in action to Pafford: Everything that could go wrong was done. In 2020, Hurricanes Laura and Zeta devastated Louisiana, a center of petrochemical production.

Then, in February, a winter storm hit Texas, with its many oil refineries and chemical factories. Millions of households and businesses, including chemical plants, lost electricity and heat. Pipes are frozen. More than 100 people died.

A lightning strike in July temporarily disabled a plant in Lake Charles, La. That produces polypropylene used in consumer packaging and automotive manufacturing.

The industry was just beginning to recover when Hurricane Ida hit the Gulf Coast in August, again damaging refineries and chemical plants. As if that weren’t enough, Tropical Storm Nicholas caused flooding.

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

“Anything to do with basic chemicals – you’ve had a hell of a year,” said Tom Derry, CEO of the Institute for Supply Management, an association of purchasing managers.

“It’s been the toughest year for logistics and supply chain managers,” said Pafford. “They always say the most stressful job in the world is an air traffic controller at an airport … I dare say the job of supply chain manager is this year – or worse.”

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

“I think we as business leaders should expect supply chain challenges for the foreseeable future,” said CEO Jim Farley.

The bottlenecks are slowing production at two leading paint manufacturers, Sherwin-Williams and PPG. Both have raised prices and downgraded their sales forecasts as the outlook for additional supply remains bleak.

Sherwin-Williams reported strong earnings in the second quarter, but said the shortage of raw materials detracted from sales by 3.5% for the period. CEO John Morikis said Sherwin-Williams raised prices in America by 7% in August and another 4% this month. Further increases are possible next year, he said.

Chemical shortages combined with oil prices nearly doubling last year to $ 75 per barrel of US benchmark crude oil are leading to higher prices for many goods.

“The consumer will have to pay,” said Bill Selesky, a chemistry analyst at Argus Research, who indicated that many households equipped with cash from government aid and accumulated savings will be willing to pay higher prices.

The supply problem is not getting any better now. A WS Jenks & Son hardware store in Washington, DC receives only 20-30% of the paint it needs to meet customer demand without reordering. In normal times, that rate is typically 90%, says Billy Wommack, purchasing manager.

“Nobody is happy about it,” said Wommack. “There are a lot of ‘I’m sorry’ out there.”

Billy Wommack, purchasing manager at WS Jenks & Son hardware store in Washington, DC, says his store gets only 20 to 30% of the paint it needs to meet customer demand without reordering. In normal times, this rate is usually 90%.(Manuel Balce Ceneta)

The shortage is generally felt most strongly by large contractors who, for example, need the same color paint for numerous apartment complexes and other large projects. Individual homeowners can usually be more flexible.

Duval Paint & Decorating, with three stores in the Jacksonville, Florida area, makes an effort to fulfill orders, especially for large contractors who need a lot of paint, said John Cornell, a salesperson who orders paint for the stores.

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

Andrew Moore, an employee at Ricciardi Brothers in Philadelphia, said the business is running out of the inferior paints used by large contractors, even though there is a plentiful supply of higher quality paints. The demand is so great that the store has had a record year, with sales up 20% over the previous year. Prices are up as much as 15% for some brands, Moore said.

Problems in the petrochemical supply chain have been exacerbated by labor shortages and shipping containers, as well as congested ports. Some Asian ports have been closed due to COVID-19 outbreaks. In the US, ports like the one in Long Beach, California, are struggling with ship jams waiting to be unloaded.

“I think this will go on for a long time because there are so many factors at play here,” said Kaitlin Wowak, a management professor at the University of Notre Dame. “And it can be found in so many products everywhere.”

It also forces manufacturers to rethink some of their practices. For decades, companies relocated production to China to take advantage of lower labor costs. They also kept expenses to a minimum by reducing inventories. Using a “just-in-time” strategy, they only bought materials as needed to fulfill orders. But, as the recession and recovery have shown, there are risks in keeping inventory levels flimsy.

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

The old management philosophy, she said, was “to get everything for the lowest possible price. What we are dealing with right now is a consequence of these decisions. Companies have lost hundreds of millions, sometimes billions of dollars in (lost) profits because their supply chains have failed. “

The petrochemical experience, Vakil said, will teach companies to monitor the lowest links in their supply chains. It is always easier to just keep track of the important things – such as motors or electronics.

But simple plastics are also important. Imagine trying to market breakfast cereals without a cheap plastic bag for corn flakes or wheat bran.

“You can’t just tip the muesli into the box and send it off,” says Vakil. “The plastic bag is just as crucial an ingredient as the actual (product) and the box and everything else. But supply chain practitioners have traditionally not viewed this as that critical. And plastics are ubiquitous these days. “

Analysts assume that the petrochemical crisis will last well into 2022.

“You really need to put COVID in the rearview mirror for this logistics situation to normalize,” Pafford said. “You can’t just throw more ships and more containers onto the water. … we have to load them. If ports are closed due to a COVID lockdown – good luck. “

Paul Wiseman and Tom Krisher,

The Associated Press

Wiseman reported from Washington, Krisher from Detroit.

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