In the North American polyolefins market, we have become used to supply disruptions due to weather events, like winter storms or hurricanes. This year, however, we are facing a new type of supply disruption: a “Logistical Hurricane” that is tightening supplies, not because producers are unable to manufacture polymers, but because they are unable to move them…
Let’s explore what is going on.
How Do We Move Polyolefins?
Most polyolefins in North America are moved by rail. The following illustration shows the freight rail maps for Texas and Louisiana, the two states that concentrate approximately 80% of the polyolefins production in the country. Union Pacific, BNSF and Kansas City Southern are the main suppliers of freight services for these two States.
How is Rail Traffic in 2022?
If the premise is that polyolefin producers are experiencing logistical issues, the first question to ask is whether U.S. rail traffic in 2022 is higher than prior years. To check this, we looked at the American Association of Railroads weekly traffic data. The following chart presents the year-to-date average weekly rail traffic in the United States. In the first 15 weeks of 2022, the average traffic totaled 490 thousand carloads and intermodal units. To date, average carloads in 2022 have been 2% higher than the 2021 average, whereas intermodal units have been 7% lower than the 2021 average. Overall, average year-to-date weekly traffic has been 3% lower than the average level a year ago. When compared to 2018, the year with the highest weekly traffic average of the last 6 years, carloads in 2022 have been 10% lower than their 2018 level, intermodal units 3% lower and overall traffic has been 6% below the 2018 level.
What Are Rail Companies Telling Us?
The next question is what are railcar companies telling us is going on? On April 11, 2022, Union Pacific indicated that “Over the last few weeks, our network has experienced some setbacks – including numerous service interruptions, crew shortages in select areas and delays to our network – as we have seen our operating inventory continue to climb over the past 60 days. This additional inventory has led to more congestion in yards, an imbalance of our resources, and further slowdown of our operational performance.” The company’s performance measures show that U.P.’s operating car inventory in 2022 is at its highest level over the last two years and climbing, and average train velocity is at its lowest level in two years and trending down.
On the other hand, on April 22, 2022, BNSF indicated that “While we have generated improvement in locomotive availability during the past several days, active car inventory on the network remains significantly above current volume levels. Reducing this elevated number of railcars online remains an impactful action in the short-term to generating faster velocity and greater network fluidity.”
Finally, KCS service updates do not offer any specific information about recent performance. However, an analysis of the company’s performance measures indicate that the company’s average velocity is within the last two years’ range but has a decreasing trend. Additionally, the number of operational cars online is within the last two years’ range but they show an increasing trend.
So, even though overall traffic is not higher than in previous years, speed is getting slower and operating cars inventory is moving higher. As a result, UP and BNSF are asking some clients to reduce their rail car inventories. Both companies are also increasing the number of locomotives on their fleets and are making efforts to recruit and train additional crew personnel, but are facing difficulties related to the tight labor market in the country.
If customers don’t voluntarily reduce their active freight-car inventories, Union Pacific will start limiting customer-owned railcars on its network. There are reports that, because of rail restrictions, Ineos Olefins & Polymers declared a force majeure in all its polyolefin products.
What Else Is Going On?
The logistical issues polyolefin producers are facing, such as the ones described before, are not limited to domestic rail transportation. Export logistics are also presenting difficulties. Besides high international freight costs and long transportation times, ports around the world are experiencing congestion. The port of Houston has seen an increase in imports in the last 12 months, as merchandise and containerships are diverted from other ports into the U.S. Gulf Coast. As you can see in the next chart, monthly imports are approximately 50% higher than their level two years ago, and exports of empty containers have more than tripled during the same period.
The combination of port congestion and high shipping costs are pushing export warehouses to reach capacity. In the words of one of the largest U.S. polymer traders, warehouses “can’t fit even one more bag” of polyethylene pellets.
What Are The Consequences of These Issues?
In summary, polyolefin producers are facing difficulties shipping polymers to domestic buyers, and their ability to export is impacted as well. At the same time, domestic demand by U.S. converters is reportedly strong. The combination of all these factors is resulting in some surprising dynamics in the North American market.
Just as a hurricane constrains supplies, what we are experiencing is a logistics driven, hurricane-like inability to supply. Producers have the capacity to manufacture what’s required domestically, and have plenty of excess capacity to manufacture polyethylene for the exports market. However, difficulties to ship material domestically and to export outside of the country are preventing them from doing so. To keep inventories from growing out of hand, producers will need to decrease operating rates (which apparently they haven’t, at least not through March). To dissuade demand, producers are pushing for price increases, which are surprisingly taking hold. And all of this is happening without a storm or weather front in sight! That’s how we (North America) end up (again) with the highest prices in the world, and the lowest cost to produce polyethylene and polypropylene…
Sources: ChemOrbis (Asian Prices), ChemPMC (North American Prices, Cost Estimates)
This is a unique and abnormal situation. In an efficient market, U.S. producers should be able to ship domestically and abroad as much as the market would require. If exports are not attracting interest from overseas, prices should fall to make those exports attractive. And, if their ability to produce exceeds the sum of exports and domestic demand, prices should fall. None of this is happening.
We as consumers may feel that the COVID pandemic is gone. But situations like this remind us that the pandemic’s lingering effects will be with us for a while. Without the pandemic-driven inefficiencies, North American prices would be a lot more competitive, and we would be having a very different conversation…