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Hurricanes Storm in with Lasting Impact

by Chris Kuehl, managing director

Armada Corporate Intelligence

SUBMITTED

It’s an ill wind that blows nobody good. This Scottish saying was not directed at the impact of a hurricane, but the sentiment is one that can be universally shared. This year has been a roller coaster due to the storms and other natural disasters that have befallen the US.

On the one hand the toll has been very high – both in terms of lives lost and the economic damage. The totals still are being tallied, and already the numbers are in the hundreds of billions. But, even as the assessments are being made, there is the silver lining (at least from the perspective of the economist). What has been destroyed now has to be rebuilt. This process also will cost hundreds of billions, but this will be money spent to bring the infrastructure back and to make people and businesses whole.

There have been several unique aspects of these storms and disasters. Hurricane Harvey took aim at the part of Texas that hosts almost 50 percent of the country’s total refinery capacity. This concentration of capacity is even more profound when one understands the variety of refined product produced in the US. The storm affected the production of vehicle fuel, to be sure, but the most profound impact was in the production of ethylene, as well as other petrochemicals critical to the plastics industry. Initial estimates held that these production facilities would be out of commission for many months and, in some cases, that estimate is proving accurate. The damage caused by the storm itself was significant, but the flooding that followed did the real damage.

At the time of the disaster, the price of basic plastic material shot up to levels not seen in years. These price hikes affected many of the basics, such as polyethylene and PVC. The price hikes were expected to last into November, and that has been the case for many categories. The shortages reverberated through the entire supply chain and will continue to be an issue into the coming year. It is that cascade of reactions that will cause the greatest concern. The entity that can’t source the commodity will miss opportunities to fill that order – and then that customer misses opportunities and so on.

Some attempt has been made to source elsewhere, but the US has played a dominant role in this sector for a long time, and switching to some other supply network is far easier said than done. The majority of the world simply has to wait for the US to get back to its former production levels.

The good news in all this stems from the fact the recovery will bring new technology to the damaged areas. As recovery and rebuilding get underway, the operations will avail themselves of the newest and most technologically advanced equipment. The good news is that Houston is a wealthy city in a wealthy country, and the affected businesses have the wherewithal to rebuild. In contrast, there has been Puerto Rico – a part of the US that is not wealthy. The reconstruction process there has been extremely slow, and even the basic recovery of power is still months away.

The impact on fuel has been more limited, and the price per gallon for gasoline and diesel remained somewhat more reasonable. The recovery has been swift enough, although there are still transportation issues stemming from the fact the colonial pipeline is old and under capacity – limiting what can be sent from the middle of the country to the Eastern states.

Will there be lessons learned from these disasters? There should be, but it is likely there will be far more talk than action. The hurricanes were very different and hit in very different ways. It would have been hard to anticipate the path or the damage. Hurricane Harvey was a flood event, and no scenario anticipated the amount of rain that fell in the Houston area. The preparations that had been made would have been enough to handle a normal situation. The path of Hurricane Irma went toward an area that had not been hit for almost 30 years. The path of Hurricane Maria was a direct hit on Puerto Rico, and that had never happened previously. Certainly, plans must be in place to better protect and prepare, but there are limits to what can be done and what people are willing to pay.

The other aspect of preparation concerns the supply chain, and there is abundant evidence that companies are setting up contingency plans to cope with future issues of this magnitude. These range from creating a more diverse supplier base to storing more material than might have been the case before. The limiting factor is expense. It sounds good to have multiple suppliers, but this means giving up some of the volume discounts. It sounds good to have more product in reserve, but that means inventory costs and running the risk of missing out on price declines. The notion of “just-in-time” was a reaction to the costs of storage and warehousing. What seems like a great idea in the wake of a severe disruption looks like an unnecessary expense after years and years of no incidents.

The best estimate is that rebuilding will be largely complete by early next year, and it is likely that very little will change as far as the current system is concerned. This will apply to the petrochemical sector, as well as the other sectors that have been affected. The fuel situation is unlikely to alter, and there will be no change as far as shipping is concerned. Once the infrastructure for an industry this large has been established, it is very hard to change it. The options that look good now will not look as lucrative once the damaged infrastructure is developed.

The storms had a profound impact on the economy as a whole, but this is another case of good news following bad. The initial damage to the employment market was severe – Texas alone lost 133,000 jobs, and the national totals dipped for a month – down by 33,000 jobs. The majority of these have already been recovered, and a surge in new jobs will be seen as people arrive to engage in the reconstruction.

By the end of the year, job creation will be back up. The third quarter GDP numbers shook off the storms for the most part and finished above 3.0 percent. It had been expected to crest at around 3.6 percent, but the dip from storm impact was far less than had been thought.

Several industries got a major boost from the aftermath of the storm. The most aggressive was the automotive sector, as there was an immediate demand for some four million cars to replace those lost to the storm. This was an urgent situation, as there was no real alternative to the private vehicle in these communities. That surge was good for some solid, but temporary, numbers in car sales.

A major boost has been seen in demand for building materials, appliances, furniture and all the other accoutrements of modern life, and now there will be hiked demand for infrastructure supplies – everything from steel to aluminum and lumber. Much remains to be done to return these areas to some sense of normal.

Chris Kuehl is managing director of Armada Corporate Intelligence. Founded by Keith Prather and Chris Kuehl in January 2001, Armada focuses on the market forces bearing down on organizations. For more information, visit www.armada-intel.com.