December 18, 2017

Petrochemical Supply Chain & Logistics Conference

By Jon Gates
Attendees at the Petrochemical Supply Chain & Logistics Conference were upbeat on growth and exports for 2018, driven by the low-cost shale gas, and transportation sources also expect capacity shortages and higher rates in 2018.

Resin Tsunami in 2018
This year’s Petrochemical Supply Chain & Logistics (PSC) conference focused mainly on what is being termed “a resin tsunami” that is expected to emerge from the U.S. petrochemical industry by 2H18. By most accounts, the surge is late. Some industry presenters urged caution after an initial wave of infrastructure spending failed to see polyethylene/resin volumes meet expectations; however, now more than a dozen major projects are in various stages of completion ($45 billion investment), with the first wave expected to unleash an estimated 9 million tons of resin production in 2018 and 2019. All this was started by the shale gas revolution 10 years ago that significantly lowered natural gas and NGL prices and created massive U.S.-based reserves. A second wave of expansion is now on the boards for 2020-2025. Most of this volume growth is being targeted at export markets, now dominated by the Middle East.

Petrochemical producers mentioned at the conference as leading this expansion were DowDuPont Inc., Chevron Phillips Chemical Co. LLC (CPChem), Exxon Mobile Corp., LyondellBasell Industries N.V., Huntsman Corp. and others. Polymer packaging companies are rapidly expanding their production square footage as well to prepare for the resin wave. Companies like Vinmar International Ltd., Plantgistix and M. Holland Co. presented at the conference. An M. Holland speaker said, “It’s a Goldilocks opportunity. After 30 years in this industry, this is the best outlook we’ve ever seen. With the shale [gas] revolution, wage rates rising in developing countries, U.S. efficiency gains [and] …the markets will prevail.”  

An industry consultant laid the case for steady managed growth in the PE/resin supply chain as it shifts toward exports. Plastic pellet (resin) shipments are expected to double in that period, with more than 90% of the volume on rail, the rest on truck.

Golden Year Expected for Transport
OTR Global talked to operators of five large truck-based transport groups at the conference, representing more than 8,000 units in their operations, primarily specialty chemical haulers and flatbed services, plus one intermodal group. The fleets mainly serve the shale industry, petrochemical, industrial and construction markets. The intermodal group is broadly across numerous verticals including consumer/retail. Based on demand, capacity limitations and the ELD mandate, they all expect capacity limitations and double-digit rate hikes in 2018. Rate increases for 2018 were in a range of 10%-30% yy for contracted services. These estimates by specialty carriers are higher than in OTR Global’s Dec. 5 TL/LTL report, which forecast 2018 rates up 5%-8%. An intermodal representative suggested that those forced to go to the spot market in 2018 for lack of capacity in their contracts will be in a difficult position.

Fleet operator estimates varied on how much trucking capacity would be taken out of the market with the ELD implementation, and several suggested a possible 5%-10% capacity reduction in 2018. (The expectation reported in the Dec. 5 TL/LTL report suggested 5% or less). A fleet executive with 4,000 trucks (mix of owner operators and fleet-owned) said he had 70 owner operators leave the industry in the last couple weeks and that more would do so by the deadline. He thought local and long-haul fleets would have the best shot at maintaining business flows with ELD compliance, but that fleets operating in the 500-mile regional haul markets would be under the most pressure. He expected a 20% yy rate increase in 2018, with spot above that.

An intermodal source said there is a perfect storm of events leading toward rate increases for the industry in 2018: the ELD mandate, hurricane supply chain disruptions, the CSX Corp. transformation moving tonnage to Norfolk Southern Corp. and trucks, and the western flow of goods via intermodal still running strong with the Inc. factor. He said traditional shippers -- including big-box stores and department stores -- normally position inventory by late October and early November, but the date for Amazon is Dec. 13 and eastbound volumes are still running at peak levels. All the major intermodal groups are sold out. His operations initially budgeted for 7%-12% yy intermodal rate increase in 2018 but now were revising up to 10%-15% yy.

Railcar Issues Cited at the Event
Pressurized Tankers:
In OTR Global’s Dec. 1 Rail Services report, a major chemical shipper noted that an interim designed pressurized tanker segment was going to be mandated into a new replacement cycle. A rail expert at the PCS conference identified those cars as pressurized chlorine cars, a subset in the tanker market. If the tanker market is 400,000 units and pressurized cars are about 80,000 units (20% of tankers, mostly LPG, LNG, etc.), the chlorine cars represent about 7,000-8,000 of the pressurized tankers (8%-10%). Most of that fleet are 500-psi cars. New mandates require upgrades to 600-psi cars that have thicker steel hulls. That replacement cycle would start in 2018. The Greenbrier Cos. Inc. is expected to announce a new tanker design for the 600-psi chlorine market. (OTR Global’s Railcar Spending report is scheduled to be released Dec. 21.)

Tenaris Expected to Gain Share in the U.S. Shale Drill Pipe Market
Two industry supply chain sources on the conference floor said they expect Tenaris S.A. to take significant market share from overseas pipe suppliers (primarily Asia-based suppliers) in the U.S. shale market when they open the new Bay City, Texas, manufacturing center.