Tight shipping challenges US chems

13:00 PM | August 6, 2018 | Clay Boswell

US chemical producers have always understood that the current investment boom would create logistical challenges, but steady economic growth is compounding the problem. Rail remains a sore point, while trucking has become increasingly scarce and unreliable. With the system maxing out, shipping costs have shot up.

The Cass Truckload Linehaul Index, a measure of truckload pricing published by Cass Information Systems, shows that the situation is not improving. In June, the index increased 9.5% year over year (YOY), for a fifteenth consecutive monthly gain. “We are increasing our realized contract pricing forecast for 2018 from a range of 6–8% to a range of 6–12%, and current data is clearly signaling that the risk to our estimate may be to the upside,” says Donald Broughton, principal managing partner of Broughton Capital and a contributor to the index. “We believe that this is the strongest normalized percentage level of truckload pricing achieved since deregulation.”

Producers have begun to pass the cost along. On 25 April, Oxea announced a freight adjustment, citing “escalating costs associated with securing truck carrier capacity.” BASF followed on 21 May. “It has become increasingly difficult to meet growing market demand in the current transportation environment,” said Teressa Szelest, president/market and business development at BASF. “We are implementing additional supply models and other means to secure the freight capacity that allows us to provide our customers with the products they need, when they need them.” Celanese made a similar announcement on 8 June.

Even worse than expected

A crunch of some sort had always been in the cards, given the number of plants being built in the United States (chart).

To get ahead of the issue, the American Chemistry Council (ACC) commissioned a study by PricewaterhouseCoopers (PwC), “Transporting Growth: Delivering a chemical manufacturing renaissance.” Published in March 2017, it projected an additional 1.8 million annual shipments by 2020 across all modes of transportation. PwC estimated that transportation delays would result in excess inventories costing $22 billion in working capital, that logistical inefficiencies would drive up operating costs by $29 billion over a 10-year period, and that additional investments in the equipment and infrastructure necessary to handle the increased congestion and delays would cost $23 billion.

The costs could be even higher, says ACC’s Scott Jensen. “Those estimates were based on investment numbers of $160 billion and 260 projects,” he notes. “The figure is now closer to $200 billion and 325 projects.”

The projects include a host of world-scale polyethylene plants, mostly located on the US Gulf Coast in Texas or Louisiana. The first six, totaling almost 3.6 million metric tons/year (MMt/y) of production capacity, began operation in late 2017, and at least eight more totaling 3 MMt/y of capacity are slated for startup by early 2020. PE sales ticked upward just 3% YOY during the first quarter of 2018, but as the new plants ramped up, volume surged 16% YOY during the second quarter to nearly 5 million metric tons, according to data from the ACC.

Production has increased throughout the US chemical industry, as well, driven by both new capacity and solid demand, says ACC. After a slow start during the first quarter, output increased 2.3% YOY during the second quarter, and ACC expects 3.4% for the year.

Delivering this product might have been easier a few years ago, but production has meanwhile rebounded throughout the industrial sector (chart). Freight capacity tightened significantly in 2017, and logistics now seems to be a strong seller’s market, according to the Council of Supply Chain Management Professionals’ “2018 State of Logistics Report,” published in June.

“United States business logistics costs rose 6.2% last year, following a rare decline in 2016,” says the report’s author, firm A.T. Kearney. “Transportation led the way with a 7% overall increase, with costs running well above inflation for every shipping mode except waterborne freight. Private or dedicated fleet and rail saw the biggest hikes as shippers scrambled to lock up capacity.”

Too few truckers

“No sector saw more change last year than motor freight, where severe capacity pressures sparked sharp rate hikes,” A.T. Kearney notes. The problem is mainly a labor shortage. According to a recent report in the Washington Post, the industry is short 63,000 drivers, and with annual turnover at 94%, uncertainty is rife. That has been bad news for US chemical producers, who relied on trucks to deliver 480 million metric tons of product in 2017—55% of all shipments, according to figures from the ACC.

US chemical producers sent 20% of shipments by rail in 2017, but prices are increasing there, also. “As cargo shifted to rail from trucks, railroads were able to raise prices sharply, reversing a 2016 decline,” says A.T. Kearney. The Cass Intermodal Index has reflected the change, leaping 8.8% YOY during the second quarter. “Tight truckload capacity and higher diesel prices are creating incremental demand and pricing power for domestic intermodal,” explains Broughton.

Chemical rail volume continues to swell, according to data from the Association of American Railroads. Railcar loadings, which exclude intermodal, increased 3% YOY during the first quarter, and 4.5% YOY during the second quarter. Total freight rail likewise surged, rising 3.7% YOY during the first half, with most of the gain from intermodal traffic, which increased 6% YOY.

Waterborne shipping, unlike truck and rail, has not yet become more expensive. “Water shippers capitalized on lax pricing discipline among carriers to negotiate 2018 contracts at or below last year’s rates,” says A.T. Kearney. “Industry fundamentals are expected to balance out this year, with higher fuel prices likely to boost shipping costs.”

However, there are other issues to consider, particularly where to load for export. Geographically, the Port of Houston is the logical point of embarkation for the millions of tons of additional PE resin to be produced on the Texas coast. It already handles nearly half of US resin exports, but it is crowded. To improve access, the state of Texas last year enacted a law allowing heavier trucks along designated corridors in the region. The Port itself has spent over $1 billion on improvements.

Even so, ports on the east and west coasts of the United States have been attracting a greater share of the business. During the first five months of 2018, resin volume through the Port of Charleston, South Carolina, increased 15% YOY, according to the Journal of Commerce. The port accounted for a 6.7% share of US resin exports during the period, up from 5.5% for the whole of 2017. Other key port alternatives on the east coast are Savannah, Georgia, and Norfolk, Virginia, and on the west coast Long Beach, California.

To facilitate these options, warehouse operator Katoen Natie has built a plastics packaging facility in Dallas, Texas, where hopper cars of resin pellets can be received, repackaged to order, and reloaded into intermodal containers for shipment by Union Pacific Railroad (UP), which has a nearby intermodal terminal. UP calls the service “Dallas to Dock”.

“Houston will take about 50% of total exports, but we feel there need to be alternatives, and Dallas could be a great one,” says Frank Vingerhoets, president/petrochemicals, who spoke in March at IHS Markit’s World Petrochemical Conference.

Katoen Natie already operates two facilities in Houston. Together they total almost 5 million square feet, with another 5 million available for build out. They also have a combined 1,300 railcar spots, with options for more. “What is very important is having the capacity to store railcars,” he notes. Fog or any other kind of port delay can quickly create a backlog.

The initial phase of the new Dallas facility has an area of 250,000 square feet and 220 railcar spots, but 2.5 million square feet and 600 railcar spots are planned.