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Clearing the Gulf Coast’s chemicals logjam

As a massive wave of chemical plants comes online, companies chart different courses to the market

by Alexander H. Tullo
August 28, 2017 | A version of this story appeared in Volume 95, Issue 34

A photo of containers on the Houston ship channel.
Credit: Port Houston
Cranes haul containers at a terminal on the busy Houston Ship Channel.

The heavy lift vessel Zhen Hua 13 departed from Shanghai last month carrying three new, 120-meter-tall cranes. The big ship should reach its destination on the Houston Ship Channel by early October.

The new cranes are part of a $700 million upgrade project at Barbours Cut, one of the ship channel’s two container terminals. The improvements will allow its wharves to accommodate the larger vessels soon to arrive through the newly expanded Panama Canal and boost container handling capacity by 60%.

Both the expansions and the bigger ships will provide the capacity the port needs to handle the flood of exports that officials are expecting from the Houston area’s new polymer plants.

Cheap, shale-gas-derived feedstocks have induced chemical makers to spend tens of billions of dollars on multiple new plants in the U.S. Around the Gulf Coast, companies will start up 10 ethylene cracker complexes—most complete with plants for derivatives such as polyethylene—within the next few years.

A few projects, among the largest of the coming wave, are starting up already. Major players Dow Chemical, Chevron Phillips Chemical, and ExxonMobil Chemical are all commissioning polyethylene plants in Texas.

With the buildup at hand, chemical company logistics managers are concerned about whether the region’s port, rail, and truck transportation systems will be able to handle the flood of resins that will leave the country through the Gulf Coast. They are working on strategies to use local ports as effectively as they can—and on contingency plans to circumvent the entire region if they need to.

The consulting group Accenture forecasts that U.S. polyethylene capacity will increase by one-third between 2015 and 2018. By 2020, it expects 4.6 million metric tons of new annual polyethylene exports. This is enough to fill 255,000 standard 20-foot (about 6-meter) shipping containers, which in turn would fully load 51 container ships. By itself, polyethylene would represent a more-than-10% increase in traffic through Port Houston, which handled 2.2 million standard containers last year.

“A lot of the resin capacity hasn’t turned on yet, but when it does, there are a lot of concerns about congestion,” says Paul Bjacek, chemicals and natural resources research lead at Accenture.

Until recently, U.S. chemical executives didn’t have to think about the issue, Bjacek notes, because exports weren’t essential to their business. For polyethylene, for example, exports made up roughly 10 to 20% of shipments. “Now, whole polymer plants are being built for export,” he says.

The chemical export boom by the numbers

4.6 million metric tons: The amount of additional annual polyethylene exports from the U.S. expected by 2020.

255,000: The number of 20-foot (about 6-meter) shipping containers that the polyethylene will fill.

51n: The number of container ships it will take to transport those containers.

2.2 million The number of containers Port Houston handled in 2016.

11%: The increase in Port Houston container traffic over the past three years.

Sources: Accenture, Port Houston

“The U.S. has not had the kind of construction going” that it now has, Chevron Phillips’s chief executive officer, Mark Lashier, told an audience at the IHS Markit World Petrochemical Conference earlier this year. Lashier estimated that 60% of the new polymer capacity will be exported. “How is it all going to get out of the country?” he asked.

Today, most plastic resin leaves Gulf Coast plants in hopper cars. At large domestic customers, such as those that convert the resin into milk bottles, the cars roll right up to the plant gates. For international shipments, the cars go to packaging firms around Houston that repackage the bulk resin into 25-kg sacks, which are loaded into shipping containers and trucked to terminals on the Houston Ship Channel.

“The waterside is absolutely ready,” says retired Capt. Bill Diehl, president of the Greater Houston Port Bureau. The big new cranes, he notes, are on their way. The waters around Barbours Cut and Bayport, the ship channel’s two container terminals, have been dredged down to a depth of 14 meters. The upgrades will allow the port to bring in the larger ships that have begun to transit the new lane of the Panama Canal, which opened last year.

Before the expansion, the canal could handle container ships carrying 4,500 containers. Now, ships laden with as many as 13,000 can make it through. With its improvements, Houston will handle ships bearing 9,000 containers, Diehl says.

The bigger ships will spur the port of Houston’s growth, Diehl argues. The boost in size of the ships will decrease the cost of shipping each box, improving the competitiveness of Houston and East Coast ports against ports on the West Coast.

Additionally, Diehl says, Houston is strategically suited to take advantage of the larger ships. Many U.S. ports suffer from a container imbalance because they import more than they export. In Los Angeles, which is an arrival point for Chinese imports, boxes go back to China empty, driving up the cost of shipping because half of the shipping and handling is wasted on unused boxes.

Houston, in contrast, is a large export port because of all the local industry. A good balance between imports and exports helps containers go in and out fully loaded and keeps shipping costs relatively low. Diehl sees a virtuous cycle. As plastics exports ramp up, shipping companies will increasingly use the port because they know they will be able to fill the boxes for the return trip from Houston.

But even if Port Houston manages the growth, chemical companies may have plenty of transportation problems to worry about. Earlier this year, the consulting firm PricewaterhouseCoopers (PwC) conducted a study, sponsored by the American Chemistry Council trade group, of how railroads, trucks, and ports will handle the coming wave of production.

PwC forecasts that U.S. chemical shipments will increase roughly 36 million metric tons over the next three years. Producers will require additions of 270,000 railcars, 723,000 trucks, and 808,000 shipping containers.

The increased traffic will stress each mode of transportation differently: The rail system’s long-standing infrastructure is difficult to expand, trucking faces a limited supply of drivers, and marine shipping capacity has to grow as fast as the chemical exports.

The rail system will be strained particularly around hubs such as Houston; Corpus Christi, Texas; Baton Rouge, La.; and New Orleans. Chemical companies are already experiencing delays of four days on average for their rail deliveries, PwC reports.

“We expect those delays to get much worse based on trying to put additional production through the existing infrastructure,” says Mark Lustig, a principal at PwC, noting that delays are on track to double by 2025.

The railroads are investing. Union Pacific, for example, will spend about half a billion dollars on Texas rail infrastructure this year. But making improvements around Houston is a challenge, Lustig points out. “The rail network inside of Houston has been there for quite a while. The city has grown up around it,” he says. “It makes it difficult to expand.”

On the waterfront, the issue isn’t efficiently loading and unloading ships at Houston’s docks but rather getting shipments from trucks and trains to the docks. And despite the assurances of port officials, many chemical companies are also anxious about whether Houston will have enough containers and ships to handle the surge.

Company logistics managers are increasingly considering options such as sending shipments by rail to Los Angeles and other West Coast ports. About one-third of U.S. chemical exports run through ports outside the Gulf of Mexico already, PwC says.

Diehl of the Greater Houston Port Bureau cautions that such routes could be expensive. “Is it better, faster, cheaper for me to come out of Houston and go to Dallas by truck or train, touch the shipment again,and go by truck or train to Los Angeles or the East Coast?” he asks. “Or is it cheaper for me to just get it to the dock?”

“Train beats truck; ship beats train,” Diehl says, quoting an adage that describes the relative costs of long-distance shipping.

Overall, PwC expects costs to mount for shippers. For example, by 2025, the chemical industry will need to keep $22 billion worth of additional inventory because of all the products that will be tied up through delays and longer routes. Operating costs will increase by $29 billion over the same period, largely because of higher shipping rates. Capital expenditures will total $23 billion as companies require more railcars and other equipment, PwC predicts.

As production ramps up, each of the major chemical companies is developing its own strategy for navigating shipments through the growing traffic.

Chevron Phillips established new packaging facilities in Fort Worth and Charleston, S.C., to ensure it can move product out of its two new 500,000-metric-ton-per-year polyethylene plants in Old Ocean, Texas. The resins arriving in Fort Worth will be sent to ports on the West Coast. The product processed in Charleston will find ships at Charleston’s large container port.

“This doesn’t mean we are unhappy with the Houston Ship Channel. They are important for our business today and will be in the future,” CEO Lashier told the Houston audience. “But when you’re betting $6 billion, you want to have a lot of options.”

Dow is putting a lot of emphasis on communication. Karen Bryant, Dow’s director of logistics, says the firm will collaborate with the ports of Houston and New Orleans to clear the way for its products.

“These two ports have made physical upgrades as well as operational upgrades such as increased hours of service, and we believe the increase in volume will be manageable,” Bryant says. Dow will also collaborate with steamship lines to coordinate vessel space and containers, she adds.

Bryant expects to see rail congestion around Houston even though the railroads are adding storage track for parking railcars to ease the squeeze, she says. Dow is also contracting with resin repackagers for storage space.

“Dow does have contingency plans in place in the event Houston and New Orleans become congested or experience a shortage of containers,” Bryant says. Options include using packaging facilities in the Dallas/Fort Worth area to stage exports to the East and West Coasts.

The firm could also use the port of Freeport, in the shadow of its own massive Freeport complex. The container terminal there handles about 100,000 boxes per year. Dow may also send shipments through Monterrey, Mexico.

With its new polyethylene plants in Mont Belvieu, Texas, ExxonMobil is taking an approach to logistics unique in the U.S. chemical industry. ExxonMobil will dedicate all the new plants’ 1.3 million metric tons of annual production capacity to the export market. The company will do its own packaging on-site. Some 200 trucks per day will haul loaded containers about 30 km to Port Houston. The new plants don’t even have a rail connection for the domestic market.

“This was built to be an efficient export machine,” says April Feick, ExxonMobil Chemical’s vice president of global supply chain.

Finding drivers, Feick says, hasn’t been a problem because it’s easier to hire truckers for short, routine hauls than it is for long ones. The Texas legislature recently passed legislation easing the weight restrictions for trucks on Texas highways within 48 km of a container port. The limit for trucks with six axles increased from 38 to 42 metric tons. The difference will allow ExxonMobil to fully load containers and take 10% of its trucks off the road.

A new polyethylene plant that ExxonMobil is planning for Beaumont, Texas, which is farther from Houston, will be connected by rail and have more of a domestic orientation. The company, Feick says, may further optimize its system by dedicating Beaumont to the U.S. and directing more of the polyethylene output at its older Mont Belvieu facility toward the export market.

If it remains adaptable, the chemical industry should succeed in moving all its new product to market, Feick predicts. “The key on this is going to be logistics flexibility,” she says, “and really working through every element of the supply chain.”


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