Update on the Hurricane Harvey material crisis

On August 30th, following the Texas landfall of Hurricane Harvey we sent a letter to our clients, and posted the same on our company social media accounts, about the possibility of a materials crisis in the plastics industry following that destructive hurricane.

 

Unlike many plastics processors, we were being proactive in that regard, just as we have always been proactive in materials management, knowing something like this hurricane would happen.

 

That preparedness manifested itself in multiple ways: the investment years back in material silos that would allow us to hold over a million pounds of resin at a time; the utilization of a mixed basket of six  materials suppliers with none holding more than 30% of our business; and the careful consideration of the markets by our materials manager, Cliff Hoover.

 

Despite all that planning, no one could be prepared for what the marketplace has become and will continue to be. Hurricane Harvey was an unprecedented event.

 

Almost three-quarters of the North American blow molding materials come from the Texas communities that were affected by the floods and three-quarters of those producers are still to this day either idled, crippled, or a shell of their former selves.

 

Here are some random observations about what faces us — and faces you:

 

  • High density polyethylene is incredibly hard to come by, no matter your buying power. Many of our September railcars have yet to roll, and some are delayed by two weeks and likely more
  • One huge supplier won’t have their main plant up and running soon and they are not accepting new orders until January. That caused them to cancel a half-million pounds of resin that we had on order with them for September and October
  • Another supplier lost an incredible 75 million pounds of material that was stored in rail cars that became submerged in the flooding
  • The plants that produce critical building blocks of material – ethylene and hexane comonomers are hurting. The latter is still lacking 67% of what the industry needs
  • Our material prices have risen dramatically. Versus where we were in July, a pound of material is 20% higher than it was and that number is expected to grow. It could be worse had we not managed risk: Some well-known manufacturers that are household names have always chosen to single source materials so they can reap rebates at the end of the year (which pleases their shareholders). By doing so, when their source is damaged they have to buy on the spot market and are paying 20% above our newfound higher price
  • Suppliers have told us that November will be worse than September and October – that’s because all prime stock will have been used up by then and filling orders will take some time
  • It has been stressful trying to manage supplies and anticipated supplies as we produce existing orders and plan for the building of our inventory of pool and spa products for the 2018 season. My greatest displeasure is had in my periodic idling of machines and, above all, the idling of our machine operators who run them and have families to feed

 

But, despite that gloom and doom, we are in fair shape and a lot better off than many of our competitors. We have material in stock, we are getting more (allegedly) and are set through November (allegedly). Cliff is doing a yeoman’s job in this material crisis. But, know that this is an active, fluid situation and things can change….at a moment’s notice.

 

How does this impact you?

 

Hopefully it doesn’t from a supply standpoint. We should be able to secure material to make your products. There will be some delays in delivering to you, no doubt, but you will still get your products.

 

Our prices to you are certain to change. The quantum leap in material prices has to be passed on. How that affects you is based on how large of an item you are buying. How long the prices will remain high is unknown. The Texas plastics plants have to recoup their losses and manage the spot market’s rewards. And, as you know with gas prices, petrochemical companies are quick to raise prices but slow to lower them. Best guess, I envision at least 7 months of high resin prices.

 

I hate giving you bad news but I hope you appreciate the insight and frankness. Most manufacturers haven’t been so upfront with their clients and that leads to crises with the clients (and the clients’ clients).

 

We look at all of our proactivity as just another part of our culture of strong customer service – we prepare for the worst, create business models around those possibilities to mitigate our risks and yours, and keep you informed so that you can adjust your business plans accordingly.

 

We’ll get through this, but it’s going to be a wild roller coaster ride.