An update from Fratco President, Chris Overmyer
Industry-wide, customers who rely on resin suppliers to manufacture pipe are facing challenges. After reasonably consistent and predictable markets in 2019 and 2020, the forecast for 2021 was more of the same. With Asia and Europe expecting weak demand, America’s exports to these regions were supposed to be fairly small, allowing domestic PE supplies from Houston-area producers to remain stable and steady. As the saying goes, a “series of unfortunate events” unfolded, dealing pipe suppliers unforeseen realities. Saying everything changed overnight in resin production is not an understatement.
At the epicenter was an issue between the Mexican government and Braskem. Braskem is a Mexico-based PE producer who assisted Houston-area suppliers by taking a load off of exports over the last few years. A dispute regarding natural gas costs led to the Mexican government shutting off the supply of natural gas to the plant—literally—in the middle of the night. This resulted in an immediate zero output of PE product and tipped the balance of supply and demand in the Gulf Region just enough to stabilize and even slightly increase PE prices in North America through the remainder of December; a surprise to everyone involved.
While prices inched up through January, Texas was about to encounter a deep freeze unlike anything they had experienced in modern history. To us in the Midwest, who spend half the winter deeply frozen, the news of impending Texas winter weather didn’t sound like a big deal. Yet as the kids say today, Texas is “built different.” Most residential buildings have electric heat pumps for climate control, for instance. The sudden demand for power crippled the electrical grid in Texas. The state’s rather outdated rules of not allowing some regional providers to share capacity with others brought some areas to a grinding halt. This led to many Texans being without heat or electricity for an extended period. Large industry wasn’t immune to this standstill. Larger small town-sized refineries and reactors that produce everything from gasoline to polyethylene were left idle.
At first, this pause in production didn’t seem alarming. After all, every hurricane season brings scares that lead to plant evacuation. Once the storm passes, the production lines are usually back up and running in a matter of days. Nobody expected the damage that freezing would cause to miles of cast-iron pipes that convey material through plants. When the freeze ended, thawed pipes and cast-iron valves had developed cracks and were rendered unusable. We now find ourselves weeks into a situation where 85% of US production of polyethylene is shut down. Once the smoke clears, there is no roadmap or timeline for full-capacity production.
Every major producer of polyethylene has declared force majeure. This means they’re no longer honoring any contractual supply obligations—they simply can’t. Think about it: From milk jugs to PPE, garbage bags to medical supplies, every company who relied on contracted, regular deliveries of prime PE are scrambling for material that isn’t available. Why? It isn’t there. These producers began bidding on the spot market for virgin material. This drove market prices well above the prime contracted price. The irony is that none of that material is available either. If you’re not making prime material, you’re definitely not making off-spec material either. This caused a rush to the recycled market, bidding the cost up to unprecedented prices in a short amount of time.
“On behalf of Fratco, I apologize to you, our customers, for the inconvenience of this whole experience.“
To say my team and I are deeply sorry feels like an understatement. We understand the difficulty that no market visibility and sudden, measurable price changes cause you, our loyal customers. In all transparency, there is no immediate end in sight to this situation. This means Fratco will be forced to price products according to raw material market conditions. Please understand the unprecedented crisis we find ourselves in nation-wide. This is much bigger than our corrugated pipe market. Other industries are not immune. The supply chain disruption has a huge ripple effect on everyone who relies on plastics. Within our industry, this situation affects those who are tirelessly working to restore resin production, the drivers who deliver it to our plants and our Fratco teams who continue producing the best pipe in the business.
I can make no overarching promises, yet you can count on one thing: Fratco will continue supplying you with the highest quality HDPE pipe and accessories through this situation. We cannot forecast what this will involve, how long it will last or when we will see market stabilization. While that may sound extreme, it is indeed the situation we all find ourselves in—together.
President and CEO