|By 2013, natural disasters have increased by almost 2.25 times the level of 1980 (see Figure 11), mostly driven by severe weather.2 Although climate cycles can be cyclical, in recent years they have had a significant impact on the basic materials business. For instance:
In 2010-11, coal mines in Queensland, Australia were shut down due to devastating floods.
The March 2011, the Tohoku 9.0 magnitude earthquake and tsunami that struck northern Japan disrupted supply in the markets for electronic chemicals, automotive coatings and other chemical products .3 Approximately 30% of Japan’s petrochemicals production was shut down, and several paper mills and glass production plants were closed. The disruption to industrial production impacted global mineral markets as well.4
Hurricane Sandy (October 2012) caused numerous shutdowns and supply line disruptions, with some chemical facilities remaining closed afterwards.
In 2012, the US went through the worst drought in 60 years, adversely affecting the corn yield and quality for the year. Irrigation for ethanol crops and steam for solar energy also depend on water. Naturally, fertilizer and pesticides markets were impacted as well.
Regarding petrochemicals, ethylene crackers are typically situated in coastal areas (see Figure 2), which happen to be among the most susceptible geographies to weather-related disasters. Even a one day outage of an ethylene cracker in the US Gulf Coast would represent a loss for $3.5 million in revenue (using 4Q13 performance) on first order (ethylene and co-products, excluding derivative units) products alone6.
Employing cloud computing solutions, especially as globalization and centralization of business operations are leading to more assets exposed to localized events.
For North American operators, taking advantage of current higher profitability levels brought about by low cost gas to fortify assets and create more flexible supply chains.
Developing relationships with other producers for alternate supplies to continue the flow of goods to customers.
Actively engaging in the development of infrastructure around plants, particularly pipeline, road and rail.
Assessing and mitigating electrical power dependence, since power supply outages were a major issue in post-hurricane recoveries.
Having capabilities and plans for communications management with local communities, press, employees, suppliers, customers and other relevant entities.
Developing and practicing disaster exercises and contingency plans. These should include management, employees and external emergency groups.
Planning in advance the fate of assets in the event of a natural disaster. Some companies turned natural disasters into opportunities to shut down or improve poor performing assets.
Thank you also to Patricia Faust, Khayyam Jahangir, Segran Pillay and Manish Sharma for input to this blog.