Hurricanes have made a mockery of assured supply

Karen Prema & Tom Stundza -- Purchasing, 11/3/2005

Goodyear Tire & Rubber has slowed tire production by 30% in North America because of disruptions in the supply of key raw materials produced in the Gulf of Mexico region. Christopher Clark, senior vice president of global sourcing at Goodyear, says the tight supply was caused by damage to suppliers' plants in Texas and Louisiana by Hurricane Rita. And Goodyear isn't alone: Bridgestone/Firestone and Cooper Tire & Rubber also have scaled back tire production because of shortages of synthetic rubbers and carbon black.

It's supply shortages caused by hurricanes and the resulting force majeure announcements that have buyers in a corner, according to the most recent PURCHASING monthly business survey. With natural gas production cutbacks impacting output of petrochemicals, chemical buyers are seeing slowed deliveries of ethylene, styrene, benzene, heptane, toluene, and xylenes. Such industrial gases as argon, hydrogen and carbon dioxide are tight; liquid hydrogen simply can't be found in some areas because of plant shutdowns.

Titanium dioxide is having a particular supply problem just now, and there are shortages of caustic soda, sulfuric acid, hydrochloric acid, nitric acid, methyl ethyl ketone and potassium chloride. "One of our key suppliers has told us they may not be able to ship all we order through November," says a procurement specialist at packaging supplies firm in Pennsylvania in the recent survey.

"We simply can't produce all the bottles, jars and pails that we normally make and distribute into a variety of markets," says another buyer in Ohio. That's because she and other buyers of resins are getting headaches due to short supplies of polypropylene, all types and grades of polyethylene, polyesters (especially polyethylene terephthalate, or PET) and latex products.

Furniture maker La-Z-Boy and bedding products manufacturer Sealy Mattress have been put on allocation by key suppliers of polyurethane foam due to the lack of availability of TDI (toluene diisocyanate), a key chemical component. Polyurethane foam supply used throughout the upholstery and bedding industry is reported at 50% of normal. So, Sealy is "leveraging its extensive global business relationships to source foam product from its partners," says David J. McIlquham, chief executive officer.

A procurement manager in Philadelphia says his nylon suppliers have declared force majeure and put his firm on 70% allocation until further notice. (Liability is excused when force majeure is declared when supply contract obligations can't be met from war, natural disasters or other "acts of God.")

Thermoplastic products maker Lamson & Sessions has seen its supply chain of key raw materials disrupted, especially for polyvinyl chloride (PVC) resin—where several suppliers have declared force majeure. "This situation has resulted in immediate and significantly higher resin costs and the company has raised its selling prices to recover these additional costs. In addition, this situation has created material shortages and uncertain delivery performance," says a Lamson & Sessions statement.

Buyers at consumer goods companies are having supply troubles, as well. Clorox is raising prices on 40% of its products, or 13 brands, because it can't get petroleum-based resins for many of its products. Carpet maker Mohawk Industries is raising prices 5-8% because of tight deliveries and high costs for raw materials.

"Reduced capacity in the Gulf of Mexico region has rapidly driven up chemical costs; in fact, prices are escalating on a monthly basis—and even then we can't get timely deliveries," says the purchasing director for safety and facility identification products manufacturing firm in Wisconsin. "All petrochemicals—in particular solvents, some films and resin—are harder to get as a result of the two hurricanes," says a buyer at a high-performance flexible packaging systems plant in Pennsylvania.

Supply shortages for basic manufacturing commodities and building materials are popping up across the Gulf Coast and along the Mississippi River into the upper Midwest because of both production and transportation snafus in the aftermath of hurricanes Katrina and Rita.

It likely will cost more than $200 billion and take several years to rebuild Gulf of Mexico areas ravaged by the hurricanes, according to a study by the American Institute of Architects. In the meantime, there likely will be price spikes and supply shortages for basic building materials, suggests Kermit Baker, chief economist for the institute. He says that wallboard prices have increased 5.5% since the hurricanes struck at the end of August and early September while concrete prices have risen 2.5%.

"There already are reports of wallboard supplies being placed under allocation in some parts of the country," Baker says, adding: "In the coming months, we expect to see a jump in prices for such building materials as concrete and gypsum products. Due to the destruction of some regional timberlands by Hurricane Katrina, there will also likely be a rise in lumber and plywood prices."

There also are supply-delivery problems on both coasts caused by rail and trucking disruptions. "Any and all supply issues that we have are related directly to Gulf Coast and hurricane situations," says the purchasing manager of a North Carolina wire and cable producer. "Even trucks to make deliveries to and from the southern U.S. are in short supply."

Buyers are facing tighter supplies, but no shortages, of such steel products as cold-rolled and galvanized sheets, abrasion-resistant plate, bars, beams, tubing and some types of stainless steel. The buyer at a metals fabrication and distribution center in Louisiana says "there has been some panic buying in steel, which has given some of the mills the impression that business is great." Overall, it's now believed there was an immediate knee-jerk reaction to the storm among steel producers, who pushed some prices up and now are pulling them back.

"So far, I haven't run out of anything but orders for flat bars from the mills are out 12 weeks at best," says the purchasing manager for an equipment manufacturer in the Pacific Northwest, "and a lot of my bearings orders are late because my suppliers can't get their orders of steel either." He also complains that carbon steel plate and alloy steel bar suppliers are allocating deliveries.

"Also," says this buyer: "I'm now being forced to call multiple suppliers to get fin stock," a grade of flat-rolled aluminum. Other aluminum products cited as tight are plates and wire. Brass fittings and forgings are among other shortages. Titanium sheets are causing particular supply concerns to aerospace and aviation subcontractors. And, suddenly, some buyers are citing shortages of bar stock made from nickel-based alloys.