Supply chain bottlenecks pressure US petchem markets
Cheap and abundant feedstocks, a booming economy, tax breaks and improved investment capital have led to even more investment in the U.S. petrochemical market. While the growth is spectacular for corporate earnings and regional market dependence, the need to address worsening transportation and infrastructure issues is imperative.
Supply chain challenges are already slowing down the transport of products, raising costs, and could prevent the industry from realizing the full benefits of increased capacity, supply chain professionals told Petrochemical Update.
“The top challenges facing the petrochemical supply chain are…getting on time deliveries because of transit time increases,” said Rick Lissa, Senior Director of Logistics Management, Formosa Plastics. “This is a result of demand increasing and carriers being behind on beefing up resources.”
Unless resolved, logistics shortcomings across primary modes of transportation including truck, rail, and marine container will greatly affect the chemical industry and its customers, industry agencies warn.
Potential impact could be excess inventories, increased capital expenditures of up to $23 billion for equipment and infrastructure to handle increased congestion and delays. In addition, owners could expect higher operating costs of up to $29 billion over a 10-year period due to logistical inefficiencies, according to a 2017 report by the American Chemistry Council (ACC) and PricewaterhouseCooper (PwC).
“Most of the top challenges in the petrochemical supply chain are geared around the added capacity and lack of trucking and infrastructure to get the extra product to customers,” Bruce Sullivan, Director of Logistics, Strategy & Procurement at Covestro told Petrochemical Update.
Supply Chain Challenges
“The economy is booming. There is a truck shortage on capacity that has hindered the ability to get product to customers,” Sullivan said. “There really is a demographic issue within the trucking community. There is not a lot of truckers coming into the marketplace.”
The average age of a truck driver in the U.S. at 49, is seven years older than the average American worker, according to the American Trucking Association (ATA).
The truck industry is facing a record labor shortage with more than 60,000 drivers needed now to meet demand. If current trends hold, the shortage could swell to over 174,000 by 2026, the ATA said in a 2017 report.
The lack of available drivers is causing a bottleneck in the supply chain, leading to delayed deliveries and increased prices.
“We know that as freight demand continues to rise, demand for drivers to move those goods will also rise, which often results in more driver churn or turnover,” Bob Costello, President of the ATA said in a statement. “Finding enough qualified drivers remains a tremendous challenge for the trucking industry and one that if not solved will threaten the entire supply chain.”
New petrochemical capacity is projected to result in an additional 1.8 million annual shipments by 2020 across all modes of transportation, adding an additional 270,000 railcars, 723,000 truck FTLs, and 808,000 marine TEUs each year, according to the ACC and PwC analysis.
Increased production volumes will require an additional 1.8 million shipments
Petrochemical supply chain professionals did make plans to prepare for shipping the added capacity when capital plans were being laid, but what they couldn’t plan for was the increases in demand on the retail side from companies like Amazon and Wal-Mart.
Truck tonnage is up 8% year to date, double the rate of growth at the same time a year ago, and there is a shortage of around 63,000 truck drivers, Darren Hawkins, CEO of YRC Worldwide said, while speaking at the ICIS World Chemical Purchasing Summit in September.
60% of YRC's trucking business is industrial and 40% is retail, Hawkins said.
Despite a barrage of higher freight costs, petrochemical suppliers are looking at creative ways to get products to customers including multimodal options, from truck to rail, or rail to an intermodal location, or at transload locations to get products closer to customers.
Intermodal is moving cargo by several modes of transport where each of these modes have a different transport carrier responsible, each with its own independent contract. Multimodal is using various modes of transport but with one transport bill of lading.
“What we have done and what we have seen the industry do is to ship some of the demand to terminals, warehouses, and transloading locations closer to the customer,” Sullivan said.
“We focused on shortening our supply chain because of our capacity in the marketplace. Carriers want to be more regionalized. We are trying to regionalize our product base to get closer to the customer.”
Covestro mitigated its own supply chain challenges through preparation with building relationships, communication and planning.
“We have a lot of solid relationships with our carriers, on truck, on rail, and transloading locations. We already had in place some dedicated capacity on the truck side,” Sullivan said.
Because of the relationships Covestro had in place, the company was able to expand its dedicated truck capacity.
“Although we were not immune to the costs increase, I think we were better off than a lot of shippers, because we already had dedicated capacity in place that helped us with getting our product to customers,” Sullivan said.
Planning needs to get better on all sides, supply chain professionals lament.
“Planning needs to get better and we have no choice but to get better at it, because we need to work with our carriers,” Sullivan said. “Relationships needs to change if we are going to do a better job getting product to our customers.”
While solutions like drone delivery and driverless trucks are an attractive solution for the future, the best solution for now seems to be to maintain a solid line of communication between carriers and suppliers.
“I don’t think there is enough planning ahead of time to work with the carriers to share demand plans and collaborate on the best path to get our product to customers,” Sullivan said.
“It all comes down to collaboration. It must work for both supplier and carrier regardless of mode. We must fit in to their networks,” Sullivan said. “We must fit in to what works for them to get product out.”
By Heather Doyle