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Harvey threatens to choke off supply of critical chemicals, plastics to US manufacturers

  • Tropical Storm Harvey has shut down specialty chemical and petrochemical plants along the Gulf Coast.
  • The storm has affected about 40 percent of the petrochemicals market, according to one analyst.
  • Many manufacturers depend on the region for their supplies of basic plastics.

Shutdowns at specialty chemical plants along the Texas Gulf Coast caused by Tropical Storm Harvey threaten to snarl supply chains across the United States.

Southern Texas is the epicenter of the U.S. specialty chemicals and petrochemicals industry. This crucial part of the U.S. manufacturing sector uses byproducts from oil and natural gas to make the building blocks for the products Americans use on a daily basis, from water bottles to pill coatings.

"There's not a thing that you touch on a daily basis that is not produced in some part from here in Houston." -Bob Mitchell, Bay Area Houston Economic Partnership president

Roughly 40 percent of the U.S. petrochemicals market was offline as of Tuesday morning as Harvey continued to drench the region, according to Tamar Essner, director of energy and utilities at Nasdaq Corporate Solutions.

"It's a bigger impact on petrochemicals right now than it is on refining capacity," she told CNBC's "Squawk Box" on Tuesday.

The market has been keenly focused on gasoline prices as oil refineries power down amid torrential rain and devastating flooding in the Houston area, but the specialty chemicals industry will be the sector most affected by Harvey, according to Bob Mitchell president of the Bay Area Houston Economic Partnership.

"There's not a thing that you touch on a daily basis that is not produced in some part from here in Houston," he told CNBC on Monday.

Many plants from Corpus Christi to Houston shut down or throttled back activity to prepare for Harvey.

The closure of ports and flooding mean the plants cannot get raw materials into the facilities and finished product out, Mitchell said. It remains to be seen when workers will be able to access the plants, he added.

Texas accounts for about 70 percent of U.S. production of ethylene, one of the most important chemicals used to make plastics, according to Kevin McCarthy, a partner at Vertical Research Partners who covers the global chemicals industry.

About 37 percent of total U.S. ethylene production has been disrupted since August 21, according to live monitoring by ICIS, a petrochemical market information provider.

Louisiana, which is also in the path of Harvey, is responsible for another 20 percent of U.S. ethylene output, McCarthy said.

"So tremendous concentration on the supply side, and that's what we'll be watching in the days and weeks to come," he told CNBC on Monday. "How quickly can these assets come back online? Will it be measured in days, weeks or months?"

A boom in U.S. shale oil and natural gas production has supplied the chemicals industry with an abundance of drilling byproducts used to make petrochemicals.

Some of those byproducts are transported to the Gulf Coast from natural gas-rich basins underlying parts of Pennsylvania, Ohio, West Virginia and neighboring states. Ethylene and polyethylene pellets are then shipped back north to supply plants that make plastics products.

Business associations keen on developing a second U.S. petrochemicals hub in the Appalachian region have warned that the chemicals industry is too concentrated along the Gulf Coast, creating risks of supply disruptions.