Hurricane Harvey Exposes the Key Role of the U.S. Oil Industry in World Markets
World energy markets, from butane in Asia to diesel in Europe and gasoline in Latin America, are feeling the ripple effect of deadly hurricane Harvey’s devastation in southeastern Texas, highlighting the growing role of the U.S. in the global oil industry. When Hurricane Katrina hit in 2005, the U.S. exported just 800,000 barrels a day of mostly refined products. Today it ships more than 6 million barrels a day of crude and fuels, an increase driven by a boom in shale production, the end of a ban on crude exports, and the expansion of several refineries. “The global implications of a stormy season in the U.S. Gulf of Mexico have mounted as the U.S. has emerged as a global energy hub,” said Ed Morse, head of commodities research at Citigroup Inc. in New York.
The effect of hurricane Harvey on oil markets is opening an almost unprecedented opportunity for traders to make money, shifting around crude and refined products by ship. They are already amassing an armada of tankers to send European gasoline to the U.S. and Latin America, while Asian countries are snapping up cargoes of liquefied petroleum gases—mostly butane and propane—to replace the loss of exports from Texas. “The concentration and connectivity of the most important energy region in the world is going to test global energy security,” said Jamie Webster, a fellow at the Center on Global Energy Policy at Columbia University.
After hurricanes Katrina and Rita hit the U.S. 12 years ago, the International Energy Agency (IEA) released emergency petroleum reserves. This time around, there is no need as global inventories remain high, according to the IEA, though the agency “stands ready to act,” it said August 28. The U.S. Department of Energy released a small amount of crude from strategic reserves August 30, meeting a request from a single refinery for extra barrels.
The country’s oil system remains severely handicapped after Harvey made a second landfall between Texas and Louisiana on August 29. Flooding and power failures have reduced U.S. fuel-making capacity by about 4.25 million barrels a day—a quarter of the country’s total and equivalent to the refining capacity of France and Germany combined. The drop in output cuts supplies to the major Colonial pipeline, which takes gasoline from Texas and Louisiana to the U.S. East Coast. Its operator shut its main diesel line and plans to halt its gasoline link.
The move drove up U.S. gasoline wholesale prices above $2 a gallon for the first time since July 2015. As traders scrambled to cover their positions, they sent the price spread between the most immediate futures contract and subsequent deliveries sharply higher. While fuel prices rally, crude markets are stumbling. With refineries across Texas closed—including the largest U.S. plant—oil demand has dropped, putting pressure on prices on every grade of crude from West Texas Intermediate to Brent.
Harvey’s full impact will only be known once refiners assess the damage to their flooded plants. Unlike during Katrina and Rita, most were able to carry out a controlled shutdown ahead of the storm, reducing the chance of long-lasting equipment problems. Still, a short-term supply squeeze will have far-reaching effects. Latin America relies on imports from Texas and Louisiana. Mexico buys half its gasoline from the U.S., while Argentina, Chile, Colombia, Venezuela, and several Central American nations also buy significant quantities of U.S. fuels. Brazil purchases about 400,000 barrels a day of U.S. petroleum products, up from just 15,000 a day in 2005.
Europe will also feel a crunch if the refinery shutdowns continue because the region imports U.S. diesel. European gasoil rose above $500 a ton, heading for its highest close since February. “The amount of oil lost to Harvey by the rest of the world will quickly accumulate,” said Olivier Jakob, founder of energy consultants Petromatrix GmbH in Zug, Switzerland. “This will accelerate stock-draws in the rest of the world.”
Citations
- https://bloom.bg/2wLnEsv Bloomberg
- http://bit.ly/2gmcSPe – WorldOil.com
Chinese Garment Makers Lured to the U.S. by “Sewbots”
“Made in America” will soon grace the labels of T-shirts produced by a Chinese company in Little Rock. By early 2018, Tianyuan Garments Co., based in the Suzhou Industrial Park in eastern China, will unveil a $20 million factory staffed by about 330 robots from Atlanta-based Softwear Automation Inc. The bot-maker and garment company estimate the factory will stitch about 23 million T-shirts a year. The cost per shirt, according to Pete Santora, Softwear’s chief commercial officer: 33¢. “Around the world, even the cheapest labor market can’t compete with us,” Tang Xinhong, the chairman of Tianyuan, told the China Daily about the factory in July. The company, one of the biggest apparel makers in China, supplies Adidas, Armani, Reebok, and other major brands.
“The Tianyuan story shows that the labor cost for each T-shirt in the Arkansas plant is unbeatable,” says Jae-Hee Chang, a researcher in advanced manufacturing at the International Labor Organization (ILO) in Geneva. The machines are part of a new generation of industrial robots that Chinese manufacturers like Tianyuan are using to overcome the constraints of higher wages and aging workers. As China’s labor force has shrunk over the past five years, employers have hiked wages more than 10% a year to lure better-educated, younger workers.
The garment industry has been slower to automate than others, such as automobiles and electronics. Developing a robot that can match the dexterity of a human hand to manipulate and stitch fabric is an expensive proposition, Santora says. Stitching a dress shirt with a breast pocket requires about 78 separate steps. Tricky, but such a bot is coming, says the chief executive officer of Softwear Automation, Palaniswamy Rajan: “We will roll that out within the next five years.” It took seven years for Softwear Automation, founded in 2007 by a group of engineers from Georgia Tech, to introduce its first “sewbot,” which is capable of making bathmats and towels. A $1.8 million grant from the Pentagon’s Defense Advanced Research Projects Agency funded the work. The T-shirt bots will produce one piece about every 26 seconds, Santora says.
Tianyuan’s Arkansas plant will be the first apparel production line for Softwear Automation. Setting up shop closer to a product’s intended market will help Tianyuan meet demand more quickly. “Fast fashion is transforming the traditional garment supply system,” says Xu Yingxin, vice president of the China National Textile & Apparel Council in Beijing. “The change on the consumption side has led to the need to be close to consumers.”
Arkansas officials spent about a year negotiating the deal with Tianyuan, according to Mike Preston, executive director of the Arkansas Economic Development Commission. He says the company, which declined to comment for this story, liked the centrality of the location. “About one-third of U.S. residents are within a day’s drive of Arkansas,” Preston says. Another big draw: state and county incentives worth at least $3.2 million, according to the development commission. They include infrastructure assistance and money for training. Tianyuan also will receive as much as a 65% reduction on property taxes. The company will create 400 jobs in Little Rock, mostly for machine operators, Preston says.
Tianyuan is not the only Chinese company to operate in Arkansas. In May, Shandong Ruyi Technology Group Co., the owner of apparel brands Sandro and Maje, among others, announced plans to invest $410 million in an automated factory in Forrest City, where it will spin locally grown cotton into yarn. With America’s supply chain, infrastructure, consumer market, and skilled workforce, “the U.S. is undeniably an attractive production base if labor cost is taken out of the equation,” says the ILO’s Chang. Still, many garment makers are reluctant to move away from China. Over the past two decades, the industry has built up an extensive supply network for yarns, dyes, fasteners, zippers, and trimmings. China is still the world’s largest exporter of garments, with an annual value of $170 billion, says Xu of the apparel council.
One T-shirt factory is not going to change that. But after tariffs, duties, and shipping costs are factored in, the case for shifting production to the U.S. from emerging markets is a compelling one, Santora says. Meanwhile, as robots become smarter and market access becomes more important, poorer nations that counted on manufacturing to climb out of poverty—as Japan, Korea, and China did in the decades after World War II—will have to offer more than cheap labor. Bangladesh, Cambodia, Myanmar, and other countries will need to invest in technology, education, training, and infrastructure, says David Loevinger, an analyst at TCW Group Inc. in Los Angeles and a former China specialist at the U.S. Department of the Treasury. “Some of Asia’s economic laggards will have to find a different path to prosperity,” he says.
Citations
- https://bloom.bg/2iJs7Gn – BusinessWeek
- http://bit.ly/2fWeDDP – TalkBusiness.net
The Good News Is . . .
- The U.S. economy grew faster than initially thought in the second quarter, notching its quickest pace in more than two years. Gross domestic product increased at a 3.0% annual rate in the April-June period, the Commerce Department said in its second estimate. The upward revision from the 2.6% pace reported last month reflected robust consumer spending as well as strong business investment. Retail sales and business spending data so far suggest the economy maintained its momentum early into the third quarter.
- Analog Devices, Inc., a leading global producer of high-performance devices that sense, measure, and interpret analog data, reported earnings of $1.26 per share, an increase of 53.7% over year-earlier earnings of $0.82 per share. The firm’s earnings topped the consensus estimate of analysts by $0.12. The company reported revenues of $1.46 billion, an increase of 67.7%. Management attributed the results to strength in its industrial business segment and contributions from the recent acquisition of Linear Technology.
- The drug-maker Gilead Sciences said that it would buy Kite Pharma for about $11.9 billion to bolster its aging portfolio with an emerging cancer treatment. With the deal, Gilead would acquire Kite’s new cancer-fighting method, which harnesses the body’s immune system to attack malignant cells. Kite’s most promising treatment, which targets non-Hodgkin lymphoma, is expected to receive government approval within the next year. The acquisition of Kite will help establish Gilead as a leader in cellular therapy and provides a foundation for it to develop more products to treat advanced cancers. Under the terms of the agreement, Gilead will pay $180 a share in cash.
Citations
- http://reut.rs/2vEYND2 – Reuters
- http://cnb.cx/2lwnm3s – CNBC
- http://cnb.cx/2lwnm3s – Analog Devices, Inc.
- http://nyti.ms/2vvsQRw – NY Times Dealbook
Planning Tips
Guide to Understanding Flood Insurance
Homebuyers usually have to purchase homeowners’ insurance if they plan on taking out a mortgage on their property. However, standard homeowners’ insurance does not cover flooding, so homeowners at risk must purchase flood insurance coverage. Buyers should do their homework on flood insurance, since there are several myths and misconceptions about this product. Below are some of the common misconceptions about flood insurance. If you are considering flood insurance, be sure to consult with your financial or insurance advisor.
Consumers Must Purchase Private Flood Insurance – One common misconception about flood insurance is that consumers must purchase the insurance from a private insurance carrier. In fact, a federally regulated program, called the National Flood Insurance Program (NFIP), offers the most common flood insurance policies. A prospective policyholder can purchase two types of coverage—one that insures the value of a home up to $250,000 and another type that covers personal property up to $100,000. Buyers who require more than $250,000 of coverage on their homes must purchase excess flood insurance through a private carrier. Some private insurance carriers offer a purely private policy, but these policies cost more than NFIP policies and often only insure properties worth more than $1 million. Furthermore, many mortgage companies will not accept private flood insurance, since it carries greater risks than the federal program.
Consumers Pay One Flat Rate – Another myth about flood insurance cost is that all buyers pay the same flat rate. Although the average one-year premium for flood insurance is $600, buyers should consult an insurance agent for an actual quote. Factors such as the amount of coverage, the deductible, the flood risk of the area and the condition and age of the building, impact the cost of coverage.
Flood Insurance Covers All Damages – What does flood insurance cover? One myth about flood insurance is that a flood policy covers all types of damage. Buyers of flood insurance should understand what exactly flood insurance covers in the event of an incident. A property policy from the NFIP covers the foundation of the home, electrical and plumbing, air conditioners, water heaters, furnaces, kitchen appliances, permanent carpeting, permanent wallboard and paneling, permanent cabinets and bookcases, window blinds, detached garages (limited to 10% of the home policy) and debris removal. An NFIP personal property policy covers clothing, furniture, electronic equipment, curtains, window air conditioning units, portable microwaves and dishwashers, carpets not covered by the property policy, washers, dryers, freezers, frozen food and up to $2,500 in valuables, such as furs or jewelry. NFIP policies do not cover precious metals, stock certificates, bearer bonds and cash. They also do not cover trees, plants, wells, septic systems, walkways, decks, patios, fences, hot tubs, swimming pools, boathouses, retaining walls, storm shelters, temporary housing, loss of income, cars or mold damage.
Only Flood-Zone Residents Need Coverage – Another misconception about flood insurance is that only people in high-risk flood areas need coverage. In fact, residents outside of high-flood areas receive one-third of disaster relief for flooding and over 20% of flood insurance claims. Flooding is the most common type of natural disaster in the country, and all 50 states face risks. Buyers in high-risk zones, known as special hazard flood areas, must purchase flood insurance in order to qualify for a mortgage. However, buyers outside of those areas may also wish to purchase a policy. Homebuyers should consult the Federal Emergency Management Agency (FEMA) website to find out if their property is in an area that participates in the NFIP program. Since flooding impacts every state, almost all areas are eligible for coverage. Buyers outside of special hazard flood areas must assess their ability to withstand the financial loss from flooding. One resource that they can consult is the FloodSmart website (http://www.floodsmart.gov/). Homeowners can enter their address and receive estimates of their risk and their premiums, and a list of agents who serve their area.
All Excess Water Constitutes Flooding – Many people mistakenly believe that all excess water on a property constitutes a flood. In fact, water must either cover at least two acres of normally dry land or damage at least two or more properties in order to constitute a flood. In addition, the water must come from overflowing inland or tidal waters, rapid accumulation or runoff of surface waters, mudflows or shore front land collapses. Flood insurance does not cover water and seepage from sewer or drain backups.
Citations
- http://bit.ly/2esUQhd – FEMA
- http://bit.ly/2eIcWbY – Insurance.com
- http://bit.ly/2xBmjSE – Investopedia
- http://bit.ly/2o20v0d – Bankrate.com
- http://bit.ly/2et1wvY – MoneyCrashers.com
