‘A Venice from Hell’

While the final tally of the misery wrought by Hurricane Katrina in Louisiana, Mississippi and Alabama is still unknown, it’s clear that the storm didn’t just turn New Orleans into a “Venice from Hell,” as one BBC journalist described it, but inflicted significant damage on Louisiana’s and Mississippi’s energy infrastructure, especially their substantial petroleum-refining capacity. And that news has sent waves through the world’s commodities markets.

Information released by the U.S. Energy Information Administration on August 31 gave the last glimpse of gasoline inventories before the hurricane struck, and it showed an extremely tight situation that likely would have led to higher gasoline prices this autumn without any hurricane damage.

The pre-hurricane gasoline data revealed that inventories were continuing to decline sharply in the face of rising demand, even with a 40% increase in retail prices this year.

“The U.S. is facing a major gasoline crisis and is starting from a nearly empty tank,” wrote Kevin Norrish, oil analyst at London-based Barclays Capital, in a daily commodity briefing in early September.

Taking into account Hurricane Katrina, he reckons that the potential cumulative reduction in U.S. gasoline output will be 25 million barrels, and lays out the following scenario for recovery: once power is restored to pumping stations, there can be a resumption of flow through the key arterial pipelines from the Gulf of Mexico into the East Coast, the Colonial and the Plantation.

Commented Norrish: “The situation seems to suggest that gasoline prices will remain high for a while yet, and that demand destruction through pricing, conservation and even overt supply shortage will have a major role to play.”

The U.S. government responded to the energy crunch by announcing it had loaned oil from the Strategic Petroleum Reserve at the request of a refiner. This refiner later withdrew the request, though others soon followed with similar ones.

The government’s move was largely symbolic, in that the shortage is one of refining capacity, not crude-oil supply. Indeed, in the futures markets, after the hurricane struck, gasoline prices were on the upswing while crude oil retreated below the US$70-per- barrel mark.

The U.S. government also waived many emission standards until mid-September, which will allow dirtier, lower-grade gasoline and diesel fuel to be burned in mandated areas.

The effects of the storm on natural-gas markets was milder, owing to falling power-generation demand from the northeastern and midwestern states, which are experiencing colder weather. The already-high natural gas prices were still volatile, though, bouncing around with each report of lines originating from the Gulf region returning to significant capacity.

Katrina’s wrath eventually dented the U.S. dollar a few days after the hurricane, driving gold prices up above US$446 per oz. on Sept. 5. Gold had dipped below US$429 per oz. on the day of the hurricane. Silver prices have held steady through the period around US$7.00 while platinum followed gold’s lead and spiked US$20 to US$906 per oz.

The unprecedented flooding of New Orleans prompted the London Metal Exchange to temporarily suspend as good delivery against LME contracts all LME warrants for zinc, copper and primary aluminum stored in New Orleans’ vast warehouses. LME-registered warehouses in New Orleans hold almost half of the total LME zinc stocks of 558,000 tonnes.

The LME has also temporarily removed the backwardation limit on the zinc market. Zinc prices spiked 4% higher to US$1,445 per tonne for a few hours following the LME announcement on September 5.

In the aluminum market, Gramercy Alumina in Louisiana lost two days of output from its alumina refinery owing to shipping delays caused by Katrina. The refinery produces 1.25 million tonnes of alumina annually. Gramercy said the refinery received “only minor damage” during the hurricane, and it is working to assist employees who lost personal property.

Gramercy’s equal owners, Falconbridge and Century Aluminum Co., have donated US$150,000 to the American Red Cross’s hurricane relief funds and another US$50,000 to relief efforts in the Gramercy area.

Arizona-based copper giant Phelps Dodge reported that its subsidiary Columbian Chemicals Co. suffered “no significant damage” at its North Bend carbon black manufacturing facility in Centerville, Louisiana, about 161 km west of New Orleans. All employees of the North Bend site are accounted for and safe.

Phelps Dodge is donating US$1 million to the American Red Cross Hurricane Katrina disaster-response effort.

Showing grace under pressure was Freeport McMoRan Copper & Gold, the operator of one of the largest mines in the world — the Grasberg copper-gold mine in Indonesia’s Papua province — and a copper smelter in Spain. Freeport’s posh headquarters on Poydras Street in New Orleans was evacuated, as the building containing the offices flooded with a foot and a half of water on its ground floor. The building is across the street from the now-infamous Louisiana Superdome, which served as both a refuge and a gathering point for the weak and the poor to evacuate the city.

Following its long-held contingency plan, Freeport swiftly moved its headquarters and all its 150 head-office employees to Baton Rouge, Louisiana, on a “semi-permanent” basis. All of Freeport’s head-office employees are believed to be unharmed.

As well, many barges ferrying coal and other commodities along the Mississippi were sunk, with most of the lost cargo deemed unsalvageable.

New Orleans’ devastation also means that next month’s New Orleans 2005 Investment Conference — one of the largest investment shows in the U.S. for retail investors — will likely need to be rescheduled and relocated to another city.

The show was scheduled to begin October 30 at the Marriott Hotel in the city’s French Quarter. The show has been a yearly fixture in the city since 1974.