INSIGHT: LyondellBasell focuses on metrics and costs

10 May 2010 17:11  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--LyondellBasell talks of its “back to basics” strategy following emergence from Chapter 11 bankruptcy protection in the US.

That includes the usual points of focus for a commodity/specialty chemicals player but pulls it clearly away from its post merger, recession-driven Chapter 11 woes.

LyondellBasell has the advantage of focus and a particularly strong technology platform. But its primary polyolefins businesses are exposed to the expected rapid increase this year and next in olefins and polyolefins production capabilities in the Middle East and Asia.

The new capacities will put great pressure on the upturn for all producers of these materials. Performance in the future depends very much on the operational excellence, cost reduction, capital discipline and portfolio management that LyondellBasell says are key parts of its current view of the world.

In its day-to-day operations the company has hit a high point already this year. The olefins business in the US saw to that. CEO Jim Gallogly called the olefins uptick “a pleasant surprise” but knows it can’t last.

“We got a bump ending the first quarter and into the early second quarter with olefins prices blowing up because of operating issues,” he said on Friday.

New production facilities in Asia and the Middle East have not come on-stream as fast as anticipated to the company's benefit. But the leeway all producers have gained is likely to be lost in the second half.

Sector players are facing a rapid increase in production at a time of still uncertain demand growth. Gallogly talked of a quarter or two benefit from the relative supply tightness but an expected fall off in earnings later this year as supply/demand balances shift.

Spot ethylene prices in the US, having risen by 14 cents a pound in the first quarter, dropped sharply at the beginning of this month signalling some trouble ahead. But LyondellBasell says volume demand currently is good.

The LyondellBasell polyethylene business suffered in the quarter in the US from high feedstock costs, although more margin was made downstream from the cracker in Europe. The company and its peers were making money on US olefins but the high ethylene price was crimping PE.

LyondellBasell, however, has got off to a good start for the year. It is making money on refining in the US - although is struggling in Europe. First quarter earnings before interest, tax, deprecation and amortisation on a current cost basis (EBITDAR) were $604m.

Coming out of Chapter 11 protection the company has a total of $3.5bn of liquidity, including $2.7bn of cash. Debt of $7.2bn compares with close to $25bn when it went into bankruptcy protection. The company expects to be paying an interest charge of about $160m in coming quarters: in the first quarter interest payments were $411m.

Better placed though it may be post bankruptcy protection, LyondellBasell still has to prove to inventors that it can perform: it does not necessarily have to grow.

Gallogly talks of an intense focus on metrics and the desire to “close the gaps on industry leaders” in terms of plant operability and overall business performance.

LyondellBasell is targeting about$1bn in capital spending this year, including plant maintenance. The focus has to continue to be on costs and performance in uncertain times.

($1 = €0.78)

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By: Nigel Davis
+44 20 8652 3214

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