INSIGHT: LyondellBasell expects leverage from up-cycle

08 December 2010 17:54  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The world’s largest polypropylene producer and a major polyethylene maker, LyondellBasell, has been preparing for years for a period of plentiful supply.

But as with almost all chemicals makers, it has been the demand side that has presented the greatest uncertainty.

This year, the company has seen welcome volume growth and managed to lift margins. Specialty polymers have done well in Asia, as China has continued to suck in imports.

Polypropylene was bumping along in North America in the third and into the start of the fourth quarter. Volumes were higher in Europe and Asia with specialty compounds continuing to show stronger growth.

Polyethylene has not fared as well in 2010 although volumes and margins have improved as olefins costs have fluctuated.

The company said last week that overall, positive business conditions continued into October but that it expected some seasonal decline in a current quarter that typically is weaker than the second or third.

On Tuesday (8 December) company executives were much more up-beat about future prospects - although they were talking to investors.

”We think the [ethylene] up-cycle is finally in place,” Bob Patel, the head of olefins & polyolefins outside of North America said. Demand-side uncertainty had been replaced by a more positive trend, he suggested, with close to double digit growth in Asia.

The highly-anticipated cyclical trough was finally upon the sector, he admitted, even though, in his words, “it’s been a great year”.

LyondellBasell is about two years ahead in its thinking, however, and says now that 2010 capacity increases can be absorbed in 2011 and 2012.

Few ethylene capacity addictions have been sanctioned after 2011 and it sees a much improved global ethylene supply/demand balance between 2013 and 2015.

With a better costs structure and an improved asset base, LyondellBasell should be in a position to capitalise on stronger industry fundamentals.

“The company has gigantic leverage to this uptick” CEO Jim Gallogly said. In this business, when markets start to turn, cash and margins are generated very quickly.

LyondellBasell has had to work hard on the fundamentals through its difficult period in US Chapter 11 bankruptcy protection and subsequently.

Costs have to go down every year, Gallogly says, bringing his operating experience from Chevron Phillips to bear on one of the world’s largest chemical companies.

Capital discipline is tough - there is less than $1bn a year to spend. About $1bn (€750m) in fixed costs has been taken out of the business since the end of 2008. The post-Chapter 11 capital structure means that annual interest payments have been cut by $1.7bn.

For some time, LyondellBasell has talked about its “back-to-basics” strategy. Not surprisingly that focuses on operational excellence, cost reduction and revenue enhancement. LyondellBasell has been managing its portfolio of assets, particularly in Europe.

A significant amount of polypropylene production capability has been taken out with some added in Saudi Arabia joint ventures. In polyethylene, net production capability has been lifted with additions in Saudi Arabia and additions, as well as cuts in Europe.

LyondellBasell says that close to 90% of its European polyolefins production assets are now in the second or third quartile fixed cost position compared with 57% in 2008. But more is likely to be done to raise the operating capability of the assets that remain.

In North America, the olefins and polyolefins operations benefit from shale gas dynamics and the improved ethane cost outlook. Despite still lacklustre US economic and industrial growth prospects, the company expects to capture low cost opportunities to export polyethylene.

“This is a new company and a company with a bright future,” Gallogly says. In three to four years he expects to have the company operating in a very different petrochemicals world.

($1 = €0.75)

For more on LyondellBasell visit ICIS company intelligence
Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog
To discuss issues facing the chemical industry visit ICIS connect


By: Nigel Davis
+44 20 8652 3214



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