INSIGHT: LBI sees Europe challenged but Americas advantaged

27 August 2012 10:50  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--LyondellBasell joined most other chemical companies towards the end of July, talking of slowed demand in Europe and heightened concern regarding economic growth globally.

The contagion from Europe has spread and the slump could well deepen given the apparent inability of eurozone politicians and the European Central Bank (ECB) to get to grips with the damaging situation.

The contrast in performance between the company's businesses in North America and Europe currently does not always appear stark. Both are suffering from reduced polymer demand; the European operations particularly so.

But North America olefins benefit greatly from a low cost natural gas liquids (NGLs) feedstock advantage and that advantage can be fed down the product chain.

Cracker margins in Europe were relatively strong in the second quarter but the high cost of naphtha was passed on in polyolefins prices. Add that cost burden to lower polymer demand and the mix downstream is far from attractive.

But margins improved earlier in the quarter compared with the January to March period. The turn down really became apparent as July approached.

"During the second quarter, we continued to demonstrate the earnings power of our company as margins strengthened over the first quarter," CEO Jim Gallogly, said on release of the second quarter financial results.

"While global economic uncertainties dominate the headlines, our company's performance has remained strong. NGL supply and costs continue to drive favourable US olefin results particularly in the Midwest where ethane prices declined to below equivalent fuel values," he added.

"The Olefins and Polyolefins-EAI segment benefited from improved European olefin margins and joint venture dividend payments despite weak European economic conditions, which led to lower volumes.”

The drop in volumes in the Europe, Asia, International (EAI) Olefins & Polyolefins segment was significant. Polyethylene volumes were down 14% from the first quarter of 2012. Polypropylene sales volumes were down 13%, LyondellBasell said. It did not give comparisons with the year earlier period.

In a difficult period the company managed to push earnings before interest, tax, depreciation and amortisation (EBITDA) higher in the O&P EAI segment compared with the year earlier period as well as with the first quarter of 2012.

EU light olefins and butadiene margins were higher but volumes were flat compared with the first quarter of 2012.EU polyethylene volumes, margins and EBITDA were all down quarter to quarter.

Polypropylene  saw “modest” margin improvement LyondellBasell said and EBITDA was up despite the significant drop in volumes.

It is the US that stands out as a performer in the difficult operating environment and shale gas ethane and propane were the key.

Versus the first quarter of the year, LBI said the ethylene price was down 6 cents/lb but its cost of ethylene was down 13 cents/lb. The company made 85% of its ethylene from natural gas liquids (NGLs) in the quarter. In polyethylene the price/cost spread was 3 cents/lb better and although volumes were down margins and EBITDA was up. LBI called the margin improvement in PP in North America “modest”. Volumes were flat while EBITDA was higher.

"While we expect global economic uncertainty to continue and related volatility to limit our near-term visibility, we remain focused on the fundamentals,” Gallogly said.

“In North America, current ethane and propane raw material prices position our North American olefins business to remain advantaged relative to global ethylene producers. On the other hand, our European olefins and polyolefins business will be challenged, and thus we will continue efforts to improve our relative cost position," he added.

LyondellBasell has already rationalised four polymer plants in Europe and sees itself in a strong competitive position but it continues to appraise the portfolio.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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