INSIGHT: Low cost ethane drives record profitability

29 April 2013 16:58  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--LyondellBasell kept output from its US crackers above nameplate capacity for the third consecutive quarter in Q1, a fact which helped the polyolefins giant achieve record financial results from its olefins & polymers (O&P) Americas reporting segment and in terms of group undiluted earnings per share (EPS).

Good operability came “as our cost of ethylene production metric declined and the average ethylene price increased four cents per pound,” the company said. “I personally think we are showing very differentiated performance in our US ethylene operations at a time when margins are great,” CEO Jim Gallogly told investment analysts.

The company is clearly capitalising on the competitive natural gas liquids (NGLs) feedstock position in the US while its tackles cost and competitiveness issues in Europe. The “back to basics” strategy particularly is serving it well when plant operability and efficiency are key.

Olefins production volumes in the US were slightly lower than in the fourth quarter of 2012 but ethane and propane feedstock costs were favourable in a reporting period in which the big US olefins makers continued to reap the benefits of low-cost gas feedstock.

LyondellBasell ran 87% of its cracking capacity on NGLs feedstock in the first quarter. It is also planning to bring on-stream a significant total ethylene capacity increase of 839,000 tonnes/year at its US crackers by late 2015, probably a couple of years ahead of its major rivals.

Remember what Gallogly said in March at an investor day in New York: “We hope these projects will be paid for before our competitors even come online.”

“We aim to finish these projects two-to-three years earlier than our competition at a cost of around $0.50/annual lb versus $0.80 – faster, cheaper.”

The LyondellBasell earnings increase in the first quarter was significant when compared with the similar period of last year and with the fourth quarter of 2012. O&P Americas segment earnings before interest, tax, depreciation and amortisation (EBITDA) were up 51% year-on-year in the first quarter at $898m (€691m) and up 16% on the fourth quarter of last year.

Group EBITDA in the first quarter were $1.59bn, a 29% increase year on year and a 25% rise from the fourth quarter of 2012, on the back of the strong O&P Americas results.

O&P Europe, Asia and International (EAI) EBITDA rose to $225m from $115m in the year-earlier period and $27m reported for the fourth quarter of 2012, primarily because of improved margins in a volatile naphtha cost environment.

US raw material costs in April have been similar to those in the first quarter and there has been some increased demand for US polyethylene imports but it is clear that companies like LyondellBasell are making a higher proportion than usual of their integrated cracking margin on olefins. Polyolefins demand is not good and markets are weaker in a lower priced oil environment.

That situation is more widely apparent in Europe but applies also to the US. “Generally, we’d rather sell [ethylene] to competitors than make polyethylene these days,” Gallogly said referring specifically to US markets.

In Europe, it is still very much a question of on-going restructuring and of ensuring that operations are fit for purpose. The weak and uncertain European economic outlook hangs heavy over the business.

LyondellBasell will have to operate effectively and focus on costs in Europe, according to the CEO. “We ran reasonably well [in Europe in the first quarter],” he said. “Market conditions are reasonable stressed.”

The company was able to make some margin gains in Europe as it managed naphtha cost fluctuations but is only operating its crackers at about 80% of nameplate capacity. It talks of “advancing cost reduction efforts in Europe,” but no details have emerged of any planned cutbacks.

Gallogly said LyondellBasell is working with Works Councils (employee representative bodies) on restructuring in Europe.

($1 = €0.77)

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By: Nigel Davis
+44 20 8652 3214

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