Commentary: US polyolefins edge becomes starkly apparent in Q2 results

07 August 2014 18:09  [Source: ICB]

US polyolefins businesses posted EBITDA margins in the second quarter ranging from 28-38% – the envy of any world-class specialty chemical unit. Can the good times roll?

Amid the parade of second-quarter financial results, the US shale gas cost advantage continues to stand out. Nowhere is this more apparent than in the polyolefins sector, and polyethylene (PE) in particular where ethane feeds into ethylene and then PE. So far, the huge margins seen in 2013 have been sustained in 2014.

US polyolefins businesses posted EBITDA (earnings before interest, tax, depreciation and amortisation) margins ranging from 28-38% in the second quarter, according to an ICIS analysis. Those fat margins in what is largely a commodity business would be the envy of any world-class specialty chemical unit.

The comparisons between the polyolefins business segments of companies worldwide are never completely apples-to-apples. For example, US-based Westlake Chemical’s olefins segment consists almost entirely of US integrated PE where much of the shale gas advantage lies – there is one styrene plant included. That helps explain its leading 38.0% EBITDA margin in the second quarter, even as it had an unplanned outage at one ethylene unit at Lake Charles, Louisiana, US.

Dow Chemical’s performance plastics segment, which generated a lower, yet robust EBITDA margin of 28.5%, contains not just North American assets, but also facilities in Europe, Asia, Middle East and Latin America. And the product mix is not just PE, but includes acrylics, elastomers and ethylene propylene diene monomer (EPDM).

And LyondellBasell’s Olefins & Polyolefins (O&P) – Americas segment, while encompassing all US assets, also includes significant polypropylene (PP) production, which does not enjoy a meaningful advantage from shale gas, along with butadiene (BD). That segment posted a second-quarter EBITDA margin of 28.2%.

Comparing these US or US-influenced segment results with European counterparts proves somewhat problematic, as only LyondellBasell breaks out EBITDA and sales figures for its O&P - EAI (Europe, Asia, International) unit. This segment, which is mostly Europe asset weighted, posted an EBITDA margin of just 8.1% in the quarter – not terrible and more typical of a commodity business.

INEOS does break out EBITDA for its Olefins & Polymers units in North America and Europe, but provides no sales figures, making an EBITDA margin calculation impossible. Just in raw numbers, its O&P North America segment posted EBITDA of €236m while O&P Europe clocked in €79m.

Among the other polyolefins players, France-based Total includes refining & chemicals in one segment, making it unsuitable for comparison. Saudi Arabia’s SABIC only includes certain figures, excluding EBITDA, for its entire chemicals segment while Austria-headquartered Borealis does not break out results for its segments – polyolefins, base chemicals and fertilizers.

Are 28-38% EBITDA margins for US polyolefins businesses sustainable in the long run? Doubtful, as new cost advantaged capacity is being built en masse in the US. Plus, the huge margins from a global cost advantage are predicated on low US natural gas prices and high crude oil prices – not something that will 
last forever.

But these units have been churning out outsized profits for some years now and there are likely more strong such quarters to come.


By: Joseph Chang
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