Commentary: US polyolefins margins in perspective

US integrated polyolefins segment EBITDA margins have been at record highs, and a look at the history of company segment results offers some interesting perspective.

The US shale gas boom has produced record profit margins for integrated polyolefins businesses. And it’s worth taking a look at history to see how today’s level of profitability compares to past margins through the cycle. The bigger question is: Can it last? And if so, for how long?

First, gauging profit margins for US polyolfins operations is not as simple an exercise as one might imagine. There are many profitability metrics, but we’ll use the purest measure of cash flow – earnings before interest, taxes, depreciation and amortisation (EBITDA) as a percentage of sales, or EBITDA margin.

For this exercise, we examine the results of three US-based polyolefins businesses – LyondellBasell’s Olefins & Polyolefins – Americas segment, Westlake Chemical’s Olefins segment, and Dow Chemical’s Performance Plastics segment.

The LyondellBasell and Westlake units are predominantly US assets. Dow’s segment is international, yet more than one-third of sales are from North America – the geography with the highest percentage of sales. So it’s not perfectly apples-to-apples.

And then there are many iterations of the companies’ polyolefins segments through the past, and periods of gaps in the data. For example, prior to LyondellBasell emerging from bankruptcy in 2010 and issuing new stock, it was in private hands, leaving a data gap for two years – from Q4 2007 to Q4 2009. The company is also the product of a merger between the former Netherlands-based Basell, and US-based Lyondell Chemical. So for data prior to Q4 2007, we use the results of Lyondell’s Ethylene, Co-products & Derivatives (EC&D) segment. If we were to go back further than 2005, we would use an even earlier entity – that of joint venture Equistar.

These different segments are also not completely apples-to-apples, as they consist of slightly different assets i.e., EC&D included ethylene glycol (EG) and acetyls. But they are close enough for our exercise. And for Dow, prior to Q4 2010, it did not have a Performance Plastics segment. Rather, much of the assets were in what it called its Basic Plastics segment. Basic Plastics included polypropylene (PP), styrenics as well as polyolefin catalysts licensing – businesses not included now.

Yet it’s a revealing analysis. For the past two years – Q2 2012 to Q2/Q3 2014 (Westlake had not reported 
Q3 as of press time) – EBITDA margins have ranged from 20-41%, historically high levels for these commodity businesses.

Prior to the US shale gas boom, which began in earnest in 2008-2009, there were plenty of periods of single-digit EBITDA margins. The most robust from our analysis prior to this was in 2005 with margins in the mid-teens.

What could derail today’s record margins? A major sustained decline in crude oil, for one, as US petrochemical and polymers prices track oil, rather than their primary raw material natural gas. But past cycles by definition, have been rooted in undercapacity and overcapacity, caused by alternating periods of underinvestment and overinvestment.

Today, there are six US crackers under construction and six more in planning stages. US ethylene capacity is set to rise from 36-60% . Today’s margins won’t be sustained.