US-based Westlake Chemical’s competitive ethylene feedstock position and downstream integration have been the driving forces for increased profitability and the company’s ascension to the ICIS Company of the Year based on outstanding financial performance in 2012.
“Our performance over the last several years reflects the earnings potential of our light olefin crackers, driven primarily by lower-cost, natural-gas-liquids-based ethylene production,” said Albert Chao, president and CEO of Westlake Chemical.
With numerous expansions on the brink of completion, Westlake continues to adapt to market conditions and the US shale gas boom
The company’s vertical integration has been a clear advantage, as has the fact that Westlake has not been overly exposed to China’s demand growth slowdown and the eurozone crisis as many chemical companies were in 2012.
Westlake makes basic chemicals, vinyls, polymers and fabricated building products, so it can tap into growth in a diverse range of markets but mainly packaging, automotive, construction and durable and non-durable goods.
Its principal shareholder is the family holding company TTWF LP which controls 68% of the company and is managed by the sons and daughter of T.T. Chao, a pioneer in the chemicals and plastics industry.
Westlake Chemical was founded in 1986 when the Chao group bought a polyethylene (PE) plant in Lake Charles, Louisiana, from Occidental Petroleum.
The largest producer of low density polyethylene (LDPE) in the US, Westlake also has plants that produce linear low density polyethylene (LLDPE) and styrene, and is integrated in the polyvinyl chloride (PVC) chain from chlorine and ethylene feedstock downstream to PVC building products such as window profiles and pipe.
US FEEDSTOCK POSITION
The company has been taking advantage of the US ethylene feedstock position since 2009. It has two gas crackers at Lake Charles and a propane feed cracker in Calvert City, Kentucky, which is being converted to ethane feed. It produces PVC building products, largely PVC pipe and residential products including fencing, decking and window profiles at a number of locations across the US. A joint venture with INEOS in China makes PVC resins and profiles, along with PVC sheet. In 2012, Westlake faced a tricky market environment.
The PVC business had to contend with still slow growth in construction. Olefins sales prices were down year on year while PE sales were down by 6.4%. Group net sales were down by 1.3% to $3.57bn on 5.9% lower sales prices and a 4.5% increase in volumes.
The lift to profits – Westlake’s 2012 income from operations was up by 37.7% at $615m and its 2012 net profit up by 48.9% at $386m – came clearly from lower feedstock and energy costs. “Our raw material costs in both segments normally track industry prices, which experienced a decrease of 48.1% for ethane and 31.5% for propane in 2012 as compared to 2011,” it said in its 2012 annual 10-K filing with the US Securities and Exchange Commission (SEC).
“A high oil-to-gas price ratio in the past several years and low cost natural gas liquids (NGLs) are the driving force behind Westlake’s strong financial performance, coupled with Westlake’s high product integration,” said Chao.
Some of its costs in 2012 were higher. Selling, general and administrative costs were up 8.4% year on year, for instance, largely on the costs associated with the failed bid for US PVC producer Georgia Gulf. But the feedstock advantage has certainly given the company more room to manoeuvre.
Westlake is embarking on a significant expansion programme. It is adding 350,000 tonnes/year of chlor-alkali capacity in Geismar, Louisiana, due for start-up in the fourth quarter of 2013. Its current chlorine capacity is 250,000 tonnes/year.
Ethylene capacity expansions in 2013, 2014 and possibly in 2015 could add between 260,000 and 308,000 tonnes/year of ethylene to the current 1.45m tonne/year total. The company is also raising its PVC capacity by more than 11%, adding close to 91,000 tonnes/year. The new chlor-alkali plant brings with it further integration in the vinyls chain and lower costs while the ethylene expansion balances the company’s requirement for ethylene.
“Our financial strength and flexibility has provided the ability to fund these important capital projects and investments and should provide the platform for future growth,” said Chao. “And we will continue to seek future opportunities for growth through both acquisition and organic growth.” The company notes that both its Calvert City and its Lake Charles production sites are well positioned to benefit from the new abundance of shale gas and NGLs.
Westlake’s integration strategy is aimed at improving its costs and market position.
“The expansion of our ethylene capacity in Lake Charles, and expansion and conversion from propane to ethane feedstock in Calvert City will lower our cost structure, improve margins and capitalise on the structural changes in the ethane market. Similarly, our new chlor-alkali facility in Geismar will leverage the availability of low-cost, natural-gas-based power to achieve these same cost and margin objectives,” Chao said.
“The acquisition of the CertainTeed speciality pipe business allows us to extend our integration further downstream and enhance our building products portfolio, and improve our profitability,” he added.
The company is targeting more specialised markets for PE with autoclave plants making up 80% of its LDPE capacity. LDPE accounts for 62% of its total LDPE/LLDPE capacity of 1.1m tonnes/year.
“We continue to benefit from the higher margins associated with LDPE and are committed to LDPE for the long term,” noted Chao, adding that the company continues to evaluate options for potential expansions.
PVC AND CONSTRUCTION
Along with other PVC producers, Westlake is facing something of an uphill battle in the PVC business with US housing construction particularly still under pressure following the 2008-2009 crash. “We continue to see slow but steady recovery in the building and construction markets as the economy rebounds and gains momentum,” said Chao.
He noted that the North American PVC industry is exporting 35-40% of production into global markets, leveraging the shale-based, lower-cost feedstock advantage. “We would anticipate exports of PVC to continue at current levels. Primary export markets will remain the growing regions such as Asia and Latin America,” said Chao.
“In PE, we have been domestic-focused for the last few years, but going forward would expect to export more as we take advantage of our low-cost position globally. We would typically target Latin America as the most logical choice for increased exports but also could participate in Europe and Asia,” he added.
SUCCESS IN 2013
The company has seen the shale-derived cost advantage continue to work through its financial results in 2013. In the first half, sales were down by 7.4% at $1.80bn with operating profits up by 35.3% year on year to $429m and net income up by 32.5% to $269m.
The current capital spending programme has passed its peak although the further ethylene expansions, while planned, have yet to be finalised. The company remains confident, however, in the longer-term viability of North America’s shale gas and oil boom and the benefits that might be available to domestic chemical producers while noting that supply/demand balances might change if too many crackers are built.
“We are driving toward the completion of our capital expansion programme to complete our strategic objectives of enhancing integration, leveraging our existing asset base and adding meaningfully to our earning potential,” said Chao. A substantial portion of that capital programme is expected to be completed by the end of 2013, with the expanded ethylene project completed in Lake Charles in the first quarter of this year and the planned start-up of our Geismar chlor-alkali plant in the fourth quarter of 2013.
“We believe the billions of dollars invested to produce, fractionate, and transport natural gas and natural gas liquids in the US should keep our feedstock abundant, sustaining the global cost advantage,” Chao noted. “We believe Westlake Chemical remains well positioned to benefit from this advantage.”