LyondellBasell sees 'constructive' outlook for PE

Source: ECN

2019/02/08

LyondellBasell CEO Bob Patel is encouraged by signs pointing 
to a more constructive outlook for polyethylene (PE) in 2019 and 2020.

“Over the past three years, capacity additions have surpassed demand, and [have] moderated operating rates. With less global capacity scheduled to start up during 2019 and 2020, we believe that LyondellBasell’s new Hyperzone HDPE (high density PE) capacity will find favourable markets as we ramp up during the second half of this year,” Patel said on the company’s Q4 earnings conference call.

LyondellBasell’s 500,000 tonne/ year Hyperzone HDPE project 
in La Porte, Texas, is on track 
for completion by Q3 2019, 
he noted.

Going into 2019, Patel said LyondellBasell’s PE inventories are manageable with some build-up in anticipation of a turnaround at its largest 2bn lb/year (907,000 tonne/year) plant in the first quarter, while downstream inventories are actually moderate to low after destocking in the fourth quarter.

“We’re not carrying unusually high amounts of inventory across our entire system… Frankly, downstream because the destocking happened, we think inventories are quite moderate or below average,” said Patel.

The company’s PE inventories at the end of Q4 2018 versus Q4 2017 were only up about $90m on a cash basis, noted LyondellBasell chief financial officer Thomas Aebischer.

Patel did not specify the location of the PE plant for turnaround, but market sources said it is in Matagorda, Texas, where LyondellBasell has two units that produce HDPE. LyondellBasell is also planning a turnaround at a cracker in the third quarter, noted Aebischer.

DEMAND OUTLOOK

LyondellBasell expects demand to pick up through the year as well. “As we look at January, we are seeing in the US a return to more normal demand. And we expect as February, March and April progress, seasonally we tend to see an uptick in demand because of packaging and so on,” said Patel.

“What we hear from our customers is that [the] seasonal uptick in demand should be expected. And… because of the destocking that occurred with the reducing oil price… we think downstream inventories are quite lean,” he added.

Overall, after the pause in PE buying activity amid destocking in Q4 2018 prompted by a 40% plunge in the crude oil price, the market is normalising, with order volumes improving following the rebound in oil prices, according to the CEO.

“I think the set-up is constructive for the entire year given that demand typically grows in the first two or three quarters of the year [and] operating rates are high,” said Patel.

He also remains “encouraged” by forecasts for PE demand growth to continue at long-term historical ranges of 4-5%/year.

“I’m quite optimistic and hopeful about what we will see post Chinese New Year,” said Patel.

Like Celanese, DowDuPont and others, LyondellBasell noted a slowdown in demand in China during Q4. Many companies 
attributed this mostly to trade uncertainties.

Patel added that consumer lending in China had also tightened in Q4, which further contributed to the disruptions in the auto sector. Credit is now loosening in China, Patel said. “It seems to be me that demand for automobiles should be constructive, barring some event that none of us can predict.”

CHINA NAPHTHA CRACKERS

Responding to an analyst question about projections by certain consultants that companies are planning to build over 20 naphtha crackers in China by 2021 and somewhat beyond, the CEO said any build-out would be stretched out time-wise.

“We don’t see that magnitude in that timeframe. A lot of 
them are under consideration but I would say the timeline is much later than what’s described,” said Patel. “So we’ll look for those updates as those projects reach final investment decisions. But we expect those will go forward further in terms of timing.”

BRASKEM DEAL ONLY AT RIGHT PRICE

LyondellBasell continues to have discussions to acquire Brazil-based polyolefins producer Braskem but would make a deal only “at the right price”.

“We have been in discussions with relevant stakeholders including Odebrecht. We don’t know whether these discussions will lead to an agreement,” said Patel. “But I can tell you we will only move forward at the right price and if we believe the transaction creates significant value for all of our stakeholders.”

Brazil-based conglomerate Odebrecht is the controlling shareholder of Braskem, with state-controlled oil and gas company Petrobras as the second largest shareholder.

LyondellBasell announced it entered into exclusive discussions with Odebrecht to acquire Braskem in June 2018.

“Part of the protracted timeline has been the pause because of the change in government, and given the shareholder ownership… for Braskem,” said Patel.

“So I can tell you that we’ve completed very high-quality due diligence. We have a few follow-up items, but I think as we sit here today we better understand issues and value creation drivers,” he added.

In terms of strategic merits of a potential deal, Patel cited Brazil’s positive economic outlook and high growth rates, geographic expansion for LyondellBasell, and a consolidation opportunity for polypropylene (PP) in the US and Europe. However, he reiterated that a deal has “got to be at the right price and has to be significantly value creating for our shareholders”.

Additional reporting by Zachary Moore