The year 2010 marked the beginning for the new LyondellBasell Industries, according to Bhavesh V. Patel, the company’s senior vice president, olefins and polyolefins. This is because the company emerged from Chapter 11 bankruptcy last April and was listed on the New York Stock Exchange in October 2010.
“Within the company, we moved to one common SAP system, completing an important part of our integration of the two companies. We’ve also implemented new performance-management systems and many other standard processes and procedures that will help us become one company,” Patel said at last month’s Barclays Capital Americas Select Conference in London.
He noted that the company had recorded $4.8 billion in EBITDA (earnings before interest, taxes, depreciation and amortization) while repaying $1.2 billion in debt, reporting numerous manufacturing throughput records and starting up new operations in Europe and Asia.
These results were achieved through the use of a “Back-to-Basics” strategy, which included achieving operational excellence, reducing costs and enhancing revenue, maintaining capital discipline, and utilizing technology-driven growth.
“Our focus is on return, it’s not on market share, it’s not on increasing our volume, it’s more about return on capital -- and we want our return to be accretive on new investments,” he said.
One of the obvious ways in which the company is seeking to enhance its revenue is by leveraging lower-priced ethane by cracking more of it. Throughout the rest of the year, LyondellBasell will invest in more ethane cracking, which will provide it with more cyclical upside entering the peak of the petrochemical cycle.
“The petrochemical business is cyclical because we tend to add capacity in lumps and demand grows at a steadier rate. So we have boom-and-bust cycles … As we sit here today in 2011, we’ve come off trough conditions and we’re still transiting toward peak conditions. We think this next up-cycle could last for the next four or five years and it will be different than the past [cycles],” Patel said.
He noted that while naphtha is used as the major ethylene feedstock in both Asia and Europe, it only represents 12% of the ethylene feedstock in the United States because of the emergence of the shale plays and cheaper ethane.
Ethane Economics To Remain Advantageous
Patel anticipates positive global demand for ethylene, with the primary driver for this growth coming from Asia. While ethylene demand is expected to increase 1% to 2% in more mature areas such as the U.S. and Europe, the demand in China and India will increase 7% to 10%.
“The per capita consumption of plastics in China and India is among the lowest in the world. Even if they were to double, it’s still very, very low. This will be the growth driver for polyolefins and many of the other products that we produce in LyondellBasell,” he said.
With demand expected to increase at a sizable rate, supply will need to do the same. He noted that the industry is in the midst of a wave of capacity increases, which he said will slow down in the next two years.
“Over the next five years, based on our demand projections, we would need 35 new world-scale ethylene crackers to meet that demand rate, when, in fact, only 24 equivalent world-scale ethylene crackers are announced … So supply growth will not be high enough to meet demand growth in the coming years, and this will provide for the up-cycle in our industry,” he said.
This cycle will result in the company converting more of its cracking capacity to ethane due to the large amount that will be produced during the coming years. Indeed, Patel noted that a 30% increase in ethane supply during the next three years is expected.
“As we sit here today, the demand for ethane in the U.S. is about 950,000 barrels per day (b/d) and the supply of ethane is somewhere between 950,000 b/d and 975,000 b/d. So the two are well-balanced. When all of the crackers are running well in the U.S., ethane prices tend to rise. When there are unplanned outages or significant planned outages, then the ethane consumption declines and ethane prices tend to decline. Over the next two or three years, as this new capacity comes on, we think there should be a more consistent oversupply of ethane, which should provide for very advantageous ethane economics in the U.S. for some time to come,” he said.
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