LyondellBasell CEO sees resin markets tight at least through year’s end

LyondellBasell’s CEO Bhavesh Patel said that the strong plastic resin demand and tight market conditions that boosted the company’s first quarter profitability may continue through December.

The La Porte Complex in Houston produces ethylene, propylene, linear low-density polyethylene and low-density polyethylene, as well as acetyls which are used to produce acetic acid and vinylacetate monomer (VAM). Image courtesy of LyondellBasell.

The company’s first quarter net income improved by 25% from the previous quarter thanks to improved margins across most segments as resin inventories were tight, he said.

The unusually cold weather and associated power outages that occurred during February in Texas resulted in about one month of downtime or a significant share of total U.S. production capacity located within the state.

Deferred turnarounds from 2020 resulted in high levels of planned maintenance downtime for many resin producers during the second quarter.

Tight markets

“We expect markets will remain tight through at least the end of this year due to very high demand, low inventories and the capacity that will be lost during planned downtime,” Patel said according to a transcript of the April 30 first quarter earnings discussion call transcrip by Motley Fool.

“With customer demand exceeding production, the full extent of our customers' backlogs, deferred consumption and unmet demand are unknown,” he added.

Tight domestic supply will keep companies from exporting enough to meet all the demand from abroad.

“It will likely require quite some time before North American polyethylene industry can fulfill backlogs, satisfy domestic demand and return to last year's pace of selling 40% of production into the export market to serve global demand,” Patel said.

“And this scenario of replenishing inventory over the course of 2021 does not factor in an additional wave of demand that is likely to arise in the second half of this year from restocking and increased activity in the travel, leisure and hospitality sectors as vaccines provide for increased mobility,” he said.

Post-Covid trends

Consumer packaged goods demand remains elevated in 2021 by single-digit percentages relative to pre-pandemic levels, Patel said.

“We expect somewhat elevated demand for packaging will persist following the pandemic with some permanent changes in society as a portion of the population continues to work remotely, school remotely and use home delivery,” he added.

A second economic driver for resin producers has been a recovery in consumer, industrial and construction-related demand for durable goods since the third quarter of 2020.

With government stimulus supporting the U.S. economy and limited travel, leisure and public dining options, consumers remodeled homes and bought vehicles. This improved demand for many intermediate chemicals like propylene oxide, used in polyurethane foams for seats, furniture and as insulation material for construction.

As vaccination rates improve, activity in the travel, leisure and hospitality sectors can return to some semblance of pre-pandemic normalcy, Patel said.

Strong demand for diesel and improving demand for gasoline is expected to improve profitability for LyondellBasell's refining segment during the second half of this year. “Increased mobility will also benefit the polymer businesses as the restaurant, hotel and tourism industries restock,” he said.

“The sum of these trends points to a strong outlook for both the global economy and for LyondellBasell during the remainder of 2021 and well as into 2022,” Patel said.

Prices soared since April 2020

Over the past two years global demand for polyolefins has grown by 14%, far above the long-term trends of 4% and 5% annual demand growth for polyethylene and polypropylene, respectively.

Strong global demand and constrained production have supported polyethylene contract price increases of $950 per metric ton in the U.S. from May 2020 through March.

Of that, $420 per ton occurred since November. More than $300 per ton of additional price increases are on the table for April and May of 2021, Patel said.

“As demand should get even stronger as we progress through the recovery, we expect tight markets and strong margins for polyolefins to persist into next year,” he added.

Olefins margins increased, with higher ethylene and propylene prices outpacing higher feedstock and utility costs. Volumes “decreased due to downtime driven by Texas weather events, partially offset by a full quarter of volume from our Louisiana joint venture that we formed in December,” he said.

The ethylene cracker at the joint venture operated continuously throughout the weather events and “exceeded ethylene nameplate operating rates by 9% during March,” Patel said.

Past forecasts were off

“Early in the pandemic, many predicted declines in polyethylene demand for 2020. By the middle of the year, forecasts improved to flat demand. Most consultants now believe global polyolefin demand grew by approximately 4% in 2020, similar to growth rates seen consistently over the past 30 years,” Patel said.

Projections of reduced demand were off even before the pandemic.
“Predictions of reduced operating rates due to new capacity are highly reminiscent of forecasts from consulting reports published in 2016,” Patel said.

Those reports predicted global operating rates would dip due to U.S. Gulf Coast capacity additions in 2017 and 2018.

“Press releases announcing capacity additions often have ambitious timelines and typical delays in construction and commissioning can allow consistent demand growth to absorb capacity additions with less impact on operating rates and margins than predicted,” Patel said.

By Renzo Pipoli