LyondellBasell Propylene Oxide Update
August 1, 2022
LyondellBasell Industries Q2 2022 Earnings Call Transcript
Fri., July 29, 2022 | AlphaStreet Share (Ad)
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- David KinneyHead of Investor Relations
- Peter VanackerChief Executive Officer
- Michael McMurrayChief Financial Officer
- Kenneth (Ken) LaneExecutive Vice President, Global Olefins & Polyolefins (O&P)
- Torkel RhenmanExecutive Vice President, Intermediates and Derivatives, and Refining
- James GuilfoyleExecutive Vice President, Advanced Polymer Solutions & Global Supply Chain
Executive Vice President, Intermediates and Derivatives, and Refining at LyondellBasell Industries
Thank you, Ken. Please turn to Slide 14 as we take a look at our Intermediates & Derivatives segment. Exceptional Oxyfuels margins resulted in record second quarter segment EBITDA of $675 million. During the quarter styrene results benefited from tight market supply. We are beginning to see that softer demand for durable goods is leading to moderation in propylene oxide margins.
In the third quarter we expect margin compression across most product lines. Oxyfuels margins are also moderating but expected to remain elevated at levels well above historical averages. The steady success of our Intermediates & Derivatives Segments is rooted in the advantaged technologies, underpinning our propylene oxide business.
On Slide 15, let me highlight the cost advantages of LyondellBasell’s propylene oxide production. The chart on the right depicts the global cost curve for producing propylene oxide by asset. The lower an asset is positioned on the curve, the greater the cost advantage. As you can see, LyondellBasell’s assets that produce propylene oxide with a tertiarybutyl alcohol co product are on the lowest or most favorable part of the cost curve. PO/TBA assets represent roughly 50% of global capacity and derive their advantage from favorable cost for butane, raw materials and strong pricing for the clean burning high octane Oxyfuels products produced from tertiarybutyl alcohol.
LyondellBasell’s plants that produce propylene oxide with the styrene monomer co products are the next lowest cost technology and represent 35% share of global capacity. Much of the industry produces propylene oxide using older, higher cost technologies such as the chlorohydrin process. With the recent escalation in chlorine prices, the cost chlorohydrin based propylene oxide has only steepened, creating hardships for producers using this technology.
LyondellBasell’s advantage PO/TBA technology provides an excellent platform to address increasing global demand for propylene oxide and Oxyfuels. Propylene oxide is used in the production of polyurethanes, versatile materials that saves energy by producing insulation and reducing weight in a wide range of applications. Oxyfuels are clean burning, high-octane gasoline blending components that increase fuel efficiencies and improves air quality by reducing harmful emissions.
Let’s continue with Slide 16 with an update on our PO/TBA project that we are completing here in Houston. This is the largest greenfield investment in LyondellBasell’s history and will deliver much needed capacity to serve growing demand for these products that provide sustainable solutions for our planet. We are thrilled to have nearly completed construction and we have already begun commissioning the Oxyfuels assets depicted in the photo on the right.
The PO/TBA plant commissioning will begin during the fourth quarter and we expect the integrated facility to start up in the first quarter of 2023. Our ramp up during 2023 will not provide for full year of production, but continued market strength is likely to support stronger margins than the mid-cycle economics depicted on this line. With LyondellBasell’s advantaged technology and affordable shale advantaged butane feedstocks, our new capacity’s starting up with the support of favorable markets.
Now, let’s turn to Slide 17 and discuss the results for our Refining segment. Second quarter EBITDA was $418 million with improved margins driven by increased demand for gasoline, diesel and jet fuel. In the second quarter, the Maya 2-1-1 spread expanded significantly to about $56 per barrel. We operated the refinery at 94% of capacity, with an average crude throughput of 52,000 barrels per day. In the near term, the Maya 2-1-1 spread is moderating from second quarter levels. We plan to run the refinery above 87% of capacity during the third quarter to perform a limited scope of planned maintenance.
Stephen Byrne Analyst at Bank of America Merrill Lynch
Okay. Yes, thank you. I appreciate the Slide 15 on your outlook for PO. And Torkel, maybe you could comment on what do you think that slide would have looked like historically? Clearly, now you have some reasons for it to be shaped like that with a lower butane and higher ethyl benzene and certainly higher chlorine, but is part of this just because TBA is so valuable right now and is this — is the shape of this your outlook in the years to come, is that part of your EBITDA forecast?
Torkel Rhenman Executive Vice President, Intermediates and Derivatives, and Refining at LyondellBasell Industries
So, hi, thank you for the question. I think as we looked at this, we’ve — and if you compare it to historical averages, it’s actually widened in terms of the differential in terms of our competitive advantage. And that’s primarily driven — right now the value of the co products, and of course that will fluctuate over the cycle, but fundamentally we see for the next — where we are right now and in the coming next two years, we are in a very favorable cycle situation.
Then as you drive — if you look at energy cost going up, that will also favor our technology. So I think fundamentally, where we are and looking at it right now, I think our technology is very advantaged.
Kevin McCarthy Analyst at Vertical Research Partners
Yes, good morning. Question for Ken, perhaps, I was wondering if you could comment on the U.S. propylene market. It seems to have gotten a bit sloppy here in recent months. I believe the U.S. July contract price declined another $0.04 earlier this week, and it makes four consecutive monthly declines of 35% negative or so. Can you comment on both sides, supply/demand, what you’re seeing there and whether we might expect that pattern to reverse in coming months?Kenneth (Ken) LaneExecutive Vice President, Global Olefins & Polyolefins (O&P) at LyondellBasell Industries
Sure. Kevin, thank you for the question. Yes, I do see — expect to see that trend in propylene reverse in the U.S. In fact, I would — I think we’re going to see that in August, already. We’re starting to see spot prices move up again for propylene. And I’ll go back to the answer that I gave earlier, there’s been a lot of downtime for polypropylene assets in the U.S. and that’s put some length into the propylene market. What’s happening now is you’re starting to see those assets run again and you’re going to start to see people refilling inventory levels because of all the downtime that we’ve had with polypropylene. And that’s going to start to bring the propylene price back up a little bit here in the back-half of the year.
John Roberts Analyst at Credit Suisse
Thank you. In the presentation, you talked about continued strength in propylene oxide, but I think the release discussed some slowing in polyurethane markets, which I guess we’d expect with auto and appliances and construction. As you begin commissioning the new PO plant, do you plan to take downtime in other plants to kind of keep the market balanced if we are facing a slowdown there?Torkel RhenmanExecutive Vice President, Intermediates and Derivatives, and Refining at LyondellBasell Industries
As part of our start-up plan, we have other outages scheduled for other plants that we have delayed in terms of managing our supply on the PO. But we also expect that the plan to ramp up during the year. And we expect that for next year, we will produce about 50% of the annualized capacity from the plant.Peter VanackerChief Executive Officer at LyondellBasell Industries
Yes, John, start-up is scheduled towards the end of Q1, 2023. And I said by Torkel then, you’ll gradually move into the nameplate capacity volumes. So therefore, if you average it out over the year 2023, then it would be approximately, we expect, 50% of the nameplate capacity.