LyondellBasell Industries NV (LYB), the world’s biggest maker of polypropylene plastic, said “tight” markets for its products may stall the narrower margins that it expects will ultimately come from lower oil prices.
The fundamentals of the U.S. chemical industry have remained “favorable” in October, Chairman and Chief Executive Officer Jim Gallogly said today in the Rotterdam-based company’s third-quarter earnings statement. Competitors’ plant outages are keeping products such as polyethylene in short supply and prices high, he said on a conference call.
“Under those conditions, prices don’t fall very quickly,” Gallogly said on the call. “The supply chain is tight at this point, and of course the U.S. economy is doing well.”
U.S. producers of ethylene and related plastics use natural gas liquids such as ethane as a raw material. While NGLs are cheaper than the oil-derived naphtha used in Europe and elsewhere, a drop in crude prices may undermine that advantage. Brent crude has declined more than 20 percent since its June peak, meeting a common definition of a bear market.
LyondellBasell customers aren’t canceling orders or cutting inventories in anticipation of lower prices, Gallogly said.
“Recent crude oil price declines are expected to ultimately impact domestic margins, but today’s tight market conditions may delay the timing of potential declines,” Gallogly said in the statement. “We are watching to see how this develops.”
U.S. plastics companies should be “relatively insulated” from the drop in crude because ethylene supplies are tight, David Begleiter, a New York-based analyst at Deutsche Bank AG, said in an Oct. 22 note, citing an IHS Inc. presentation. Still, ethylene probably will drop in the current quarter and 2015, he said.
Gallogly, who plans to retire in early 2015, also said on the call that he’s “not too worried” that the oil drop will curtail drilling in shale formations, leading to higher raw-material costs. Drillers are producing more ethane than the chemical industry can use, he said.
Shares of LyondellBasell dropped 2.1 percent to $92.39 in New York. They have climbed 15 percent this year.
Third-quarter net income rose to $2.45 a share from $1.50 a year earlier. Profit excluding some items was $2.51, exceeding the $2.30 average of 18 analysts’ estimates compiled by Bloomberg.
Sales climbed to $12.1 billion from $11.2 billion, exceeding the $11.9 billion average estimate.