LyondellBasell Earnings: Weak End-Market Demand Will Constrain Performance Through Year-End
LyondellBasell’s LYB second-quarter performance emulated that of peers, with sales down 31% year over year and roughly flat sequentially. The firmwide adjusted EBITDA margin was also flat compared with last quarter at 14%. Results reflect softer-than-expected demand across end markets owing to widespread economic uncertainty, a dynamic that will likely persist through year-end. We’ll incorporate the firm’s full financial results shortly, but after this first look, we maintain our narrow moat rating and $124 fair value estimate.
The olefins and polyolefins business in North America was LyondellBasell’s strongest segment this quarter, expanding its EBITDA margin by more than 550 basis points sequentially despite a 3% revenue contraction. Lower feedstock (ethane) costs coupled with favorable polyethylene prices contributed to much-improved profitability despite weak underlying demand. The segment’s near-term prospects are tempered, as feedstock costs are volatile and new production capacity entering the market will likely compress margins moving forward. Customers also remain wary about their inventory levels and will likely continue to demonstrate cautious buying through year-end.
Demand in LyondellBasell’s remaining end markets will prove similarly weak in the second half, as economic uncertainty and energy volatility constrain demand in Europe, and a slower-than-expected recovery from China pervades end-market demand in Asia, as well as overall global supply/demand balances. Automotive end markets remain a key bright spot in the near term, partially offsetting prolonged weakness in packaging and construction end markets. We maintain an optimistic outlook regarding LyondellBasell’s long-run prospects despite its myriad near-term challenges. For example, we expect housing starts will recover in early 2024 and remain strong thereafter, improving demand for polyolefin products and other chemical derivatives with construction applications.
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