LyondellBasell Industries NV (LYB) Q3 2021 Earnings Call Transcript

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LyondellBasell Industries NV (LYB -1.09%)
Q3 2021 Earnings Call
Oct 29, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the LyondellBasell Teleconference. [Operator Instructions]

I'd now like to turn the conference over to Mr. David Kinney, Head of Investor Relations. Sir, you may begin.

David Kinney -- Head of Investor Relations

Thank you, operator. Hello, and welcome to LyondellBasell's Third Quarter 2021 Teleconference. I'm joined today by Bob Patel, our Chief Executive Officer; and Michael McMurray, our Chief Financial Officer. Before we begin the discussion, I would like to point out that a slide presentation accompanies today's call and is available on our website at www.lyondellbasell.com/investorrelations. Today, we will be discussing our business results while making reference to some forward-looking statements and non-GAAP financial measures. We believe the forward-looking statements are based upon reasonable assumptions, and the alternative measures are useful to investors. Nonetheless, the forward-looking statements are subject to significant risk and uncertainty. We encourage you to learn more about the factors that could lead our actual results to differ by reviewing the cautionary statements in the presentation slides and our regulatory filings, which are also available at our investor website.

Additional documents on our investor website provide reconciliations of non-GAAP financial measures to GAAP financial measures, together with other disclosures, including the earnings release. A recording of this call will be available by telephone beginning at 1:00 p.m. Eastern Time today until November 30, by calling (877) 660-6853 in the United States and (201) 612-7415 outside the United States. The pass code for both numbers is 13723396.

During today's call, we will focus on third quarter results, the current environment, our near-term outlook and provide an update on our growth initiatives. Before turning the call over to Bob, I would like to call your attention to the noncash lower of cost or market inventory adjustments, or LCM, that we have discussed on past calls. These adjustments are related to our use of last in, first out or LIFO accounting and the volatility in prices for our raw material and finished goods inventories. During the third quarter of 2020, we recognized a non-cash impairment of $582 million that reflected our expectation for reduced profitability from our Houston refinery. Comments made on this call will be in regard to our underlying business results, excluding the impacts of the refinery impairment and the LCM inventory adjustments.

With that being said, I would now like to turn the call over to Bob.

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Thank you, Dave. I'm pleased to join for my 28th and last earnings call as CEO of LyondellBasell. Per our usual practice, we will review our results from the quarter. As I prepare to leave the company at the end of the year, I've taken some time to reflect on the strong company we have built and our outlook for the future. Without a doubt, LyondellBasell's future is very bright. Because of the efforts of our incredibly talented and hard-working global team, we've built a company that has proven it can perform under a range of conditions. During an event like a global pandemic, that no one could have predicted or imagined, we were able to fund our dividend with cash from operations and grow our company through accretive M&A. I'm confident that LyondellBasell will continue to deliver for its stakeholders in the future. This is a company that is focused on building value for the long term and one that is built to stand the test of time. With that said, let's review our third quarter results.

Please turn to slide three. LyondellBasell's businesses are continuing to benefit from robust global demand and tight market conditions. In the third quarter, our company delivered $5.25 per share of earnings, more than 4 times higher than the same quarter last year. EBITDA was approximately $2.7 billion, a year-over-year quarterly improvement of $1.8 billion. Efficient cash conversion generated $2.1 billion in cash from operating activities, a new quarterly record for our company. These results are indicative of strong markets, the discipline with which we approach running our business and the increased earnings power from our value-driven investments and accretive growth over the past several years. We remain focused on improving LyondellBasell's cash generation through all stages of the business cycle.

Please turn to slide four to review our quarterly profitability. While our portfolio delivered $2.7 billion of EBITDA, this quarter's results reflect a sequential decline of 11%. Increased costs for natural gas, ethane, naphtha and butane compressed margins for many products from the highs seen in the second quarter. This, however, does not change how we see the future. We continue to see very solid demand for our products and remain highly constructive on the outlook for our businesses as global reopening continues to play out over the coming quarters. We expect a combination of a well-funded economy and pent-up consumer demand for durable goods as well as the nondurable goods associated with travel, leisure and other in-person activities will continue to underpin attractive markets. In short, we remain confident that a reopening global economy and eventual normalization of global supply chains will support continued growth for our businesses over the coming quarters.

Let's turn to Slide five and review our safety performance. Our year-to-date total recordable incident rate for employees and contractors rose to 0.24 during the third quarter. Much of this increase is associated with the tragic incident at our acetyls facility in La Porte, Texas, during July. We remain committed to learning from this incident and incorporating the learnings from the investigations to help prevent such tragedies from ever happening again. Looking more closely at the chart, we are encouraged by the notable improvement in chemical industry safety performance during 2020. We are watching to see if this is a durable trend or perhaps a onetime benefit from reduced in-person work hours during the height of the pandemic. At LyondellBasell, continuous learning and a self-improving culture are key focus areas in our pursuit of GoalZERO safety performance for both our employees and our contractors.

On slide six, I would like to highlight LyondellBasell's increased commitments to help address the global challenge of climate change. In late September, we announced accelerated targets and a goal to achieve net zero Scope one and Scope two greenhouse gas emissions from our global operations by 2050. We now aim to reduce absolute emissions from our global operations by 30% relative to a 2020 baseline. We plan to achieve these goals by advancing progress on several fronts. First, we are improving energy efficiency in all our plants and reducing our need for high carbon content fuel sources, such as coal. We are already moving on this front. In September, we announced our plan to phase out coal from the power plant at our site in Wesseling, Germany. Second, we intend to procure at least 50% of our electricity from renewable sources by 2030. Third, we are focusing on minimizing flare emissions from our clients, particularly during shutdowns and start-up events. In addition, we're evaluating a portfolio of technology options across the company's manufacturing footprint, including sustainable hydrogen increased electrification and carbon capture for storage or reutilization in our processes.

We believe this strategy puts us on an achievable pathway toward our net zero goal. In the near term, we do not expect significant increases in our overall capital budget as reduced spending associated with the completion of our PO/TBA project in 2022 will be offset by an increasing share of climate-related investment.

With that, I will turn the call over to Michael, who will describe our financial and segment results in more detail.

Michael McMurray -- Executive Vice President and Chief Financial Officer

Thank you, Bob. Good morning, everyone. Before I begin, I would like to share my sincere gratitude to Bob for his tireless work, inspirational energy and thought partnership in leading and growing LyondellBasell for nearly 12 years. We are all sad to see you go, Bob, but we will be eagerly watching your progress and wishing you continued success. Please turn to slide seven, and let me begin by highlighting our strong cash generation, which has been bolstered by our recent growth investments. In the third quarter, LyondellBasell generated a record $2.1 billion of cash from operating activities that contributed toward the $5.4 billion of cash generated over the last 12 months. Our free operating cash flow for the third quarter improved by more than 10% relative to the second quarter, and our free operating cash flow yield was 15% over the last 12 months. We expect this chart will continue to improve during the fourth quarter as 2020 results drop off from our trailing performance.

Let's turn to slide eight and review the details of our cash generation and deployment during the third quarter. As I have mentioned during previous calls, we are highly focused on shareholder returns. A strong and progressive dividend plays a fundamental role in our capital deployment strategy. In addition to our dividend, we also resumed share repurchases during the third quarter and reduced our share count by approximately one million. We continue to invest in maintenance and growth projects with more than $500 million in capital expenditures. Strong cash flows supported debt reduction of nearly $700 million, bringing our year-to-date debt reduction to $2.4 billion. We closed the third quarter with cash and liquid investments of $1.9 billion. In July, S&P Global Ratings recognized the improvement in our balance sheet by upgrading our credit ratings and indicating a stable outlook. During the fourth quarter, we expect that robust cash generation and an anticipated tax refund will enable continued progress on our goal to reduce debt by up to $4 billion during 2021, and further strengthen our investment-grade balance sheet. After the quarter closed, we repaid an additional $650 million of bonds in late October. We do not foresee the need for additional debt repayment in 2022. Confidence around our deleveraging targets enabled us to resume share repurchases in September, and we continued to opportunistically repurchase shares during October. As of October 22, we have repurchased a total of 1.6 million shares.

Now I would like to highlight the results for each of our segments on slide nine. In the third quarter of 2021, LyondellBasell's business portfolio delivered EBITDA of $2.7 billion. Our results reflect strong margins supported by robust demand for our products and tight market conditions, offset by higher costs, primarily in our O&P Europe, Asia, international segment and our I&D segment. Let's begin the individual segment discussions on slide 10 with the performance of our Olefins and Polyolefins-Americas segment. Robust demand drove EBITDA to about $1.6 billion, slightly lower than the second quarter. Olefins results decreased approximately $75 million compared to the second quarter due to lower margins and volumes. Despite relatively stable benchmark ethylene margins, our margins declined as we purchased ethylene to supplement production and meet strong derivative demand. Volumes decreased due to unplanned maintenance, resulting in a cracker operating rate of 89%. Polyolefins results increased more than $75 million during the third quarter as robust demand in tight markets drove spreads higher with polyolefin prices increasing slightly more than monomer prices. In fact, our polypropylene spreads reached a historic high. We continue to see strong demand for our products as we begin the fourth quarter. However, higher energy and feedstock costs, along with typical seasonality demand softness toward the end of the year are likely to compress margins for our O&P-Americas businesses.

Now please turn to slide 11 to review the performance of our Olefins and Polyolefins Europe, Asia, international segment. Higher feedstock cost and lower seasonal demand during summer holidays reduced margins and volumes in our EAI markets resulting in a third quarter EBITDA of $474 million, $234 million lower than the second quarter. Olefins results declined about $50 million as margins decreased driven by higher feedstock costs despite the higher ethylene and co-product prices. We operated our crackers at a rate of 92% of capacity due to planned maintenance. Combined polyolefin results decreased approximately $120 million compared to the prior quarter. Lower seasonal demand drove declines in polyolefin price spreads relative to monomer cost and reduced volumes. Declining polyolefin spreads also affected our joint venture equity income by about $35 million. During the fourth quarter, we expect to see further margin declines from higher energy and feedstock costs along with end-of-year seasonality. Our ethylene volumes are expected to decline due to planned maintenance.

Please turn to slide 12 as we take a look at our Intermediates and Derivatives segment. Rising feedstock and energy costs drove margin declines in most businesses resulted in third quarter EBITDA of $348 million, $248 million lower than the prior quarter. Results were impacted by approximately $25 million due to site closure costs associated with the exit of our ethanol business. Third quarter propylene oxide and derivatives results decreased about $15 million as margins declined slightly from the historical highs of the second quarter. Durable goods demand remained strong, resulting in increased volumes. Intermediate Chemicals results decreased approximately $140 million. Margins declined in most businesses, primarily styrene and volumes decreased as a result of downtime in our acetyls business. Oxyfuels and related products results decreased about $40 million as increased butane feedstock prices more than offset the increased volume from improved gasoline demand. In the fourth quarter, we expect volumes to increase with the restart of our La Porte acetyls facility and continued strength and demand for durable goods. Margins are likely to moderate with fourth quarter seasonality and higher raw material costs for our I&D segment.

Now let's move forward and review the results of our Advanced Polymer Solutions segment on slide 13. Customer supply chain constraints continue to hinge results with third quarter EBITDA of $121 million, $8 million lower than the second quarter. Compounding and solutions results were relatively unchanged. Margins were higher but partially offset by a decrease in volume due to restricted production in downstream markets, including the automotive sector, appliance manufacturing and other industries affected by semiconductor shortages. Advanced Polymer results decreased about $10 million driven by lower margins and volumes primarily due to plant maintenance. We expect results will be similar in the fourth quarter as it will likely take several quarters before supply chain constraints begin to improve.

Now let's turn to slide 14 and discuss the results of our Refining segment. Margins improved significantly in the third quarter, resulting in an EBITDA improvement of $122 million to a positive $41 million. In the third quarter, prices for byproducts increased, costs for renewable identification number credits, or RINs, decreased and the Maya 2-11 benchmark increased by $1.65 per barrel to $23.11 per barrel. The average crude throughput at the refinery increased to 260,000 barrels per day, an operating rate of 97%. Improved demand from increasing mobility should be supportive for our refining margins and could enable continued profitability during the fourth quarter.

Let's finish the segment discussion on slide 15 with the result of our Technology segment. Increased licensing revenue drove third quarter EBITDA to a record $155 million, $63 million higher than the prior quarter. We expect that fourth quarter profitability for our technology business will return to similar quarterly levels as the first half of this year based on the anticipated timing of licensing revenue and catalyst demand.

With that, I'll turn the call over to Bob.

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Thank you, Michael. Please turn to slide 16 for a summary of the value-driven growth initiatives that our company has developed since 2018. Our approach is to pursue prudent and accretive investments that chart a clear path for increasing EBITDA. In 2018, we expanded our compounding business by acquiring A. Schulman and forming the Advanced Polymer Solutions segment from both legacy and acquired businesses. With integration complete, we have a solid platform for future growth and synergies should become increasingly visible as volumes recover in the markets served by this segment. In the second quarter of 2020, we started a 500,000 ton per year polyethylene plant in Houston, utilizing our next-generation Hyperzone HDPE technology.

At full nameplate capacity and average margins from 2017 to 2019, we estimate this asset is capable of generating $170 million of annual EBITDA. In September of 2020, we established a new integrated cracker joint venture in Northeastern China. This investment is capable of generating $150 million of annual EBITDA for our company, again based upon full capacity and historical industry margins. In December of 2020, we closed the transaction for the integrated polyethylene joint venture in Louisiana. At full capacity and historical margins, this investment is capable of contributing $330 million in EBITDA for our company. In our Intermediates and Derivatives segment, the combination of two new propylene oxide investments in China and Houston starting in 2022 and 2023 could together add almost $500 million of annual estimated EBITDA. Taken together, we estimate these initiatives could add up to $1.5 billion of EBITDA to our mid-cycle earnings.

Slide 17 provides a historical view of LyondellBasell's profitability over the course of the first complete business cycle for our company. Over the period from 2011 to 2019, we delivered a little over an average of $6.5 billion of EBITDA, excluding LCM and impairment. In fact, we reached $8.1 billion in 2015 during my first year as CEO of our company. In today's strong market and with many of our growth initiatives providing strong contributions, our last 12-month performance was $8.6 billion, exceeding our previous record and reaching nearly 30% above the historical average. While no two cycles are exactly alike, our performance during prior business cycles provides valuable context on how these growth initiatives might perform and reposition LyondellBasell during the next cycle with a larger asset base.

Let me summarize our view of current conditions and the outlook for our business with slide 18. In the near to midterm, further progress with vaccination rollouts should continue to support solid demand and margin for our products. With seven billion doses of vaccines administered worldwide, approximately 1/2 of the world's population has now received at least one dose of a COVID vaccine. New cases in the U.S. have fallen to less than half the level seen during the delta-driven spike of August and September. We are keeping a watchful eye on rising case rates in the U.K. and parts of Europe, but most virus indicators are trending in the favorable direction.

Over the coming months, margins are expected to face headwinds from typical fourth quarter seasonality and combined with increasing feedstock and energy prices, we anticipate some margin compression, but expect markets to remain relatively strong. Logistics constraints and the pace of vaccination are currently hindering demand. Eventually, consumers will have more options when purchasing a new car, back order furniture will become available, and all of us will find a way to resume traveling, whether for business or leisure. Pent-up demand is tangible and consumers have ample liquidity to drive purchases of both services and manufactured goods. Monetary stimulus may taper but the unprecedented levels of stimulus deployed during the pandemic will have lasting effects that are typically supportive for commodities.

Let me close with slide 19. As I think about the coming weeks and prepare to pass the baton to the next leader of LyondellBasell, I draw comfort from the knowledge that the broader team we have in place is incredibly talented and has created great momentum that will endure for many years. In the end, our assets don't run themselves and decisions don't get made by spreadsheets. I'm confident that this remarkable team will continue to take our company to greater heights. Our company has never forgotten our core values built upon safety, reliability and cost efficiency. These attributes form the basis for leading and advantaged positions in our industry. With these strong foundations in place, we are deploying our business model across a larger asset base with embedded growth through projects such as our PO/TBA facility and further expansions of our global joint venture partnerships. In tandem with our investment to reduce carbon emissions, we are also building innovative business models that will increase our utilization of plastic waste as a circular feedstock.

My belief is that over the next decade, LyondellBasell will become a global market leader in the exciting and rapidly growing market for sustainable plastics. With strong markets and new sources of EBITDA, our team works diligently to maximize cash conversion and we have taken care to reinvest that hard-earned cash into accretive investments that add value and drive future growth. All of this work is underpinned by a disciplined financial strategy. We stand by our dual commitments to a growing dividend and an investment-grade credit rating through cycles. We are confident that we can complete our deleveraging and achieve our target of reducing debt by $4 billion before the end of this year. With strong cash flows and no need for further debt reduction, we expect to continue reinvesting in our company through the opportunistic repurchase of LyondellBasell shares. I hope you share my sincere enthusiasm about the future of our company.

We are now pleased to take your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Jeff Zekauskas with JPMorgan.

Jeff Zekauskas -- JPMorgan -- Analyst

Thanks very much. Bob, what do you think the skill set of the new CEO of Lyondell should be? That is, what should he understand? What should his particular strengths be?

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Yes. Thank you, Jeff. Good morning. Well, I think to be successful in the business that we compete in, having a firm view about the importance of safety, reliability and cost efficiency. It's what we did in the early days when we came out of the Chapter 11 process. I think that will be important. And I recall, as I, seven years ago, roughly was named the CEO here, I talked about the importance of strategy and culture. And so my sense is if I were to think about the next chapter, the things that I would add would be focused on circularity and our sustainability initiatives. And I think the uniqueness of our culture is that the next CEO who's grounded, rigorous and works in service of the employees and the shareholders will be successful.

Operator

Our next question comes from Vincent Andrews with Morgan Stanley.

Vincent Andrews -- Morgan Stanley -- Analyst

Thanks and good morning. Thanks, Bob, good luck going forward. If I could just ask you, it's obviously been an unusual year with the weather and the outages and the chip issue. If you could help us think about utilization rates for your assets in 2022, assuming no unplanned activity, when do you think you'll see polyethylene rates get back over 90% in the U.S.? I noticed polypropylene in EAI had very high volume in the third quarter. Is that a function of less demand for compounding PP because of autos? But just how should we think about PE and PP utilization rates in the U.S. and Europe for next year?

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Sure. Thank you, Vincent. First of all, I already just mentioned a couple of words about Q3 and kind of the slightness we had. We had a couple of very atypical unplanned outages that were quite large. First, we had the acetyls unplanned downtime due to the incident we had. At Q3 volumes and margins, the volume lost and Q3 margins, that outage impacted earnings by about $75 million. We also had a couple of larger atypical events in O&P Americas at Q3 margins. That lost volume impacted earnings by about $200 million. So we could take three or four incidents and those outages reduced Q3 by about $275 million. Now there were other kind of normal unplanned outages that we have in any given quarter. But those -- it was quite an unusual quarter in that regards. As I think about next year, you said it well. I mean I think there is still a lot of constraints in terms of demand today.

We still see a global supply chain that is not operating as smoothly as what we've seen in the past, chip shortages, shipping constraints whether it's high cost for containers or just the ships being in the wrong place. I think -- I believe firmly that that has impacted exports of finished goods out of China, which have, in turn, reduced demand for plastics in China. So as we look into next year, I would expect that by the middle of the year, a lot of these issues should have normalized and we should see more typical global trade patterns and with a stronger durable goods market, especially for auto and appliances, those things that people have not had available to purchase, that should favor polypropylene, probably more differentially than polyethylene. So I think by mid next year, we should see operating rates sustained at over 90% and a lot of these constraints will have relieved themselves.

Operator

Our next question comes from Kevin McCarthy with Vertical Research Partners.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Good morning. Bob, I'd echo many of the comments Michael made in his prepared remarks about you and wish you all the best of luck in the future. My question for this morning is on the refinery, better operational results there in the quarter, but six or seven weeks ago, I think you also announced the intent to revisit strategic options there. And so I just wondering if you could comment on of those, kind of the near-term operational outlook as well as the options on the strategic menu and progress on that front lately?

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Yes. Thank you, Kevin, for your kind words. So first, on the business side, on the refinery, things have certainly turned positive. We turned to profit in Q3 as we mentioned during the prepared remarks. Q4 looks to be stronger than Q3. Of late, what we're seeing with high oil prices, we're seeing more Canadian sour crude coming down to the U.S., which is causing the light-heavy differential to widen. That favors our refinery. And I think that trend could continue for the next quarter at least. On the product side, distillate inventories are very low. Distillate cracks have expanded. We're seeing air travel get back to about 80% of pre-COVID levels in the U.S. Miles driven are back to pre-COVID levels now. So all of the trends when you think about demand, like heavy differential, all indicate improvement sequentially from Q3 to Q4. And so we're pleased to be back in the black in refining. With regards to the process and the transaction, we're working through the process now, and our aim is to move toward the transaction in the coming quarter or two. We still continue to believe that the best value for this -- that this refinery can create is by being part of the system where it can be optimized from crude purchasing to logistics, to the coproduct processing. We think that a 270,000 barrel a day refinery in the Houston Ship Channel is well placed and create tons of value as part of the system.

Operator

Our next question comes from Edlain Rodriguez with Jefferies.

Edlain Rodriguez -- Jefferies -- Analyst

Thank you. Good morning, guys. A quick question for you, Bob. I mean, when you look over the next 12 to 24 months, clearly, your expectation is for margins to moderate. You're not expecting margin cliff like some more bearish participants out there. But the question is, one, where can you be wrong? And two, like what are the market dynamics that you believe should prevent like a worst-case scenario?

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Yes. Great question, Edlain. I mean this has been the debate for the last 12, 15 months. And many of you will recall that I talked about demand being stronger for longer. I still believe that. I think as you go quarter after quarter, all of the market forecasters have underestimated demand growth. And I think that will continue to play out. I mean think about we still have reopening ahead of us. There's a lot of buying power in the hand of consumers, highest historic savings rates in the U.S. and in many other regions around the world. You have still accommodative central bank policies, even if tapering starts, still have very low interest rate environment here and abroad. And so much pent-up demand from goods and services that we couldn't access because of shortages or because of limitations on travel.

So I think this sort of scenario of moderating margins is based on continued strong demand and strengthening as reopening really takes hold and some of these supply chain constraints relieve themselves like the chip shortages. When you think about the impact in our compounding business because auto production is low, it's significant. And when those chips are available, we think that our polypropylene business, our PO business and our compounding business will benefit materially from more automotive production. You asked about what could go wrong. I think in the near term, we'll have to watch energy prices. There could be points where we could see potentially spikes in energy price. But I think sustained high energy prices are unlikely because at some point, they'll be met with more supply. So I think that's what we have to watch. And the other is the picture in China remains a bit murky, and I'll try to address that through the upcoming questions.

Operator

Our next question comes from Bob Koort with Goldman Sachs.

Mike Harris -- Goldman Sachs -- Analyst

Yes. Good morning. This is actually Mike Harris sitting in for Bob. Bob, if I could, just -- you started down the path that I wanted to ask about that. China is just considering all the dynamics around the energy controls and faster decarbonization efforts. And what do you see as kind of the future implications there for petrochemicals and perhaps just strategy for expansion in that region?

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Yes. So I don't profess to have the exact picture of what could happen, but I'll give you a few of my thoughts about what could happen. In terms of dual controls in the near term, you do see some lowering of petrochemical production. I think ultimately, that will require more imports, which benefits exporting regions like the U.S. whether it's in the I&D business or in the O&P business, I think that's a net positive. I think the reduction of coal use will likely turn off some of the CTO complexes requiring more imports of polyethylene and polypropylene favorable for global producers like us. The shipping constraints, I think, have been a net negative in the near term as they've not been producing for exports as much of finished goods.

Two reasons. One is they can't get enough containers. Second, because shipping costs, in many cases are 10 times when you consider both the sea freight plus the container cost, they're just not able to pass that kind of increase on. So I think as that normalizes, I would think that demand should increase in China as they're able to export more finished goods next year. And I think the longer-term outlook is that as there's less coal consumption, it seems to me that the amount of expansion that could take place in China could be less than what we've seen in the past. Certainly, MTO and CTO-based technology or based capacity will likely not be as robust as what we've seen in the last 10 years. So I think there are many bullish aspects to how this could play out. But I think it will be choppy over the next couple of quarters until we get back to something more normal.

Operator

Our next question comes from Hassan Ahmed with Alembic Global.

Hassan Ahmed -- Alembic Global -- Analyst

Good morning, Bob and wishing you all the best. Bob, a question around net polyethylene dynamics. In the marketplace, it seems there are two camps now. You have the IHS guys talking about as much as $0.15 a pound in margin compression for polyethylene in Q4 and you have Dow that's talking about $0.07 to $0.08 a pound. So just trying to figure out which camp Lyondell is in?

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Yes. So Hassan, in terms of PD price, moderation in price is kind of where we are and we have been for some time. It's -- if you look back over the last 10 years, most every year, you see some moderation in Q4 in polyethylene price. And I think this year will be very similar. And at the same time, we do have feedstock costs that have come up some here in the U.S. My sense is on the feedstock side that ethane is very abundant and available and what's setting the price for ethane is natural gas price. And it seems that natural gas prices kind of settled out here in the high $4, $5 per million BTU range. If that's our assumption and of course, we can have a spike here or there. But let's say, we get through the winter in that range and frac spreads are $0.05 to $0.07 a gallon for ethane. I think the cost side is kind of where we are, and there could be some moderation in margin. 15% feels heavy to me. I suspect that it will be something more modest than that. Our next question comes from David Begleiter with Deutsche Bank.

David Kinney -- Head of Investor Relations

Thank you. Good morning. Bob, all the best in your future endeavors. Bob, one of your competitors recently announced plans to spend $1 billion a year to decarbonize their asset base. How are you thinking about Lyondell's efforts to decarbonize their base -- your base and how much it will cost going forward?

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Yes. Thank you, Dave. First, let me talk more broadly about our sustainability strategy and how we think about that. We've been very clear that we want to lead on circularity and we want to be a fast follower when it comes to CO2. So what that means is that on circularity, we want to lean into innovation and developing technologies, whereas on CO2 reduction, we're likely to -- we could co-develop with others, but we may also combine that with licensing in technology. So having said all of that, when you think about, first of all, we've been consistent that we believe our capex will be about $2 billion per year through 2025. So the next four full years, we expect to be around $2 billion of capex. In the back half of the decade as we look to implement technologies like electric furnaces or whatever comes about, we think the capex could step up by about $0.5 billion a year in the back half of the decade, so instead of 2%, 2.5% per year, maybe starting in '26. But I don't expect that to be sooner than that. $1 billion per year sustainability-related capex, that's not part of our plans as we sit here today.

Michael McMurray -- Executive Vice President and Chief Financial Officer

And Dave, when you think about next year, we have capex rolling off from the PO/TBA project as that gets completed. So we do have room within the budget that Bob outlined there.

Operator

Our next question comes from P.J. Juvekar with Citi.

P.J. Juvekar -- Citi -- Analyst

Yes, good morning. And Bob, we'll miss you. Good luck in your next endeavor.

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Thank you, P.J.

P.J. Juvekar -- Citi -- Analyst

Question on feedstock slate. As natural gas prices -- natural gas liquid prices, NGL prices, are going up in the U.S., ethane propane, how did you change your feedstock slate in North America? And what do you expect going forward? And similar question in Europe, where naphtha spiked but natural gas prices also spiked. So how did the European feedstock slate change? And what do you see there as well?

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Yes. Thank you, P.J. Let me talk a little bit more broadly about energy prices as context, and then I'll get into the feedstock flexibility both here in Europe. First of all, I mean, as you look at kind of the outlook for oil prices, it's likely that oil prices will be persistently high over the next two, three years. We don't see large IOCs coming back to drill. The independents here are starting to drill more, but the very large companies who have presence in, for example, the Permian, we're not seeing drilling come back. High oil prices are good for LyondellBasell.

So I think over the long run, there will be plenty of ethane. I think ethane as there's more gas supply with more drilling ethane should be plentiful, gas price should be kept in check, especially with feedstock flexibility, we'll have a chance to rotate to other feeds. In the near term, we recently still find ethane to be the favorite feed. Propane and butane prices have run quite a lot. So they've been really out of the mix. We have been cracking some gas oil and heavies as well. So think about like a barbell slate, light and heavy, but in the middle, we've not been cracking in the U.S. In Europe, because of high LPG prices, we've been cracking naphtha mainly. And coproduct values have been pretty good. I mean betadine has run well. propylene has come off some, but still at very healthy levels. So overall, propane, butane, I would expect will be out of the mix for most of the winter. And we'll focus on ethane and the heavy end here in the U.S. and naphtha in Europe.

Operator

Our next question comes from Chris Parkinson with Mizuho.

Chris Parkinson -- Mizuho -- Analyst

Great. Thank you very much. Can you just hit on current demand trends in Intermediates? Where you sense chain inventories are? Just how do you see the setup for 2022 profitability evolving in the context of more normalized operates? And maybe just a quick update on oxyfuels as well. Thank you so much.

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Sure. Thank you. Chris. So first of all, on I&D, PO continues to be very strong. Propylene oxide demand is strong. The market continues to be tight. We will have a record year this year in our PO business, and we see that continuing. As I mentioned earlier in one of the prior questions as auto demand comes back, appliance demand comes back because of constraints being relieved we think that favors a continued strength in the PO business. And I actually think that our new capacity in '23 could come on at a time when the market desperately needs more PO and I think it could be absorbed very quickly. So we're very constructive PO next year. Acetyls continues to be strong. Our plant is back up and running. As of early October, we're back to running at full rates. And we're enjoying the benefits of a very good market, and we think that will carry well into '22.

On oxyfuels, demand is back, but unfortunately, the challenge today is higher butane price. So butane as a percent of crude oil is kind of around 90%. And likely through the winter months, we won't get much relief on that. But next year, as we get into spring and LPG prices moderate after we get through the winter season and the demand should continue to improve and be better as driving improves in Europe and other parts of the world, think oxyfuels will get back to the typical contribution of $400 million to $450 million annually prior to the new projects starting up. Styrene, likely mixed. When there are outages, we see styrene get a bump. When everyone runs, styrene is kind of either side of breakeven. But I think the real kind of gems in the portfolio next year will be propylene oxide acetyls and oxyfuel is likely starting in the spring.

Operator

Our next question comes from Steve Byrne with Bank of America.

Steve Byrne -- Bank of America -- Analyst

Yes. Thank you. So Bob, you made a comment that you want Lyondell to lead on circularity and it's not a surprising comment coming from you given your leadership few years ago in that Alliance to End Plastic Waste. But are you -- is that an ethical issue or are you saying that because your customers are demanding it you have these Circulen products. And my question for you is, do you have significant demand for those products now that you can't meet the supply, how long before you might have pyrolysis-based production or renewable feedstock-based production? How far away is this? And is it meaningful?

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Yes. Thank you, Steve. So first, I think there are two aspects to this. The first is the demand side and the second is playing to our strengths. On the demand side, absolutely, our customers are asking for more and more circular products in plastics each year, which the demand that we can't meet. And that's driven by their own commitments to increase recycled content and packaging. So the entire value chain is pulling, starting with the brand owners, they're pulling more circular products. And I think that will just grow as the years progress. Why I think we should read on circularity is that we have a strong technology base in polyolefins. We have polyolefins process technology, catalyst technology. Also, we're developing this MoReTec technology, which is the molecular recycling. That pilot plant should be operational in the coming weeks. And I suspect by about March, April, we will know whether we have an investable technology. My sense is that we will. The question will be to what degree can we get the yields that we want of pyrolysis oil. Our current plan is by end of next year to be in a position to dedicate some of our capex to building a MoReTec plant either in the U.S. or in Europe. So I think it plays to our strengths and demand -- the demand pull is there from the brand owners.

Operator

Our next question comes from John Roberts with UBS.

John Roberts -- UBS -- Analyst

Thanks. And just in case we don't get another call with you Bob, best wishes in the future.

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Thank you, John.

John Roberts -- UBS -- Analyst

Your licensing activity gets an early look into industry expansion activity. I assume that new license discussions declined during the pandemic. But have discussions for new plant licenses increased significantly coming out of the recession? And any differences between polyethylene and polypropylene?

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Sure. So John, we had a gap during the pandemic as you said. So I think probably something around 12, 15 months of much, much lower activity. It has picked up in Q3, more polypropylene than polyethylene and quite a bit of it in China. I think that's a trend that we've seen. Having said that, pickup in demand in -- or activity in Q3, we're still not quite back to 2019 levels. So I think still modest. And as you think about where you're going with this question, John, is, what does it mean for supply three, four, five years out, I do think we're going to find a gap in supply, new supply three years from now because those decisions to expand were delayed or paused during the pandemic. And then if you look further out and you think about operating rates to more fully kind of answer your question, beyond the couple of new projects that are coming in the U.S. and some pace of capacity in China, it seems to me that polyethylene and polypropylene operating rates likely reach some sort of a bottom in '22 or '23 and steadily increase. And that bottom is very shallow, if not maybe kind of sideways from where we are today given our outlook on demand. So I think we do see operating rates increase as we move through into the middle of the decade.

Operator

Our next question comes from Arun Viswanathan with RBC Capital Markets.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Great. Thanks for taking my questions and I'll add my congrats and best wishes to you, Bob, as well. A pleasure working with you. Just wanted to, I guess, ask about polypropylene and the acetyls chain. So polypropylene, I guess, was definitely impacted by the automotive shortages. Do you see that kind of evolving to a better spot over the next two quarters? And then similarly, with acetyls, was it mainly the downtime that held that business back in the quarter? And I guess, maybe you can just provide an outlook there as well.

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Certainly. I'll start with acetyls. Definitely, the downtime is what impacted us in -- and as I mentioned, at Q3 margins, that lost volume reduced our earnings by about $75 million. Back up and running full rates now, and outlook is very good for acetyls. And our view is that margins should be very healthy even going into next year. So we're quite positive about that business. On polypropylene, auto was weak, but packaging was quite strong, and we had a lot of kind of medical-related demand. So that held polypropylene. Now as we see auto come back, for our company, we have much more leverage to the auto recovery. If you think about our polypropylene sales to OEMs or Tier 2s plus what goes through compounding plus some of our polyethylene that goes into plastic fuel tanks, our company will benefit immensely from the chip shortage, hopefully alleviating as we go through the next few quarters. And I think you'll see that in the APS business, there should be a meaningful step up once we see auto come back. And as a result of all of that, I think PP business will remain tight. It's, frankly, pretty tight today and demand continues to be really strong.

Michael McMurray -- Executive Vice President and Chief Financial Officer

Yes. And Arun, in our third quarter, it was more production shortfall because we had two weeks of downtime in Lake Charles for facilities here in the United States as well.

Operator

Our next question comes from Frank Mitsch with Fermium Research.

Frank Mitsch -- Fermium Research -- Analyst

Hell of a run, Bob. Hell of a run. What are you most proud of during your tenure as CEO? And what do you think is the biggest piece of unfinished business that perhaps the next CEO ought to address early on in his or her tenure?

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Yes. Thank you, Frank. It's really been great working with all of you and getting to know all of you better. What I'm most proud of? Well, it's been 12 years with the company almost joined a very different company back in March of 2010. And I'm proud of the employees who stuck through it, through thick and thin. There are many, many people here who stayed during the Chapter 11 process and won their company back. And I'm really proud to have been a part of going from where we were back in March 2010 to where we are today. In terms of what's ahead, I think it's really about continuing to capture value from all these growth projects that we've implemented. We've invested around $9 billion in five or six discrete sort of initiatives, both organic and inorganic. And it provides an incredible runway for earnings growth. So I think it's really just capture the value from the growth that we've been through, continue to lean into circularity, focus on CO2 reduction and be value-minded when it comes to M&A, deep value like we have been and be OK with saying, no, when the deal doesn't make sense. So I think we've built an incredible cash machine here at LyondellBasell.

Operator

Our next question comes from Duffy Fischer with Barclays.

Duffy Fischer -- Barclays -- Analyst

Yes. Good morning. Two questions around Europe. So when you look at your business, one of your calling cards over the last decade was you guys going lighter and more into LPG. At least in the near term, that doesn't seem to be as beneficial. What's your view longer term LPG versus naphtha ratio? Where does that go? What does it do to the competitiveness of your business within Europe? And then the second one is, if carbon prices are just structurally going to be higher in Europe, whether that's natural gas or LPG coming in, what does that do to the competitiveness of the European petrochemical business? And should we look to see meaningful reductions in production there maybe over the next five years or so on the back of that?

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Yes. Thanks, Duffy. Both really great questions. on the European LPG competitiveness, I think this will ebb and flow. We've seen periods when LPG became expensive in Europe, we've seen when butane is traded at 45% of crude price. So I think that will continue. Part of sort of the lower prices sort of scenario will be when U.S. exports of butane and propane increase has -- there's more oil production associated gas and the NGLs that come with that. So I think having flexibility benefits companies like us because it's so hard to predict what will be favored when. But if you have flexibility, you tend to do well in a range of environments. And I think our company has that both in the U.S. and in Europe.

And your second question about competitiveness, in Europe and sort of the carbon initiatives. While there's a lot of legislation being considered, the way I think about it is that, first of all, relative competitiveness is really important. And I think within the region, we have one of the most competitive asset bases. We've built that through all of the work we did earlier in the last decade. Over time, you could see regulation that provides for border adjustments or things that will help protect the industrial economy in Europe. I think industrial employment is a very important part of the European economy. And I can't imagine that will just trade away. So I always ask my team to focus on regional competitiveness and make sure that we're at the most competitive end of the cost curve regionally.

Operator

Our next question comes from Matthew Blair with Tudor, Pickering, Holt.

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Hi. Good morning. Thanks for taking my questions. Wishing you the best, Bob. We'll definitely miss you. I was hoping you could expand a little bit on your ethane outlook. You mentioned the supply is abundant now. We do have some new crackers coming online plus a potential ramp of ethane exports. So for this incremental demand, is that something that you think would be covered by incremental production just given the recent increase in the rig count? Or would it need to pull from, I guess, either like rejection or inventory?

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Yes. Thank you, Matt. It's been a pleasure working with you as well. I've had lots of discussions with some of our largest suppliers on this topic. And I think with new capacity coming here in Corpus and more demand for ethane, my sense is that between the amount that's rejected today that could be recovered and incremental output from the independents who are starting to ramp up in the Permian. I think there's enough ethane. The price that are on ethane, I continue to believe will be natural gas with a kind of modest frac spread to get to the ethane price. We've done a lot of work on this, and we think that, that likely is a scenario. So -- and then longer term, I mean, think the feedstock flexibility here in the U.S. will serve us well as the various scenarios play out, and you could make a good argument for oil to gas ratio widening as we get past summer of '22 and into the next couple of three years.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I will now turn the call over to Bob Patel for closing remarks.

Bhavesh V. (Bob) Patel -- Chief Executive Officer

All right. Well, thank you again for all the thoughtful questions. Let me offer a few closing remarks. First of all, we continue to believe that demand will remain strong well into 2022 for all of our products and markets we serve. While we're likely to face some margin pressure from rising energy and feedstock costs, we expect that our earnings and cash flow will remain robust. LyondellBasell has an array of options to create shareholder value, ranging from a growing dividend, share repurchases and value-creating M&A. It's been my sincere pleasure and honor to serve and privileged to serve as CEO in support of our incredible employees and shareholders for nearly seven years. We've built an incredibly strong company over the past 12 years, and I'm thankful to have been a part of it. I've enjoyed getting to know all of you and working with you, and I remain very optimistic about the future of LYB. Thank you, and best wishes to all of you. You are now adjourned.

Operator

[Operator closing remarks]

Duration: 63 minutes

Call participants:

David Kinney -- Head of Investor Relations

Bhavesh V. (Bob) Patel -- Chief Executive Officer

Michael McMurray -- Executive Vice President and Chief Financial Officer

Jeff Zekauskas -- JPMorgan -- Analyst

Vincent Andrews -- Morgan Stanley -- Analyst

Kevin McCarthy -- Vertical Research Partners -- Analyst

Edlain Rodriguez -- Jefferies -- Analyst

Mike Harris -- Goldman Sachs -- Analyst

Hassan Ahmed -- Alembic Global -- Analyst

P.J. Juvekar -- Citi -- Analyst

Chris Parkinson -- Mizuho -- Analyst

Steve Byrne -- Bank of America -- Analyst

John Roberts -- UBS -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

Frank Mitsch -- Fermium Research -- Analyst

Duffy Fischer -- Barclays -- Analyst

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

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