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Westlake sees headwinds if tariffs extend into 2019: CFO

Houston β€” If tariffs stemming from US-China trade tensions remain in place in 2019, they will affect US petrochemical industry sales, the Chief Financial Officer of Westlake Chemical said Tuesday.

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"So far, the tariffs have not had a material impact on our sales volumes," Steve Bender said during the company's third-quarter 2018 earnings call. "This is due to our product mix, markets that we serve and pro-active mitigation actions that we've taken. However, these tariffs will have an impact on the industry and our business in 2019 if they continue on their current path."

If trade tensions ease, "it will be broadly positive for global trade, our industry and our business," he added.

In July, August and September, the US imposed three rounds of tariffs on Chinese goods worth a cumulative $250 billion, nearly half of the $506 billion in goods the US received from China in 2017. China retaliated at each round with tariffs imposed on US products worth a total of $110 billion.

The goods the US imposed tariffs on included 1,517 Chinese chemicals and plastics imports, while China's lists included more than 1,000 US chemicals and plastics, according to the American Chemistry Council.

Bender said Westlake has sought to mitigate the effects of higher costs from tariffs by scouting alternate sources for materials used in its petrochemical manufacturing and building products businesses.

"I'm sure it will be an effort that we and many others in the industry will take a look at to mitigate the impact of these tariffs by changing sourcing as need be," he said.

Westlake on Tuesday reported net income of $308 million, or $2.35 per share, up 46% from the third quarter of 2017. The company attributed the increase to higher sales volumes, lower taxes and a one-time gain from a settlement of pension liabilities.

Bender noted the potential impact from tariffs was not the only headwind facing the company. Stronger ethane and ethylene prices offset the benefits of higher caustic soda and polyvinyl chloride sales in the most recent quarter, and that volatility is expected to continue amid a squeeze on the infrastructure for processing and transporting the ethane to feed new crackers.

"We expect to see continued volatility in ethane prices as prices may reflect the effect of new demand from the startup of new ethylene production facilities, which will be partially offset by new ethane fractionation capacity," Bender said.

Since September 2017, three US crackers with a cumulative capacity of 4.5 million mt/year have started up, with another 4.7 million mt/year set to come online later this year and in 2019, including Westlake's joint-venture 1.2 million mt/year plant in Louisiana with South Korea's Lotte Chemical. Westlake has a 10% stake in that plant with an option to increase that to 50%.

In May, US ethylene prices fell to 12 cents/lb FD USG alongside US ethane prices at 25.875 cents/gal as new derivative plants were slow to absorb additional ethylene capacity. Ethane demand rose as more cracker capacity came online, but a lack of NGLs processing and pipeline infrastructure helped push ethane prices to 61 cents/gal on September 18, the highest level since July 2012. Ethylene rose in tandem to 23 cents/lb FD USG on the same date.

Ethane and ethylene prices have since retreated, with US ethane prices assessed Monday at 33.625 cents/gal, and US spot ethylene assessed at 20.25-20.75 cents/lb FD USG.

In addition, Enterprise Products Partners' Shin Oak 250,000 b/d NGL pipeline from West Texas to the company's Mont Belvieu hub is slated to start up in the second quarter of 2019, and new fractionation capacity is planned by Enterprise and Phillips 66 in 2020. On Tuesday, Enterprise announced plans to add 55,000 b/d of fractionation capacity at its facilities in Texas and Louisiana by the third quarter of 2019 as well.

Westlake CEO Albert Chao noted that the US petrochemical industry has limited ability to switch between ethane and heavier cracker feedstocks, such as propane and naphtha. He said up to 80% of the industry is purely ethane-based. But he sees ethane volatility being temporary, particularly given plans to add processing and transportation infrastructure to move more to markets.

--Kristen Hays,

--Edited by Richard Rubin,