Sasol Delays Ethylene Plant – Axiall, Westlake and Eastman Should be Paying Attention

Last week Sasol announced a “delay” to some of its US Gulf investments and suggested that its ethylene unit would now start-up in 2019 rather than 2018. The company gave cash flow management as a reason, but this is likely only partly true. No-one is going to plan a multi-billion dollar investment without having a pretty clear view of when the money is needed or where it is coming from. It is far more likely that Sasol has experienced some delays in terms of site preparation or equipment manufacture and is (probably correctly) unwilling to pay more to speed things up and keep to the original schedule. These are complex investments and as companies try to cut corners or save money on construction – most often by having large pieces of equipment built elsewhere and then shipped to the sight – they cede some of the timing control to others. The company is marketing this as a conscious delay because of the state of the energy markets and the profitability of the company, but we suspect the delay is something they are reacting to not something they are controlling.

If this can happen to Sasol it can happen to others, so we would take a conservative view of when some of the ethylene plants will actually be running. Few companies will likely ramp up spending today to speed up a process of keep it on track given the macro environment. This then produces another possible set of problems.

There are implications for others. Sasol is building a polyethylene plant in the US with Ineos and this facility is still on schedule to start up at the end of 2016 or early in 2017 to the best of our knowledge. It is around 1.0 billion pounds of capacity and while both Sasol and Ineos have ethylene surpluses, enough between them to feed this plant today, this ethylene will be withdrawn from the merchant market – possibly before start-up as both might choose to build ethylene inventory ahead of the start-up.

• As the largest merchant buyer of ethylene in the US, Axiall could be on the wrong end of this
  • Assuming that Ineos/Sasol can find a home for the polyethylene, they will pull close to a billion pounds out of the ethylene merchant market through 2017 and now 2018
  • As long as the US continues to see attractive export markets for polyethylene, it is likely that polyethylene will continue to bid ethylene away from PVC
    • We believe that polyethylene will weaken this year, but PVC is close to break-even and we are not modeling that for polyethylene
  • Ethylene spot pricing could, as a result, remain well above cost of production, penalizing Axiall more severely relative to other PVC producers for longer than expected
  • This possible scenario should make Axiall more interested in a transaction which brings ethylene – such as the proposed Westlake deal
• Westlake – if it succeeds in buying Axiall will inherit Axiall’s ethylene deficit and could be subject to the same problem
  • Westlake has some surplus but not nearly enough to supply Axiall
  • Westlake with a larger overall ethylene portfolio could offset problems associated with overpaying for ethylene by closing some PVC or polyethylene capacity – perhaps temporarily
• Westlake and/or Axiall could bid for Eastman’s capacity, which the company has recently suggested is up for sale
  • Absent a combination with Westlake we do not believe that Axiall shareholders would support a bid for the Eastman capacity
    • At the same time Axiall cannot afford it, given new cash flow estimates for 2016 and the need to pay its share of the ethylene investment with Lotte
  • Westlake, plus Axiall, plus the Eastman ethylene capacity makes a lot of sense

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