Welcome to the LyondellBasell teleconference. At the request of the LyondellBasell, this conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question and answer session. I'd now like to turn over the conference to Mr. David Kinney, Director of Investor Relations.
Sir, you may begin.
Thank you, Angela. Hello, and welcome to LyondellBasell's second quarter 2019 teleconference. I'm joined today by Bob Patel, our Chief Executive Officer and Thomas Abischer, our Chief Financial Officer. Before we begin the business discussion, I would like to point out that a slide presentation and company's today's call and is available on our website at www.lyondellbasell.com.
I would also like for you
to note that statements made in this call relating to matters that are not historical facts are forward looking statements. These forward looking statements are based upon assumptions of management, which are believed to be reasonable at the time made and are subject to significant risks and uncertainties. Actual results could differ materially from these forward looking statements. For more detailed information about the factors that could cause our actual results to differ, please refer to the cautionary statements in the presentation slides our financial reports, which are available at www.linedelpacell.com/investorrelations. Reconciliations of non GAAP financial measures to GAAP financial measures, together with any other applicable disclosures, including the earnings release, are currently available at our website.
Finally, I would like to point out that a recording of this call will be available by telephone beginning at 2 pm Eastern Time today. Until 11:59 pm Eastern time on September 1st by calling 888-277-9385 in the United States, and 40two-nine ninety eight-five zero nine outside the United States. Pass code for both numbers is 5713. During today's call, we will focus on 2nd quarter results, the current environment, our near term outlook and we'll provide an update on our growth initiatives. That being said, I would now like to turn the call over to Bob.
Thanks, Dave. Good day to all of you participating around the world and thank you for joining our 2nd quarter earnings call. Let's begin with Slide 3 and review the highlights. During the second quarter, consumer driven demand for our products and low feedstock costs improved profitability in 4 of our six segments. Despite concerns about capacity additions in the industry, and a challenging business environment, integrated polyethylene profitability increased during the second quarter.
With industry margins of approximately $600 per tonne in Europe $800 per tonne in North America. Across the company, Our 2nd quarter EBITDA improved by approximately 11% relative to the 1st quarter. 2nd quarter earnings were $2.70 per share, which represents a 23% improvement over the previous quarter. Our second quarter income was slightly below the guidance range we provided in June, primarily due to compressed margins from our refining business. As the oil as the price of oil fell by more than 15% from mid May to mid June, we saw many of our customers holding back on June orders, particularly in markets that are driven by industrial demand, such as automotive, appliances and industrial construction.
During July, volumes for most products rebounded to levels 10% to 20% above June and third quarter demand seems to be following typical summer seasonal strength. Our company move forward on our disciplined value driven growth strategy by announcing a second Sparizone polypropylene project and our joint venture in Thailand and ending discussions regarding the potential acquisition Breasthem. We are leveraging our innovative technologies by expanding our footprint in the growing Southeast Asian polypropylene market We're completing construction on our first Hyperzone polyethylene plant and building a new propylene oxide plant that addresses growing demand for polyurethane. These decisions demonstrate our disciplined approach to investments, which are Our strong cash flows and conservative balance sheet allowed us to launch a tender offer in June that resulted in the purchase of approximately 9.5 percent of our outstanding shares in July. Our actions in the last quarter are consistent with our balanced capital deployment strategy that positions us to grow cash flow and provide consistently strong shareholder returns in the form of both opportunistic share buybacks and a top decile dividend.
Let's turn to Slide 4 and discuss our safety performance. Our approach to the integration of the A. Schulman acquisition began by immediately instilling LyondellBasell's safety culture across our new assets, employees and contractors. Day Shoalman expanded our employee population by approximately 40% and through the end of the second quarter, we achieved considerable progress to sustain LyondellBasell's leading safety performance. And now Thomas will provide more detail on our financial highlights for the second quarter.
Thank you, Bob, and good day to all of you. Please turn to Slide 5, which illustrates developments within our company during the quarter and over the trailing 12 months. As Paul mentioned, during the second quarter, 4 of our 6 business segments posted higher profitability relative to the previous quarter. EBITDA for the entire company has continued to increase sequentially since the fourth quarter of 2018 Our business portfolio continues to provide earnings resilience through the diversity of our petrochemical products and markets then can often reduce volatility for the overall company performance. Integrated polyethylene margins have vanted in both Europe and North America due to favorable feedstock prices.
In addition, seasonally low the raw material prices drove benchmark Northwest Europe, MTBE Oxyfuels margins to the highest level since 2015. In the first quarter, we mentioned that we had a minor impact due to the service disruptions related to the March fire at the 3rd party terminal on the Houston Ship Channel. The impact of lost sales volume and expenses extended to the 2nd quarter and we estimate that results for our I and D segment were impacted by approximately $50,000,000 during the first half of twenty nineteen, primarily We anticipate that 3rd quarter results will have little to no impact due to this issue Our Houston refinery continued to run well at 97% of nameplate capacity on 4 the to MARIA-two eleven reference crack spreads. Our technology business delivered another quarter of outstanding results with several licensed reaching revenue recognition milestone. On Slide 6, you can see that LyondellBasell's businesses generated nearly $1,200,000,000 of cash from operating activities during the second quarter.
Per share in May, making this the 11th dividend increase over the past 8 years. In addition to a strong dividend, our strong cash flows provided ample capability to continue our investments in organic growth project. We are progressing construction on our POTBA plan and wrapping up construction, our Hyperzone PE plan, where we will begin commissioning activities during the second half of the year. The quarter closed with over $1,900,000,000 Please turn to Slide 7. The chart on the left illustrates our cash flow performance over the previous 4 years and the trailing 12 months.
We believe that operating cash that is available for accretive investments in organic growth and M And A or for shareholder returns through dividends and share repurchases. During the last 12 months, LyondellBasell generated $4,600,000,000 of cash from operating activity Capital expenditures during the second quarter were about $620,000,000, with roughly 35% allocated to sustaining CapEx and the balance invested in profit generating projects. This investment in growth has increased slightly during the second quarter and we expect a similar trend over the remainder of the year as we complete the construction of our Hyperzone PE facility and accelerate the activity for building our new POA POTDA plant in Houston. The chart on the right of the slide illustrates our total liquidity for the same period The decline in 2018 reflects cash used for the acquisition of A. Schulman, As I've discussed in the first quarter earnings call, liquidity improved during the first quarter of this year primarily due to the new term loan facility.
We closed the quarter with liquidity with total liquidity in excess of $8,000,000,000. At the beginning of the third quarter, we utilized $3,100,000,000 of our available liquidity to fund the tender offer which closed on July 12. The tender offer resulted in the repurchase of 35,100,000 shares, With low interest rates and LyondellBasell's strong dividend yield, our tender offer is cash flow positive. Cash savings from the quarterly dividends on the lower share count will to highlight the progress in reducing our effective and our cash tax rate are the result of many initiatives to optimize our tax planning with the largest benefits for this quarter rising from our success in obtaining incentives related to the company's targeted investment in research and development activity. At the beginning of 2019, we provided guidance that our effective tax rate for the year will be approximately 20% and that cash tax rates will be slightly lower.
We now believe that our effective tax rate for 2019 will be approximately 17% and our cash tax rate will be several percentage points lower. Our fundamental approach to capital deployment remains disciplined and unchanged. Slide 8 is an illustration we have used to contrast the sources and uses of our capital in the past and going forward. We are 1st and foremost committed to a strong and progressive dividend We will make capital investment that sustain and expand our asset footprint, pursue value minded inorganic growth opportunities and return the balance of our cash to opportunistic share repurchases. With that, I will turn the call back to Bo
Thanks, Thomas. Let's turn to Slide 9 and review our business results. In our Olefins and Polyolefins Americas segment, 2nd quarter EBITDA was $635,000,000, $119,000,000 higher than the 1st quarter. Results were driven by abundant and affordable natural gas liquids. Olefins results increased by approximately $90,000,000 compared to the first quarter.
This improvement was driven by a Heclin' operating rates remained strong during the second quarter, averaging 91%, exceeding industry rates by 5%. We continue to optimize our cracker feed slate to benefit from lower NGL prices in our U. S. Gulf Coast system We previously spoke about how much of our ethylene production was produced from NGLs. It may be more useful to understand the composition of our feature rate.
In the second quarter, we found advantage in low propane and butane prices. More than 25% of the raw materials used in North American crackers were propane or butane based and more than 55% was purity ethane. We continue to increase utilization of mixed Y grade NGLs as an advantaged ethylene feedstock. During the second quarter, mid single digit percentages of our North American cracker feed slate was composed of Ygrene. While the ethylene results increased more than $25,000,000 during the second quarter.
Polyethylene margin improved with a spread increase in polyethylene over ethylene of about $65 per ton. Spot prices of ethylene have risen during July due to industry downtime and continued delays in the commissioning of new capacity. North American polyethylene production is increasingly serving global demand and more than 1 third of U. S. And Canada industry production is now being exported.
Slide 10, depicts historical and forecast impacts from capacity additions on global polyethylene operating rates. The green dash line illustrates consultant's forecast from 2016 for the some observers believed back then that this turnaround in operating rates, this downturn in operating rates was would result in a period of compressed ethylene chain margins, similar to past cycles when effective operating rates tipped below 90%. However, delays in the start of planned capacity allowed robust global demand to absorb the new supply. As shown by the dark gray line, the industry maintained high operating rate and relatively strong integrated ethylene chain margins have endured. The forecast from 2016 proved to be far more bearish than the actual outcome.
Similarly, Current consultant forecast predict that the next wave of planned supply additions will lead to a small decline in global operating rates, during 2022, illustrated by the gray dashed line. Based on recent industry results, We expect that some of this plant capacity will also come in, come online later than expected and some projects might be canceled These delays and reductions of planned capacity are likely to once again produce a flatter operating rate profile that extends today's relatively high rates for the years to come. New industry capacity will create short term fluctuations, particularly in local markets, but we believe global markets will remain balanced to tight. Providing good profitability for advantaged producers. Now please turn to Slide 11 to review the performance of our olefins and polyolefins Europe Asia And International segment.
During the second quarter, EBITDA was $331,000,000, a $35,000,000 increase over the first quarter. Results were driven by continued seasonal improvement in polyethylene chain margins with polyethylene price increases keeping pace with rising ethylene prices. Olefins results improved more than $55,000,000. Margin improved as the ethylene contract price increased nearly $65 per ton and volume increased with improved operating rates. Combined polyolefin's results declined $15,000,000, primarily due to a decrease in volume.
During July, we have seen strong polymer demand in the region as customers return to the market after taking a pause during the second half of June with the hope of for falling prices. Looking at our Olefins and polyolefins from a global perspective, in both Europe and North America, polyethylene sales volume for July are projected at level center 15% to 20% above June. With 6 of our competitors, Western European crackers undergoing turnarounds during the third quarter, LyondellBasell will seek to capture opportunities in the market. I'd now like to take a moment to highlight some of the products our customers are creating with recycled polyethylene and polypropylene that we produced at quality circular polymers QCP, our joint venture with Tuohaz in the Netherlands. On Slide 12, you see our collaboration with Samsonite to create the first suitcase made using post consumer recycled plastic waste.
The outer shell is made from QCT post consumer polypropylene resin and the inside fabric liner is made with PET from post consumer bottles. We've also collaborated with Unilever to supply recycled plastic for Dove and acts consumer product packaging. As the circular economy increases in prominence, we believe that demand for premium recycled materials will continue to grow. Our innovative joint venture with Suez harnesses each partner's strengths and deploys LyondellBasell's deep knowledge of polymer technology to convert plastic waste into new materials and products that are valued by consumers. We believe that mechanical recycling will become an essential component of LyondellBasell's sustainable business model.
Please turn to Slide 13, let's take a look at our Intermediates And Derivatives segment. 2nd quarter EBITDA was $448,000,000, a $58,000,000 increase over the prior quarter. Results were driven by consistent performance of the IV business portfolio, bolstered by seasonally strong Oxyfuels profitability. PO and derivatives results declined by $35,000,000 primarily due to decline in volume. Intermediate chemical results improved more than $25,000,000 compared to the first quarter driven by an increase in volume for most products.
Oxyfuels and related products results improved by nearly $75,000,000 as we saw strong seasonal margin increases driven by lower butane feedstock prices. As Thomas mentioned, our Oxyfuels and related products results would have been even stronger, if not for the disruption of the Houston terminal fire. Fortunately, we expect Oxy fuel margins to remain strong during the third quarter, and we anticipate little to no impact from the terminal incident on our business. Now please turn to Slide 14 to review the results of our Advanced Polymer Solutions segment. 2nd quarter EBITDA was $120,000,000, a $28,000,000 decrease compared to the prior quarter, The seasonal strength that we anticipated for this business in the second quarter did not materialize.
Results were lower due to diminished demand in both automotive and industrial construction markets. Kaye Schulman integration costs for the second quarter were $19,000,000, and impacted earnings by $0.04 per share. As we discussed in prior earnings calls, both transaction and integration costs relates to the acquisition are included in the results for the third quarter of 2018 and only integration costs are included in the 4th quarter 2018 through the current quarter. Compounding and solutions results for the first quarter declined approximately $20,000,000 driven by softness in the automotive market. Volume decreased for most products and margin declined for polypropylene compounds primarily due to a lag in propylene pricing.
Advanced Polymers results were relatively unchanged The second quarter is typically the strongest for this business due to the summer industrial construction market. That was not the case this quarter, and volumes were down by 15% compared to the same quarter last year. Our integration of Ace Schulman is progressing very well. At the end of the second quarter, we are capturing cost synergies at an annual rate of approximately $100,000,000 and we are well on track to meet the target of $150,000,000 before August of next year. We expect volumes to be typical demand for the automotive market will be slow, particularly in Asia, where 17 Chinese cities and provinces have accelerated the implementation of stricter automotive emission standards that has reduced demand for non compliant models during July.
Customer applications for APS products extend beyond automotive and construction to market such as electronics and appliances packaging and agriculture. On Slide 15, we highlight a specific type of polymer compound called Anti blocking Masterbatches. Masterbatches are customized blends that can be mixed with commodity polymer resins during processing to improve both production efficiency and the properties of the finished product. Anti blocking Masterbatches are used in plastic films to reduce friction during processing and prevent a roll of film from sticking to itself prior to use or during use. An effective anti blocking master batch streamlines the fabrication process and improves the usability of the film to minimize waste.
By customizing properties to meet customer needs, our anti blocking Masterbatches serve a wider range of end products, including agricultural films, food packaging and tape. Turning to Slide 16, let's discuss the results for our refining segment. EBITDA for the second quarter was a negative $66,000,000, a $51,000,000 decrease compared to the first quarter. We continue to demonstrate the benefits of our reliability program at the Houston refinery with crude throughput increasing to 261,000 barrels per day and operating rate at 97% of nameplate capacity for the quarter. HEMIA-two eleven crack spread improved significantly in April and averaged approximately $19 per barrel for the second quarter.
Unfortunately, we were not able to capture the full benefit of that crack spread improvement because our refinery does not source all of its crude oil on a Maya pricing The heavy sour crude oils processed at our refinery are sourced from Mexico, Canada and other locations. High prices on the portion of heavy sour crude oil we buy on the open Houston market created a challenging market for our refining business during the second quarter. We continue to anticipate that margin benefits from the IMO 2020 regulations will bolster our refining results during September October of this year. On Slide 17, let me summarize this quarter's highlights. During the second quarter, we achieved earnings of $2.70 per share.
Lower feedstock costs and resilient consumer demand for our products drove EBITDA improvement in 4 of our six segments, resulting in an overall EBITDA increase of 11% for the quarter. Over the 12 past 12 months, our company generated $4,600,000,000 of cash from operating activities that contributed to funding for increased capital investment, paying a top decile dividend, completing $1,900,000,000 in share repurchases, and acquiring a Schulman. We move forward on our value driven growth strategy by announcing a second spherozone polypropylene project at our joint venture in Thailand, and we exhibited our disciplined approach by ending discussions regarding the potential acquisition of Braskem. We are advancing construction of our POTBA facility and will commission our new Hyperzone polyethylene plant during the second half of this year. Going forward, we expect that our business will continue to benefit from resilient consumer demand.
In North America, low cost NGL feedstocks should provide advantage for both our O and P and IND segments. In our IND segment, strong Oxyfuels profit ability should persist for the remainder of the summer driving season with Northwest Europe benchmark margins reaching the highest levels seen since 2015. Additionally, as refining markets adopt new marine fuel regulations, We will be ready confidence in our ability to remain advantaged, resilient and poised to capture opportunities across a range of market environments. Before we open the line for your questions, I want to make you aware of our upcoming investor event. On Tuesday, September 24, we will hold our next Investor Day here in Houston, Texas.
We are planning a full day event with a plan tour of our Channelview site, as well as our Houston Technology Center. You will have the opportunity to talk with members of our executive leadership team and learn more about our plans for the With that said
session. Our first question Juanathan with RBC Capital Markets. Your line is open.
Great, thanks. Good morning. Just wanted to ask about, the outlook for the rest of the year. You mentioned that July, you saw some improvement from the that the weakness in June, conversely polyethylene looks like, there was some movement up in May, June, and then that kind of looks like it's going to recede in July, August. I mean, that could be typical seasonality, too, but maybe you can just give us your thoughts on both polyethylene as well as IND and related to your earlier comments, about July improving?
Yes. So Arun, I mean, we continue to see the consumer demand driving demand for our products. Where we see a little bit more tepid buying is on the industrial side. As you know, there's a lot of, concern about trade and tariffs and Brexit and direction of interest rates. Our view is that that's all causing industrial sentiment or industrial buyers to be cautious in what they buy.
Having said all that, we still see in the case of polyethylene demand growth for this year of at least 4% year over year. And as new supply comes on, we think that the demand is there to meet it.
Our next question comes from Duffy Fischer with Barclays. Your line is open.
Yes. Good morning, guys. Question just on your PO project. The polyurethane chain has been weak, recently. When you look out, how does that impact your PO when it comes online?
Do we need to see kind of an acceleration in growth in the polyurethane chain for that to be a healthy launch when that plant comes on. Can you just kind of walk through maybe how the economics look to you today versus when you pulled figure on that plant?
Yes, Duffy, they haven't changed considerably. I mean, it's really what we're seeing today is a slowdown in the automotive market that we think is more temporary, for a variety of reasons. Some are economic. Some are because of standards, for example, in Europe, diesel standards are changing and emission regulations are changing. So frankly speaking, I mean, I think consumers in Europe don't know today what type of car they should buy.
So they're just foregoing purchases until there's more clarity on the, in the regulatory environment around emissions and so on. So our belief is that, as the middle class grows in India, China, and the rest of the world, and we think that automotive demand, although it's cyclical longer term, we believe that, more automotive ownership and generally the middle class buying furniture and all the other things that polyurethanes go into, really will underpin that investment. So our view has not changed in terms of our ability to place the product or to deliver, the returns that we expect.
Thank you. Our next question comes from Bob Koort with Goldman Sachs. Your line is open.
Good morning. This is Dylan Campbell on for Bob. Earlier as you guys talked a little bit on IND in terms of contract and improvements, maybe adding $100,000,000 of EBITDA starting essentially around now. Do you guys have any update on those contract improvements?
I mean, those are Dylan, those are coming through our P and L now, and you see those in the results. There's a lot of kind of moving parts in IND, which styrene and methanol and, and, so on. But if I can tell you, we see it in our appeals business. And even more importantly, the advantage butane, especially here in the U. S, has been a really a good positive driver for our IND earnings.
So it is in the P and L. Dylan, this is Dave.
I would remind you of Thomas comments around the $50,000,000 hit that we've taken in the first half of this year related to the ITC fire. That's primarily been felt in that segment.
Thank you. Our next question comes from Kevin McCarthy with Vertical Research Partners. Your line is open.
Good morning. In the data that you provided in the supplemental section of your release. It looks as though your polyethylene sales volumes declined 15% year over year in O and P EAI. I know you mentioned June was soft. I'm just wondering if you could elaborate on that.
Was it due to the monthly sales patterns or did you have any operational or other issues, that would explain that?
We did have some operational issues, in, in one of our crackers where we can't really buy ethylene to supplement. So that was most of that change in volume that you see, and some of that was just kind of managing our inventory. So but most of it was unplanned maintenance.
Our next question comes from Vincent Andrews with Morgan Stanley. Your line is open.
Thank you very much, Bob. On the Hyperzone project, could you give us a little more definition on the timing of the startup and the ramp? And then also, what's your view on the export market? Pricing and sort of ability to move that volume and into which regions will you go?
Yes. So Vincent, we're going to start to, we're starting to get systems turned over to us now. We're not mechanically complete yet, but the commissioning process will really begin in earnest here in the coming month or 2. And, our idea is that we would have, production in Q4 on the Hyperzone project. In terms of export markets, the way to think about it is that we're going to export from from the system on the Gulf Coast.
So it's not that all of the product that comes out of Hyperzone will be exported. We'll export, some also from other segments. Our early indications from work we did with customers in Europe and some in Asia was that indeed the products that will come off of Hyperzone are expected to be unique and provide unique characteristics for for example, large part, blow molding. And, and so we have a, we have a very good detailed marketing plan that, that includes all regions and aims to capitalize on the uniqueness of the products that come off by Brazil.
Thank you. Our next question comes from David Begleiter with Deutsche Bank. Your line is open.
Bob, with Braskem not happening, are you thinking about perhaps ramping up your organic growth activities? And as part of that, can you discuss maybe your ethylene strategy going forward? You've been prudent not any ethylene capacity, but you are ethylene company. So it might at some point, I'm sure you will. Thank you.
Yes. Thank you, David. First of all, as we think about organic and organic. Our capital allocation strategy is really geared around funding organic growth from operating cash flow. And, and so I wouldn't make a direct tie to not pursuing Braskem with increasing our organic programs, and we'll provide more of an update at the Investor Day.
But our strategy around organic growth has not changed. After we complete POTBA, we potentially can do 1 or 2 more derivative plants I actually think that our organic growth program in terms of the funds required will scale down somewhat after POTBA. And we don't anticipate that changing. So I think we'll continue to reserve balance sheet capacity for, primarily inorganic, which as we've demonstrated, we're quite patient.
Thank you. Our next question comes from PJ Juvekar with Citi. Your line is open. Please check your mute button.
Are you on mute perhaps? Hey, sorry about that, Bob. I was on mute.
Sorry. Quickly on butane was your cheapest feedstock. Can you how much max gluten can you go? And was there any benefit of lower butane in Oxyfuels And then you mentioned Ygrene NGLs. How should we think about Ygrene NGLs?
The margins there would be your regular cracker margins plus capturing frac margins as well. Is that the way to think about it?
Yes. So first of all, your question on butane, Really, we should think about propane and butane together. We can crack up to 40%, or 40% of our lien can come from propane and butanes to fees. 40% of our feed slate, sorry, 40% of our feed slate can be propane and butane Yes, indeed, it did benefit our OT fuels as well, especially here in the U. S.
So, I think that was, again, it highlights our feedstock flexibility and our ability to be resilient in a range of, energy In terms of Y grade, we're continuing to increase our demonstration of our ability to crack Y grade So, soon, we'll have demonstrated on 4 of our crackers on the Gulf Coast that we can crack Y grade. So when ethane prices were a bit higher, Y grade made a lot of sense for us. Today with where ethane is ethane as ethane is our better from an economic perspective. So I think PJ, the way to think about Y grade is that it's one more lever in our ability to flex feedstocks to maximize value. And I think now we're very confident that we can do this at meaningful rates.
Thank you. Our next question comes from Hassan Ahmed with Atlantic Global Advisors. Your line is open.
Good morning, Bob.
Good morning.
Bob, just wanted to focus on the near term. Compare and contrast relative to the back half of last year, It just seems that in the U. S. In particular, it's exactly the opposite. You have ethane, which is cratering, you have spot ethylene, which is popping.
And like you said in your prepared remarks, there's still a 30% increment, not a 30% increment, but 30% of the remaining capacity that was expected between 2016 2019 is yet to come. So what are you guys seeing, on the ground?
Okay. Well, there's a lot there, Hassan. So I'll kind of take it in pieces. First of all, when we think about the feedstock environment, you'll recall that, even 6 months ago, we were concerned about, another run-in ethane prices and that hasn't materialized. So why is that?
Well, first of all, there's a lot of wet gas coming out of the Permian. There's been more pipeline capacity added, more fracs have been added. We've also had the turnaround season and project delays. So all of that has led to ethane prices falling below even, even frankly, our expectations I've had recent conversations with a couple of midstream company CEOs. And, the impression I get is that there's a lot of ethane available that's going in the rejection now.
Wouldn't take much of a price increase to bring that ethane out of So our view is that even with new cracker startups and, and turnaround season ending and so on, there's plenty of ethane And we think that, ethane price could perhaps return to recent levels before this latest decline. We don't see a large runner. On the polyethylene side, demand is still growing at reasonably good rates globally even with the backdrop of all these concerns that are on people's mind. So my sense is that, that I don't think inventories are terribly bloated. And some confidence returning to the market could boost the operating rates and the firmness in the market Lastly, I think as you think through these new plants that start up, you have to remember that in our business, the supply comes on in a very lumpy fashion and demand grows over time.
So generally, when I look at our business I step back and look at quarterly operating rates and I look at annual operating rates. And that's where I'd take you back to the chart that was in our, in our that, annual operating rates are still very high. And I think that should be a good guide in terms of how we should think about profitability. So we're very constructive, even in this environment where there's a good bit of uncertainty, think as some of this uncertainty clears, confidence will come back to markets.
Thank you. Our next question comes from Frank Mitsch with Fermium Research. Your line is open.
Good morning, Bob and good luck with getting that uncertain cleared up anytime soon with Brent down 7% today. Hey, listen, I was interested in your thoughts on the Exxon, Baytown accident, the unfortunate accident there and what the impact might be on the propylene business and And just in general, what your outlook is for propylene into polypro?
Yes. So, Frank, certainly the uncertainty will it won't be solved overnight. And, there'll be, I suspect, more news flow on that. On the Exxon Fire, first of all, I was really pleased that there were no significant injuries, that, that's the first thing that I look for when I see incidents like that. So really pleased to see that.
In terms of the impact on the propylene market, it could have a modest impact. I mean, I think we need to how this plays out. But if you look at propylene prices, they've dropped a good bit compared to where they were a year ago. So to give you some kind of some round numbers, propylene was about $0.60 on average in Q3 slash year, about $0.50 in Q4 last year, then we dropped down to $0.38 in Q1. And, this year and then 37 in Q2.
So I cite all of that only to say that it seems that propylene prices are kind of it seems they wouldn't go too much lower. And we'll have to see how this Exxon prior and their disruption impacts prices, but I would suspect there'll be some modest impact.
Our next question comes from Jonas Oxgaard with Bernstein. Your line is open.
Good morning, guys.
I want
to return to your comment around the demand has been growing well this year. I find it hard to square with Asia margins now being down to 4 year lows. Even though we haven't added any real capacity in the last 6 months. So what am I missing here?
Well, I think part of that, Jonas, is that, new capacity has come into the market over the last 12 months. And, and I think that, buying patterns are more, more dynamic now than they were before because of the trade news and the tariffs and so on. But again, our perspective that we're seeing growth in all three regions, in polyolefins generally. So, yeah, I mean, I think that, this is just a reflection of oil price movements and and buyers sort of, anticipating the direction of prices. Okay.
What we've seen though is the demand has been declining in practically every petrochemical in Asia over the last 6 months. So why would polyethylene be the exception here?
Well, our view is that that's because of the consumer, consumable nature of a lot of the end uses. And, our, our presumption has been that, with a growing middle class, you you have more consumption of those sorts of end uses.
Thank you. Our next question comes from Steve Byrne with Bank of America. Your line is open.
Hi, good morning. This is actually Luke Washer on for Steve. Was wondering if you could give us an update on the progress you've made on your footprint and headcount consolidation in A. Schulman? Yes.
So as I mentioned, earlier in my prepared remarks, our synergy run rate that we've captured thus far as of the end of 2 or at about $100,000,000 of synergy run rate. We've announced some closures of sites, with, as we're working through our plans on that. And, the restructuring on the business side is moving very swiftly. So we've made lots of progress. I won't get into specifics about each site, but generally, when we announced the transaction, we said that we would reach a run rate of synergies of $150,000,000 per year.
About 18 months after the transaction was completed. We're not quite at the 12 month, but we're about at the 12 month point this month. And we're at a run rate of 100. So I think we're well on track.
Thank you. Our next question comes from Alex Dipromo with Nomura Instinet. Your line is open.
Thank you. Good morning. Your refining, your refinery has been running well recently in it lost money, last quarter. Is there a structural disadvantage in crude purchasing and how long do you it will continue and other investments you can make to overcome this disadvantage? So on the refinery, I think you have to look at both sides of the equation, the crude side and the product side.
So on the crude side, we do we do purchase Canadian crude by pipeline. So we processed about 25% of our of our crude slate in Q2 was Canadian Crude. As we buy other like crude by rail or other sour crudes, those do tend to be higher priced than the pipeline crude So, as I mentioned in my prepared remarks, I think the way you have to think about our Crude slate is that we don't buy it all on a Maya basis. And, and what we've had is a situation with Venezuela going out is that, the supply of sour crude shrunk. And with the Permian doing so well, supply of light crude has increased, and that's what's caused this, light heavy differential to narrow.
Just to give you some idea, that light heavy differential was about $5 per barrel in July. It should be more like $8 to $10 per barrel. It's extremely leveraging. I think the other thing that probably is not on investors' radar is that on the product side, because the propylene prices have declined so much, that's impacted profitability. I cited some of those numbers.
We've dropped, from $0.50 to $0.60 per pound range down into the high 30s. So that's had an impact. And lastly, at our refinery, our configuration is such that we don't convert naphtha into gasoline, but we don't have a reformer. And with a lot of light crude processing in the industry, there's more naphtha available, which has impacted the price of naphtha. So I think all of this has it could normalize here with IMO approaching as sour crude gets pushed back into the market and some of these product markets normalize.
Our next question comes from John Roberts with UBS. Your line is open.
Thank you. Bob, it seems like every earnings call has more about sustainability and more of your efforts in recycling and new products. Do you have any overarching targets longer term, say, 5 years in terms of sales that you want to get to or any other metrics you're using?
No, we haven't stated target nor will we, but the idea, John, is that, we do see a business model here in terms of capturing the value that exists in plastic waste and it's going to come through in a range of forms. So it's going to be mechanical recycling. We're also, doing some research on chemical recycling, I think this is going to be a growing area for us and one that will create value over time. We've not set hard targets as you know, we're a very sort of return minded company. And as we think through investments, we think about the value creation potential on each investment.
But I do see this growing in our portfolio over
Tudor, Pickering, Holt. Your line is open.
Hey, good morning, Bob. Maybe just to circle back to refining, it looks like DOE data indicates that your Houston refinery is running perhaps a little bit more domestic crudes this year than the same point last year. We've seen some other Gulf Coast refiners lighten up their slate over the past few years. Is that an option that you're thinking about considering? And if so, any thoughts on what kind of spending that would take?
Yes, good morning, Matthew. We have increased slightly our light crude processing. We can go up to about 10% in our light crude cracking, it would require a significant investment for us to increase the flexibility to do more than 10% and our current plan is not to do that. So, we think again that, with IMO, 2020 around the corner here. We think that, some of these markets are going to normalize and move in favor of the configuration of our, Houston refinery.
And, and as I've mentioned in prior calls, we're ready to meet this specific and we've completed really all of our turnaround activities. So we're prepared to run at full rates through 2020.
Thank you. Our last question comes from PJ Juvekar with Citi. Your line is open.
Yes, hi, Bob. Another question on recycling, first of all, your efforts there are commendable. And your QCB products that you showed look quite good. So and you also have this other alliance with chemical companies and some customers about ending plastic waste. So if you take a step back and look at how recycling is playing out, how would it impact Virgin Plus 6 demand?
And then maybe in recycling, could you potentially get higher margins if customers want these products?
Yes. So, as you have, there are several questions there and it's a very big topic for us. So I'll start with your last question, which is how customers perceive recycled product. Many of the consumer brands have announced targets of how much recycled content they will have in their packaging. So I do see demand for recycled high quality recycled resins, increasing.
And I think what's unique about our joint venture with SUEZ is that, they really combine the strength of both of the companies. So in the case of SUEZ, their waste collection infrastructure sorting infrastructure brings to our joint venture segregated polyolefin waste, which enables high quality, recycled products. And then when you combine that with our techno our technological know how around polyolefins, you can see from those couple of examples that we've really created some, some unique and high quality recycled products. I think the degree to which recycled products impact virgin, resin demand growth That's something that we'll have to monitor as recycling ramps up. One of the challenges is, as many of you know, is that recycling in the past has been difficult because mixed waste is the challenge and sorting has been prohibitive from an economic perspective.
So, if the waste is very mixed coming in, then the recycled product is a very poor quality. I think that's the thing that we've been able to solve at QCP. So I think something we'll have to monitor me say a couple of words about the Alliance can plastic waste, which you also asked about. So you'll recall that we launched this alliance at the beginning of this year in January. We've increased our membership now by 14 more in the last couple of months to 39 companies across the value chain.
So we have brand owners, we have chemical companies have waste handlers and we have converters, and we're seeking to add retailers as well. I think what's really great is that this, we all have rallied around and systems to collect the waste. How do we innovate so that we can use the waste and convert it to, to recycle products that can be reused. How do we educate consumers on how to responsibly dispose of, of weight so that the value can be captured. And ultimately, the alliance will also aim to fund projects that remove waste from the environment.
So We're making great progress. We had a great board meeting in July, and the momentum continues to build around the Alliance stand plastic waste. So, thanks for that question. Okay. So if there are no other questions, then let me offer a few closing remarks.
First of all, the combination of our Advantage assets and consumer driven demand for our products. It's generating resilient performance during somewhat uncertain times in, in terms of industrial demand. You can see from our quarterly results that, with the portfolio of businesses that we have and our organic and inorganic growth, we're able to continue to provide strong earnings in a range of environments I mentioned during my prepared remarks as well as during the Q And A that we continue to invest in feedstock flexibility, I think that will continue to strengthen our ability to do well in a range of energy and feedstock price environments. And lastly, we talked a lot about capital allocation and our disciplined approach to capital allocation, you should continue to expect that we will, we will focus on a strong and growing dividend over time. Our organic growth program will be modest and very disciplined.
That our CapEx will probably come down after the POTBA project is completed and our aim ultimately is to deliver strong and consistent value for you, our shareholders. So with all of that said, thank you for your interest in our company, and we look forward to updating you on the third quarter earnings call. In the meantime, we hope to see many of you at our Investor Day. Thank you, and have a great weekend.
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