Hello, welcome to the LyondellBasell teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question and answer session. At that time, to ask a question, please press star one on your touch-tone phone. I'd now like to turn the conference over to Mr. David Kinney, Director of Investor Relations. Sir, you may begin.
Thank you, Jacqueline. Hello, welcome to LyondellBasell's fourth quarter 2018 teleconference. I'm joined today by Bob Patel, our Chief Executive Officer, and Thomas Aebischer, our Chief Financial Officer. Before we begin the business 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. 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 those 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 and our financial reports, which are available at www.lyondellbasell.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 on our website at www.lyondellbasell.com. Finally, I would like to point out that a recording of this call will be available by telephone beginning at 1:30 P.M. Eastern Time today until 1:59 A.M. Eastern Time on April 2nd by calling 866-444-9039 in the United States and 203-369-1136 outside the United States. The pass code for both numbers is 6482.
During today's call, we will focus on the fourth quarter and full year results, the current environment, our near-term outlook, and provide an update on our growth initiatives. With that being said, I would now like to turn the call over to Bob.
All right. Thank you, Dave. Good day to all of you participating around the world, and thank you for joining our 2018 year-end earnings call. Let's begin with slide three and review the highlights for 2018 and our progress in advancing our value-driven growth strategy. Record-setting earnings in our Intermediates & Derivatives and technology segments partially offset declines, primarily in our Olefins & Polyolefins – Europe, Asia, International segment, to provide $4.7 billion of net income and $6.9 billion of EBITDA for the year. Increased cash generation helped to fund growth investments while we improved our free cash flow yield by over 200 basis points and posted a strong 27% return on our invested capital during 2018. The acquisition of A. Schulman in August made LyondellBasell the world's largest plastics compounding company.
In conjunction with this acquisition, we launched our Advanced Polymer Solutions business segment to provide focus and visibility for this new global platform and quickly went to work on integration that achieved an annualized synergy run rate of $47 million by the end of the year. Progress continues, and we remain confident that we will meet or exceed our target to capture $150 million of integration-related synergies within two years of the closing date. In March, we launched an innovative plastics recycling joint venture with SUEZ that provides a meaningful and sustainable solution for plastic waste. We are pleased with initial market demand for these premium recycled plastics and continue to optimize the operational and commercial performance of the business model with an eye toward replicating this model in other parts of Europe.
We advanced our pipeline of organic growth projects during 2018 with our new Hyperzone HDPE plant scheduled for startup in the third quarter of this year and construction of the world's largest PO/TBA plant on track for completion in the latter part of 2021. These projects not only increase our production capacity but also represent milestones for the commercialization of proprietary technologies such as our new Hyperzone process for polyethylene and the latest developments from our advantage propylene oxide co-product technologies. We continue to actively manage our business portfolio with several small acquisitions and divestitures around the world while we evaluate other opportunities, including a potential acquisition of Braskem. In the meantime, our cash flows enabled us to opportunistically repurchase 19.2 million shares of LyondellBasell stock and return over $3.4 billion to shareholders in the form of dividends and share repurchases.
In 2018, our company continued to deliver on our promise of value-driven growth through a balanced strategy of operational excellence, profitable organic expansions, accretive M&A, and significant shareholder returns. Please turn to slide four, where I'm proud to report that LyondellBasell's employees and contractors finished the year with a significant 14% improvement in our safety performance. During 2018, our injury rate was challenged by the need to improve upon the safety performance at the facilities we acquired from A. Schulman. We are diligently working to ensure all of our employees, contractors, assets, and the communities in which we operate finish the day in the same or better condition than they were at the start of the day. Our goal remains zero incidents or injuries every day of the year. Let's turn to slide five and review some of the detail behind our fourth quarter and annual results.
Diluted earnings were $1.79 per share for the quarter, and we earned $12.01 during the full year. As shown in the chart on the left, after excluding significant non-cash tax benefits in 2017 and 2018, earnings per share increased by approximately 10% in 2018. For the fourth quarter of 2018, we incurred $20 million of integration costs related to the Schulman acquisition that impacted quarterly earnings by $0.04 per share. Transaction and integration costs impacted the full year results by $0.14 per share. In addition to typical fourth quarter seasonal headwinds seen in our industry, our business was challenged by the substantial 40% fall in the price of crude oil that began in early October. Customers often delay orders and destock inventories during periods of declining oil prices in expectations of lower petrochemical and plastics prices.
Volumes declined in nearly every business across our six segments during the fourth quarter. As crude prices rebounded in late December and January, our order volumes have improved. We've seen European and Asian industrial demand impacted by disruptions in the automotive sector arising from issues with Chinese consumer lending, new vehicle testing standards in Europe, and trade uncertainties. We believe that global consumer demand remains strong, and we'll be closely watching trends in Asia after the Lunar New Year holidays in early February. During our third quarter earnings call, I outlined three major planned maintenance outages that were estimated to impact fourth quarter earnings by a total of $95 million. Extended maintenance, low Rhine River water levels, and feedstock supply disruptions at one of our suppliers increased the fourth quarter impact to our O&P-EAI segment by approximately $110 million.
Results were impacted by approximately $20 million by unplanned events in our Intermediates & Derivatives and refining segments. Planned and unplanned downtime impacted our fourth quarter earnings by approximately $225 million. We do not expect such high levels of maintenance over the coming months. During the first half of 2019, our only planned maintenance is scheduled for the first quarter at our O&P-Americas segment. We expect that first quarter downtime will impact earnings for the whole company by approximately $60 million-$70 million. Now, Thomas will provide more detail on our financial highlights for the fourth quarter and the year.
Thank you, Bob, good day to all of you. Please turn to slide six, which illustrates the developments of our business segments over the past two years. In 2018, LyondellBasell's business portfolio demonstrated remarkable resilience to changing market environments. Our Intermediates & Derivatives segment profitability improved by approximately 35% for the first time exceeding $2 billion in EBITDA. Our technology group granted 16 licenses for new polyolefin plant designs that helped improve segment EBITDA by 47%. As seen in the chart, these improvements help to offset declines in O&P-EAI. The profitability offsets provided by the geographic and product diversity of our business portfolio is a recurring theme for LyondellBasell and an attribute that we seek to maintain, manage, and extend as we consider strategic options for the company.
In Olefins & Polyolefins Americas, high industry margins for polyethylene help to offset the majority of the decline in olefin margins. Our business continues to benefit from strong demand and advantaged shale-based feedstocks that enabled us to retain 95% of our prior year profitability for the segment. The results for our new Advanced Polymer Solutions segment includes contributions from the A. Schulman acquisition beginning in late August 2018. Our progress towards our goal of $150 million in synergies is on schedule and will become more apparent during 2019. Our Houston refinery ran very well during 2018, and we completed all major scheduled maintenance for the next two years. We expect refining market conditions to rebalance during the first half of 2019 and look forward to strong refinery runs that will capture expected benefits of new sulfur regulations for marine fuels in late 2019 and 2020.
Now please turn to slide seven, where you can see that our businesses generated $1.3 billion of cash from operating activities during the fourth quarter, which contributed to $5.5 billion of cash generation for the year. During the quarter, investment in capital expenditures increased to approximately $700 million as we ramped up construction of our PO/TBA plant and continued to move our Hyperzone plant forward towards startup. As the stock market entered the correction during the fourth quarter, we significantly increased our share repurchases in response to lower share prices. In the fourth quarter, we repurchased 11.5 million shares, the most in any quarter since 2016. We returned $1.4 billion to shareholders in dividends and share purchases during the fourth quarter.
In 2018, our opportunistic buyback strategy allowed us to repurchase 8% more shares than would have occurred if we deployed the same amount of cash in equal amounts every trading day of the year. The quarter closed with over $1.8 billion of cash and liquid investment on the balance sheet. With approximately $2.5 billion of unused and available credit facilities, we completed the quarter with a total liquidity in excess of $4 billion. Turning to slide eight, let's review our capital deployment over the past six years. The light blue bars depict our cash generation from operating activities, which has ranged between $4.8 billion-$6 billion since 2013. The stacked bars on the right depict our uses of cash ranked in order of priority. Our highest priority is represented by the dark blue on the bottom, our progressively growing dividend. During 2018, we increased our dividend by 11%.
This strong increase reflected an improved outlook after we updated our views on tax reform and the petrochemical industry. We have a top-quartile dividend that is currently yielding approximately 4.6% return. Our next priority is maintenance capital to support the safety and reliability of our operations. Going forward, this baseline investment is approximately $1.1 billion per year. The remainder of the orange bar is allocated to profit-generating capital investment to support growth projects. We estimate this investment will increase to $1.7 billion in 2019. The gray bars reflect our share repurchases. We have returned over $18 billion in share repurchases since the inception of the program. Our buybacks add up to over 208 million shares, or 36% of the shares that were outstanding in 2013 at the inception of the program. Opportunistic share repurchase will continue to be a component of our capital deployment.
The green bar represents last year's A. Schulman transaction, our first significant acquisition. We continue to maintain a conservative balance sheet that provides optionality to pursue value-creating opportunities, and we will continuously reevaluate the relative merits of organic projects, growth through M&A, and share repurchases to optimize returns for our investors. Please turn to slide nine, where I would like to address some of your annual modeling questions for 2019. Regarding capital, we are currently planning to invest approximately $2.8 billion during 2019 to support both our base maintenance and growth programs. Approximately 60% is targeted towards profit-generating growth. The majority of this growth investment in 2019 will be dedicated to the new PO/TBA plant. Although not all plans are finalized, we estimate capital spending will average $2.8 billion annually through 2021. For 2019, we have a fairly typical plant maintenance schedule.
Activities during the year will impact annual EBITDA by approximately $160 million-$200 million. In addition to the first quarter plant maintenance in O&P-Americas mentioned by Bob, the segment will also have a cracker turnaround in the third quarter that is expected to impact EBITDA by approximately $70 million-$80 million. In our Intermediates & Derivatives segment, we have planned maintenance event that will impact EBITDA by approximately $30 million-$40 million in each of the third and fourth quarters. Our net cash interest expense for 2019 is expected to be approximately $400 million. 2019 annual book depreciation and amortization should be approximately $1.3 billion. We plan to make regular pension contribution in 2019 that total $110 million, and we estimate the pension expense of approximately $90 million.
We currently expect the 2019 effective tax rate of approximately 20%, and that our cash tax rate will be slightly lower than the effective tax rate. I will now turn the call back to Bob for a more detailed discussion of our segment results. Thank you.
Thank you, Thomas. Let's turn to slide 10 and review our segment results. In our Olefins & Polyolefins Americas segment, fourth quarter EBITDA was $631 million, a $73 million decrease versus the third quarter. For the full year, segment EBITDA was approximately $2.8 billion. Relative to the third quarter 2018, Olefins results improved by approximately $70 million due to higher ethylene prices and declining Gulf Coast ethane costs. Our cracker operating rates averaged 93% during the fourth quarter, exceeding the average industry performance of 87%. Approximately 80% of our ethylene production was from ethane, and 94% came from NGLs. Polyolefin results were approximately $115 million lower than the prior period, primarily due to a $0.04 per pound decline in polyethylene spread over ethylene. For the full year, results decreased by $137 million.
Olefin results declined by approximately $445 million, primarily due to a $0.06 per pound reduction in ethylene price. Spread improvements in polyethylene and polypropylene of $0.07 per pound and $0.03 per pound, respectively, drove an approximately $360 million improvement in polyolefins to mostly offset the declines in olefins. IHS is currently forecasting relatively stable polyethylene chain margins for the first quarter. We are optimistic that 2019 will offer earnings growth for the segment as the pace of polyethylene capacity addition slows while global demand growth remains steady. Please turn to slide 11 as we review the performance of our Olefins & Polyolefins Europe, Asia, and International segment. During the fourth quarter, EBITDA was $127 million, or $135 million lower than the third quarter. For the full year, EBITDA was $1.2 billion.
We continued to optimize our portfolio in the fourth quarter by divesting a carbon black subsidiary in France. This benefited the quarter by $36 million. Compared to the third quarter, Olefins results decreased by approximately $75 million, primarily driven by a decline in volume. Combined polyolefin results decreased approximately $35 million, driven by decreased margins. Equity income decreased by $43 million, primarily due to planned maintenance at our Polish, Korean, and Saudi joint ventures. Full year EBITDA results were $764 million lower than 2017. 2017 benefited from a gain of $108 million on the sale of our interest in Geosel. 2018 results included the benefit from the sale of our carbon black subsidiary and a favorable impact of approximately $95 million due to an increase in the euro versus the U.S. dollar exchange rate relative to 2017.
Increased feedstock costs during most of the year resulted in margin declines, while planned and unplanned maintenance and low Rhine River levels resulted in a volume decrease of approximately 10%. Combined polyolefins results decreased approximately $345 million due to $0.03 per pound and $0.02 per pound lower spreads in polyethylene and polypropylene, respectively. Joint venture equity income decreased by $46 million, primarily due to lower polyolefin spreads. In January, demand is improving following the typical seasonal declines and destocking of the fourth quarter. On slide 12, let's take a look at our Intermediates & Derivatives segment. Fourth quarter EBITDA was $379 million, a decline of $125 million from the prior quarter. For the full year, the segment generated over $2 billion, setting an annual record and improving over the prior year by $521 million.
Fourth quarter PO and derivatives results decreased by approximately $10 million when compared with the prior period, primarily due to lower volumes, partially offset by higher margins. Intermediate chemicals decreased $65 million, primarily due to reduced styrene and acetyls margins. Oxy fuels and related products results decreased approximately $40 million, driven by margin declines due to higher ethanol pricing relative to crude oil and a volume decline due to planned maintenance. During 2018, the $521 million improvement in EBITDA was largely driven by margin improvements across all products due to tight market conditions and improved contracting strategies. We're very proud of the team's accomplishments in 2018. We expect continued benefits from this work in future years.
While IHS is forecasting some moderation in methanol pricing for the first quarter, we should see improved PO and derivatives volumes for the segment due to the completion of the planned maintenance at our Bayport, Texas facility during the fourth quarter. Slide 13 charts the full year results from I&D business improvements we discussed during our second quarter earnings call. You might recall that while the majority of the increased profitability was attributable to tight market conditions and reduced maintenance downtime at our facilities, we also described LyondellBasell's improved contracting strategies and reliability as sources of durable improvements that should persist beyond 2018. Historically, our Intermediates & Derivatives segment generated relatively consistent EBITDA that averaged approximately $1.5 billion per year.
We believe our new midpoint in typical markets will be approximately $1.7 billion. While the strong market seen in 2018 may moderate, we do not believe these improved margins will fully revert in 2019. In addition, we have not stopped pursuing self-help within this business. This year, we expect I&D contracting improvements to provide an additional $100 million of annual EBITDA for the segment, starting in mid-2019.
On slide 14, let's review the results of our Advanced Polymer Solutions segment. Fourth quarter EBITDA was $86 million, a $16 million improvement over the prior period. For the full year, EBITDA was $400 million. Fourth quarter transaction and integration costs were $20 million. Compounding and solutions results improved approximately $15 million over the third quarter, as we realized a full quarter of contribution from the addition of A. Schulman product lines. This was partially offset by volume and margin declines in polypropylene compounds.
Advanced Polymers results decreased approximately $15 million due to lower margins and volumes. Full-year EBITDA results for the segment were $38 million lower than 2017. Transaction and integration costs related to the acquisition impacted the segment by $69 million in 2018. Compounding and solutions results improved approximately $15 million, with higher volumes from new product lines, partially offset by lower volume and margin in polypropylene compounds. Advanced Polymers results increased approximately $15 million due to higher volumes. Integration activities are well underway, and we have captured $47 million in forward annualized run rate synergies as of December 31st. We expect to see continued improvement in this segment as we begin 2019 with the return of higher seasonal volumes and our continued focus on capturing value from integration activities. Turning to slide 15, let's discuss the performance of our refining segment.
Fourth quarter EBITDA was negative $84 million, a $168 million decline from the third quarter. For the full year, EBITDA was $167 million, or a $10 million improvement over 2017. Planned maintenance on one of our two crude and coker trains was completed in November. As a result, the average crude throughput was 184,000 bbl per day, or 48,000 bbl per day less than the third quarter. With this work behind us, the refinery is prepared to run full rates for the next two years and benefit from expected market opportunities. In the fourth quarter, the Maya 2-1-1 crack spread declined significantly, averaging less than $11 per barrel for the first quarter and only $9.57 during November. Over the previous 12 years, the Maya 2-1-1 has been below $10 for only one month, in December of 2011. The average over this time period is more than $22 per barrel.
Spreads are improving as Pemex adjusts the monthly K factor of the Maya crude oil price formula to ensure that Mexican crude remains competitively priced for the U.S. Gulf Coast refining market. For the full year, refining margins increased when compared with 2017 due to discounted Canadian crude pricing and improved fluid catalytic cracker conversion rates. Crude throughput was 231,000 bbls per day in 2018, slightly lower than 2017. Absent our recent planned maintenance, throughput would have averaged 256,000 bbl per day for the full year. I'd like to congratulate our refinery team for their diligent work and dedication to improve our refinery reliability. With our planned maintenance completed, we look forward to stronger contributions from our refinery in 2019 as we continue to benefit from improved reliability and an increased Maya 2-1-1 crack spread.
I would now like to turn to slide 16 and speak with you about a topic of growing global concern, the management of plastic waste. I think most of you are well aware of how billions of people benefit from advances in plastic. In fact, our products are well aligned with the United Nations Sustainable Development Goals, such as reducing hunger and food spoilage with durable packaging, delivering safe drinking water with plastic pipes, and reducing energy consumption with innovative materials. However, we now face the growing problem of what to do with the plastic once it has served its initial purpose. The concern over plastic waste management is leading governments and consumers to consider bans on plastic straws and bags. These products make up only a small fraction of the plastic waste that ends up in our oceans.
Some suggest that we should replace all plastics with alternative materials, but most alternatives bring higher overall environmental and economic costs. On slide 17, I'm very proud to highlight an Alliance formed by LyondellBasell, along with more than 25 of our industry peers and other participants across the value chain that make, use, sell, process, collect, and recycle plastics. Together, we have committed over $1 billion with the goal of investing $1.5 billion over the next five years in collaborative partnerships to advance meaningful solutions that eliminate plastic waste in our environment. The Alliance's approach is based on four pillars. Infrastructure that stops plastic waste from entering the environment. Innovation in materials, technologies, and business models that increase the value of plastic waste. Engagement with partners in government, business, and consumers to enable solutions. Meaningful projects to clean up plastic waste that has already escaped into our environment.
New infrastructure to prevent and clean up plastic waste is especially important in emerging economies, where collection practices often lag the developed world. Once plastic is collected and appropriately sorted, the waste can become a valuable feedstock for technologies that create versatile new materials from these post-use plastics. LyondellBasell's QCP recycling joint venture with SUEZ is an example of an innovative business model that embraces this vision for a circular plastics economy. Education and engagement with governments, businesses, and communities is critical to the success of these initiatives. The collaborative work of our Alliance will be more powerful and efficient than fragmented efforts by each member company working alone. A survey showed that 10 rivers transport more than 90% of the river-based plastics to the ocean, and more than 50% of land-based plastic waste leakage comes from only five countries.
There will be a focus on developing solutions that stop this leakage at their sources and clean up areas with existing plastic waste by recognizing the value of reusing plastic. While we certainly have an immense challenge ahead of us, I'm confident that our Alliance will find meaningful solutions to help end plastic waste and create a sustainable future for our industry and our planet. Now let's turn to slide 18 and discuss the outlook for 2019. Ethylene feedstocks were volatile during the second half of 2018, with U.S. Gulf Coast ethane prices spiking up in September and then reverting in November. As we discussed during our third quarter earnings call, LyondellBasell has optionality across our U.S. assets with ethylene production from both low-cost Midwest ethane and feedstock flexibility at our Gulf Coast crackers.
NGL prices are likely to show some volatility during 2019, with increased demand from the remaining new ethylene crackers likely to arrive ahead of planned NGL pipeline and fractionation capacity additions. We expect that this pattern of prolonged startups for ethylene crackers, along with NGL supply additions, will smooth the path forward towards forecasts for a return to plentiful feedstock availability within the next year. We're encouraged by forecasts for polyethylene demand growth to continue with long-term historical ranges of 4%-5%. Over the past three years, capacity additions have surpassed demand and moderated operating rates. With less global capacity scheduled to start up during 2019 and 2020, we believe that LyondellBasell's new Hyperzone HDPE capacity will find favorable markets as we ramp up during the second half of this year. Turning to slide 19, let me summarize the year's highlights.
In 2018, our strong earnings were supported by record annual EBITDA in our Intermediates & Derivatives and Technology segments. We'll continue to benefit from some of the improvements for both segments through contracting changes in I&D and licensing growth in Technology. Our company generated approximately $5.5 billion of cash from operating activities. This strong cash generation contributed to growth through profit-generating capital investments and the acquisition of A. Schulman. Furthermore, we continue to provide significant shareholder returns through a growing top quartile dividend and $1.9 billion in share repurchases. By completing the acquisition of A. Schulman, we have created the world's largest plastics compounding business, and we are well underway with integration activities that are capturing significant synergies in our new Advanced Polymer Solutions segment. Our strong cash flows and healthy balance sheet leave us well-positioned to take advantage of additional value-creating inorganic opportunities.
In 2018, we advanced on the construction of our Hyperzone polyethylene plant, and we look forward to the added profitability it will contribute to our O&P Americas segment following the startup in the third quarter. Last August, we also began construction of our PO/TBA plant that will start up in 2021, providing further earnings growth for our I&D segment. We move forward on sustainable solutions for our company by forming Quality Circular Polymers, our premium plastics recycling joint venture with SUEZ. In collaboration with our industry leaders, we formed the Alliance to End Plastic Waste to generate sustainable global solutions for plastic waste that will benefit our industry and the environment.
Going into 2019, we look forward to increased production and availability of shale-based feedstocks and a moderation in the pace of capacity additions that should provide a favorable environment for our new HDPE capacity and allow us to maximize value from our diverse global business portfolio. With that said, we're now pleased to take your questions.
As a reminder, if you would like to ask a question from the phone line, it is star one and record your name. One moment please. Our first question comes from Duffy Fischer. Your line is open.
Yes. Good morning, folks.
Good morning.
First question. IHS is calling last year polyethylene demand up about 7%, which is pretty meaningfully higher than, say, the 20-year run rate. One, would you agree with that? Two, where was that extra demand coming from? What caused that to accelerate in your mind?
Duffy, we in fact did see that, especially in the first three quarters of the year. Quite a bit of it was in the pipe and packaging segment of the business. Not only here in the U.S. but more exports as well, which drove global demand growth.
Okay. Then on the supply side, again, several of the global consultants now have lists that would have in excess of 20 new naphtha plants coming online in China. They kind of call it 2021 and beyond. Obviously, you guys got some insight into that with your licensing business. How should we think about with the knowledge base you have kind of across that space, what will that wave look like? Obviously, it's not going to be that many, but is it 10? Is it 15? How many in that mid-20s period should we think about naphtha crackers in China?
Yeah, Duffy, as we have our discussions, we don't see that magnitude in that timeframe. A lot of them are under consideration, but I would say the timeline is much later than what's described. We'll look for those updates as those projects reach final investment decisions. We expect that those will go forward further in terms of timing.
Great. Thank you, guys.
Thank you.
Thank you. Our next question comes from David Begleiter. Your line is open.
Thank you. Good morning.
Hi.
Bob, just on Braskem, is there a point where you need to make a decision either way and just move forward, as this has been, sorry to say, dragging on for quite a while here?
Well, David, as I've talked about in the past, it's a very complex transaction. In terms of the timeline, part of the protracted timeline has been the pause because of the change in government and given sort of the shareholder ownership that you all know about Braskem. I can tell you that we've completed very high-quality due diligence. We have a few follow-up items, but I think as we sit here today, we better understand issues and value creation drivers. We have been in discussions with relevant stakeholders, including Odebrecht. We don't know whether these discussions will lead to an agreement. Well, I can tell you, we'd only move forward at the right price, and if we believe a transaction creates significant value for all of our stakeholders.
Very helpful. Just one last thing, Bob. On O&P-Americas EBITDA in 2019, I think you said you think you can grow this business in 2019 versus 2018. Can you provide probably a little more color on that thought process, given, again, some new capacity coming on stream and lower polyethylene prices in Q4?
I think a lot of that, David, is the Hyperzone plant, our new polyethylene capacity coming online. You'll recall today, ethylene margins have been very thin. To the extent that we can integrate downstream and capture more of the ethane to polyethylene chain margin, that will contribute. It's a world-scale plant, so it'll make a difference in terms of the O&P-Americas profitability.
Thank you very much.
Thank you.
Thank you. Our next question comes from Vincent Andrews. Your line is open.
Thank you. Bob, looking at your table two with the volume that you sold, obviously in polyethylene in the U.S., it was the lowest number on that page. I'm assuming the same is true in many of the other products around the world. Are you carrying a lot of inventory into 2019? Assuming you run at usual production rates, should 2019 be a much bigger volume year on an organic basis?
In terms of inventory, we're not carrying unusually high amounts of inventory across our entire system. I think there's some inventory build for turnaround that we're expecting here in the U.S. of our largest polyethylene plant. It's a 2 billion pound per year polyethylene plant that we will have a turnaround in Q1. Otherwise, inventories we don't see as being high across the system. Frankly, downstream because the destocking happened, we think that inventories are quite moderate or kind of below average downstream as well.
Okay. Go ahead.
When you look at the inventory difference year-over-year on a cash basis, it's about a $90 million change versus 2017. Really small.
Okay. In the I&D business, one of the bright spots in 2018 was the acetals chain and the spot margins, if you look at those, have just come in considerably since the third quarter of 2018. What are your expectations for what those margins can get back to in 2019?
Well, Vincent, it's difficult to predict where they'll go. We've seen the potential in 2018. The collection has been fairly significant. We'll have to see how that develops. I think when you think about our I&D business, the methanol, the acetyls, and the styrene margins tend to be the most dynamic part of the portfolio. As I mentioned in my prepared remarks, underlying all of that, we have more contracting improvements that will accrue to the earnings of I&D starting about mid-year. I think we've reset sort of the base in I&D from 1.5 to 1.7, if styrene and methanol markets turn out to be directionally what they were in 2018, then we should have another very strong year in I&D.
Okay. Sounds great. Thanks so much.
Thank you.
Thank you. Our next question comes from Aleksey Yefremov. Your line is open, sir.
Thank you. Good morning, everyone. You indicated in one of the slides where you expect PO/TBA earnings to be based on the average for 2014-2018 margins. Where were the margins today relative to that historical average?
I don't know where the margins are today versus the historical average. We tend to take periods of time when we communicate because if we take narrower time frames, price margins can be much higher or lower. We're very constructive about the market. If you think about TBA, and specifically MTBE last year, especially in the second half, gasoline demand and gasoline margins were quite low. We think, some improvement in that in addition to lower butane prices, which we saw during the winter, we think those bode very well for the MTBE part of our I&D business.
Thank you, Bob. You spent some time on recycling. How strong is the business case for some capital deployment into recycling today? Also, do you see sort of some threat to plastics demand in the near term and over the next 12 months, 24 months, especially in Europe from government policies here?
First of all, what we've learned from our QCP joint venture is that collection and segregation are very important. In the past, what has ailed recycling businesses is that the input is very mixed. I think that's what's differential about our joint venture with SUEZ is we get relatively segregated polyolefin waste that then is further segregated in our venture and then washed and then recycled. In terms of impact on demand, I think it'll take a bit of time for the infrastructure to get in place and to be built out. In the near term, we don't expect, meaning the next two, three, four years, we don't expect meaningful impact. We'll just have to watch and see the pace of infrastructure growth.
In terms of Europe, I can tell you that even in recent meetings that my team has had with leadership in Brussels, the focus is more on the circular economy rather than deselection of plastics. That was again reaffirmed in recent discussions. We think that our approach with the QCP venture is very well-placed. The idea for us is to now build out that platform throughout Europe. We're focused on doing that.
Thank you.
Thank you.
Thank you. Our next question comes from Robert Koort. Your line is open.
Good morning. This is Dylan Campbell on for Bob. Quick question. One of your competitors is pushing a price increase for, or they were for January, they are for February for polyethylene in the Americas. I guess what is Lyondell's expectation for the first quarter here for polyethylene pricing, given that at least one consultant is saying that inventory levels are at the highest level in maybe a decade?
Well, first of all, I don't want to comment on directional prices here on the call, but I can tell you that as we look at January, we are seeing in the U.S. a return to more normal demand. We expect as February, March, and April progress, seasonally, we tend to see an uptick in demand because of packaging and so on. What we hear from our customers is that seasonal uptick in demand should be expected. If you think about downstream inventories, because of the destocking that occurred with the reducing oil price, we think downstream inventories are quite lean. When you look at inventories, you really have to look at the inventories in the chain rather than just in one part of the chain.
I think all this will normalize, and our sense is, if you step back and look at operating rates globally, they still look to be among the highest we've seen in polyethylene in the past four years. I think the setup is very constructive for the entire year, given that demand typically grows in the first two or three quarters of the year. I think operating rates are high, and that points to a very constructive market.
Got it. Thank you. I guess a quick clarification question. You guys mentioned polyethylene to ethylene spreads declined $0.04 per pound sequentially quarter-over-quarter. I guess if I look in your data supplement, polyethylene prices declined by only $0.01-$0.02 per pound, and ethylene was fairly flat quarter-over-quarter. I guess, was Lyondell selling at a bigger discount versus the market, or can you just help walk me through that math?
Sure. That you're referring to the polyethylene to ethylene margin for us. The way we transfer ethylene price internally is it's a blend of contract and spot. You'll note that in Q4, we saw a rising spot price of ethylene. Really, there was more margin in olefins and a little bit less in polyethylene. It's not a reflection on the revenue of polyethylene.
Got it. Thank you.
Thank you. Our next question comes from Arun Viswanathan. Your line is open, sir.
Hi, guys. Thanks for taking my question. First off, just wanted to ask about the level of earnings here, kind of deteriorated pretty substantially in Q4 to $1,213, I guess, we saw a $1,415 in Q4 of 2016. I guess, what gives you guys the confidence in the snap back in Q2 through Q4? I guess I'm just curious on Europe and refining as well. Feedstocks have come down in Europe. Is there a possibility that you could see some recovery there, or would pricing be challenged to take in a lower feedstock environment like that? Thanks.
Yeah. Thanks, Arun. First of all, if you think about Q4, there were kind of three big drivers that we think are kind of one-offs. First of all, we talked about the environment of declining crude oil price and the related destocking and how price moves in that kind of environment. A 40% decline in one quarter is really enormous, and that's largely played out and oil prices rebounded. We think that's constructive as we look at the first half of 2019. In terms of Europe and EAI, just from one cracker turnaround that extended past our planned window, and the Rhine River, we had one of our suppliers of feedstock had a disruption. That all, we think, impacted earnings by about $100 million in Q4, largely behind us. Rhine River is back to normal levels.
Our cracker is expected to be, for most of the quarter, at full rate. $100 million impact, we think, is really isolated to Q4. In refining, we're sitting here with Maya 2-1-1 spreads that are the lowest we've seen since the 2008 timeframe. What's driven that is a few factors. First of all, you'll recall that the so-called K factor is what determines the delta between Mexican crude and light crude, if you will. That K factor has been slow to adjust. The light-heavy differential has been almost zero of late. We think that'll revert. We're already seeing some correction to the K factor, and we expect more to come.
The long gasoline market that I described, which may persist, I don't know, but I do think the light-heavy differential, and in particular how Maya is priced, we should see improvement as the quarter progresses. Largely, the maintenance impacts in Europe were isolated to one unit, and they're kind of behind us.
Great. Thanks. As a follow-up, I don't know what you can say on this, but maybe if you could just explain, maybe from a high level, some of the strategic benefits in a potential Braskem deal. Would it allow you to reduce your long ethylene position? You obviously will grow in polypropylene. Also, how do you feel about the vinyls chain and participating there? Is that something that would be considered core to you guys? Thanks.
Yeah. In terms of strategic merits, first of all, when you think about Brazil, the outlook for Brazil continues to improve, and the expectations are positive under the new government. It's an economy, if you look at the IMF reports, it's one of the few in the world that's expected to grow at reasonably good rates. We think longer term, the economy there holds good potential. It's an area where we don't have much of a position. It makes us even more of a global producer and seller of polyolefins. In the case of the U.S. and Europe, there's in part a consolidation opportunity, and also a lot of our technology is deployed within Braskem. Those are just a few of the merits, strategic merits, of a transaction like that.
As I mentioned earlier, it's got to be at the right price, and it has to be significantly value-creating for our shareholders.
Thanks.
Thank you. Our next question comes from P.J. Juvekar. Your line is open.
Yes. Hi, good morning, Bob.
Good morning.
On refining, you didn't mention IMO 2020. We're hearing some mixed reviews about the benefit of IMO 2020 to GRMs. I was wondering if you could comment on that.
Well, thank you for asking that. I was hoping somebody would ask me so I could work it into my commentary. I think, P.J., IMO, we still see meaningful impact, especially because we have such a heavy crude processing refinery. Yes, recent press suggest that maybe some of the impact will be muted. We actually think if we look at forward curves now, perhaps the expectations have corrected to the low side, whereas perhaps at the end of last year, there was a little bit more enthusiasm. We do continue to believe that there will be a positive impact from IMO starting in late Q3 into Q4 as the inventory is rotated into the lower sulfur diesel and that's deployed across the network around the world. Then 2020, we do expect some meaningful impact from IMO 2020.
Look, the thing we can control is we've got to operate well, and I think we've positioned ourselves by completing all of our maintenance to run at full rates and capture whatever opportunity lies ahead. I continue to think that there will be a meaningful benefit in late this year into 2020.
Great. Thank you. Secondly, I'm glad to see you're taking the lead on plastic recycling issue. I think the industry needed to do something there. I guess when you look at plastic recycling, the issue has been the economics of recycling, and recycling never made any money in developed markets like the U.S. Maybe it makes money in emerging markets because of cheaper labor. Can you talk about the economics of that and how do you work that into the solution?
Well, I think, P.J., first of all, I appreciate the recognition in terms of the momentum around the Alliance and so on. Credit goes to a lot of companies who have been really a catalyst for getting this going. In terms of the economics of recycling, as I mentioned earlier, really better collection and segregation at the source is critical to the economics, then building up scale and doing the recycling closer to where the waste is collected. Adding costs by moving waste around the world detracts from the economics. I can tell you that's what we're focused on with the QCP venture in Europe, we believe it's a model that can be replicated, certainly within Europe. As we develop that further, we'll think about other jurisdictions around the world.
Thank you.
All right. Thank you.
If we could limit to one question. We still have eight folks in the queue. I don't want to take up your lunch hour there today. Thanks.
Thank you. Our next question comes from Jonas Oxgaard. Your line is open.
Morning.
Morning.
If we're sticking to the plastic waste here. You have a slide 17, where you show four different pillars. Can you talk a little bit about how do you actually intend to, or how does the Alliance intend to invest here? Are they giving grants to companies, universities? Is that you're expected to do it in-house? Can you give us a little bit of a breakdown on how much do you think is going to be focused on each of the four pillars?
In terms of the allocation, we'll move in parallel and on all four. There's not a weighting more strongly towards one or the other. If you were to go to the website endplasticwaste.org, you can see the initial actions the Alliance will take, which we're backing and supporting an effort through a company called Renewlogy, that is converting waste plastic into fuel. There's a fund called Circulate Capital that's funding initiatives around the world that directionally end plastic waste. Jonas, I'd encourage you to look at that. We want to move on all four fronts. We do believe that we've got to slow down and stop what's entering the environment. We need to address what's already in the environment. Education and innovation are going to be what's going to make this more structural and sustainable, pardon the pun, over the long period of time.
Okay. Thank you.
Our next question comes from John Roberts. Your line is open.
Thank you. Slide 18 talks about the expected volatility in ethane, which I assume is even after the Sasol cracker has been pushed out to the back end of this year. Do you think the industry needs to do additional things here in the short term to maybe pulling forward some downtime to ease up on the ethane pressures that might cause another spike?
John, some of the news around the delays is quite fresh, and we've not included that in our analysis here. Indeed, you're right that what I've read certainly says that there are some incremental delays in some of the new crackers coming. Our view is that in a lower oil price environment like we have, and you'll recall last year, we said that more of the NGLs that are coming from the Permian contain more butane and propane as ethane was rejected, which caused kind of this run-up in ethane. All of this is to say that alternative feedstocks like propane, butane, liquids will be very competitive at lower oil price, more propane and butane available, especially after we get through the winter season. Export capacity in the near term is we don't know of any really big new capacity coming for propane.
I think that in the environment that we're in, you could say that the volatility should be less, if at all, especially with the delays. And you saw some evidence of that in Q4 when oil price dropped. You actually saw propane and butane become a lot cheaper, and they were very competitive as feedstocks.
Our next question comes from Kevin McCarthy. Your line is open.
Yes. Good morning. Bob, I was wondering if you could elaborate on your outlook for Olefins & Polyolefins EAI. If we look back to the prior oil collapse in late 2014, that segment really enjoyed a nice year in 2015, up nearly $450 million. In listening to you today, it doesn't sound as though you're as constructive on that segment relative to the Americas, for example, notwithstanding some of the one-timers, Rhine River, et cetera. Would you compare and contrast the current environment versus what we saw in the following oil collapse or the previous one, sorry?
Right. Kevin, in the Q4, we had a significant reset in prices, and I think that's because of oil price declining. That's occurred, my team tells me that January orders look very good in Europe, we're seeing demand come back. I'm actually quite constructive about the supply-demand balance in Europe. I think there will be some impetus to improve profitability as the year goes on. Again, if you step back and you look at global operating rates rising this year, now that supply chains have reset because of the declining oil price, we're coming into a seasonally strong period. All of this is a setup for improving profitability as we work through the first half of the year, I think EAI should benefit from the higher global operating rates and the oil price correction behind us.
I'm actually quite positive about EAI.
Thank you. Our next question comes from Frank Mitsch. Your line is open.
Hey, good morning. Bob, I guess I now have to start watching your interaction at industry events with Frank Bozich. Hey, you said earlier that you're closely watching Asia post-Chinese New Year. Obviously, it starts in less than a week. I'm curious as to what your best guess is as to what we'll see, particularly with respect to the automotive markets, obviously very important for polypropylene. What are your expectations that we're going to see in a few weeks' time there?
Well, I think ultimately we'll see what happens in about 10 days or 14 days. I think, Frank, given that we've been through a pretty big destocking cycle, and my view, at least on the packaging and the non-durable side is that demand is growing, and all of sort of the demographic factors we've discussed in the past are still in place. In terms of automotive, I think credit is loosening over there, and the middle class is growing. It seems to me that demand for automobiles should be constructive, barring some event that none of us can predict. I'm quite optimistic and hopeful about what we'll see post-Chinese New Year.
Thank you. Our next question comes from Hassan Ahmed. Your line is open.
Morning, Bob.
Good morning, Hassan.
I've got a question on the U.S. ethylene market. If we took a look at 2018, obviously there was extreme volatility. I'd actually even call it a fairly sloppy market. Beyond obviously oil doing what it did, I think one of the main reasons was obviously a mismatch between ethylene capacity coming online, derivatives not sort of following suit immediately. It seems now that as we look at 2019, both ethylene and deriv capacity seems to be coming online in lockstep. Is it fair to assume that the ethylene market in the U.S. should not actually see the sort of volatility we saw last year?
Indeed. I think, Hassan, the volatility could come from the degree of reliability we see in the various crackers. As new, very large world-scale units come online, you can imagine if 1 billion, 3 billion-pound cracker comes offline, that could cause a significant change in the supply-demand balance. The other thing that I think we'll have to watch is the timing of derivative expansions versus cracker expansions. If derivative expansions come sooner, that could actually cause more firmness in the ethylene market. I think the opposite is unlikely. If anything, derivatives could come a little bit earlier, especially in one or two projects that are more integrated in terms of their setup. It's not just polyethylene, it's glycols, it's alpha olefins, a lot of other ethylene consumers as well.
Thank you. Our next question comes from Jeff Zekauskas. Your line is open.
Thanks very much. Oil's rebounded since the beginning of the year from roughly $50-$60 in Brent terms. Propylene really hasn't moved in the U.S. Maybe polymer grade is still a little bit under $0.40, and it's come down from $0.60. Can you talk about some of the dynamics that have pushed propylene down? What are your expectations for it this year, and are you surprised that it hasn't moved?
Well, I think, Jeff, as we see more PDH capacity coming to the market, it'll probably reduce the volatility of propylene because now you have a bigger base that generally runs and is not dependent on peak top flexibility. That's been part of the source of propylene price volatility is when peak tops change. In the past, it had a big impact on the amount of propylene volume that was available. Now as the base of PDH capacity grows, it'll probably act to stabilize and maybe reduce some of the volatility.
Thank you. Our next question comes from Steve Byrne. Your line is open.
Hi, I think this is Ian Bennett on for Steve. The past couple quarters as Lyondell's EBITDA has been declining, your net debt has been increasing to buy back more stock, and I think that sends a strong message about your view of the longer-term trajectory of the earnings and value of this business. If EBITDA were to continue to decline, how willing are you to continue to increase net debt to buy back stock? Does that affect your ability at all to pursue Braskem?
Yeah, Thomas will take that question.
No, thank you, Ian, for the question. I think if you look, first of all, we took significant advantage of attractive share prices, especially in the fourth quarter. We have always said that we are buying back our own share opportunistically. I think when you ask your question, it's important to note that we obviously increased net debt. You're absolutely right. But the main reason to increase net debt, or the reason, is actually the Schulman acquisition. If you look at cash flow from operating activity is $5.5 billion for the year. We have CapEx of $2.1 billion and dividend and share buybacks of $3.1 billion. For the share buyback program, we actually did what we always said, that we are using excess cash flow to buy back our own shares.
Now we are at the point where we have to make decisions as the share price stays attractive to actually raise debt in order to replenish our debt portfolio, which we have used the cash for the acquisition of Schulman. We have sufficient funds. As I said, liquidity is above $4 billion. We have sufficient funds to pursue our growth initiatives as well as to continue with our share buybacks opportunistically.
Yeah, Ian, if you think step back and strategically look at what we've been doing, we've been looking to create shareholder value by pulling a number of levers. We had meaningful organic growth in 2018, inorganic growth with the Schulman acquisition, and we bought back a meaningful number of our shares. I think you ought to look for that to continue because this is a company that has many levers, and we'll look for the one that creates the most value as we think about deploying our operating cash flow or our balance sheet.
Our last question comes from Matthew Blair. Your line is open.
Hey, good morning, Bob. Last quarter, Enterprise announced a couple of new PDH plants. We're wondering if you can say whether you're a customer here and how might this affect your potential polypropylene and, I guess, potential PDH plant as well.
With all the other initiatives we've had going on, with the PP plant, we're still considering it. Certainly the buy versus build scenario on propylene is one that we're contemplating today. As you know from your conference, I know Jim very well, and I spent some time with him, that's an option depending on the economics of buy versus build. We'll continue to evaluate that.
Thank you. We have no other questions at this time.
Great. Let me offer a few closing remarks, if I may. After a challenging fourth quarter where typical seasonality was exacerbated by decline in crude oil, we're looking forward to rebounding demand from restocking of supply chains. In 2019, we'll continue to accrue synergies in our APS segment from the Schulman acquisition. We look forward to growth from our new Hyperzone production and anticipate an improving refining market. With a lighter plan maintenance schedule in 2019, we're really well prepared to maximize production to meet the needs of growing markets. Our global business portfolio provides the resilience. We're well positioned to pursue any other value-creating opportunities. Thank you for your interest, and we look forward to updating you in April on our first quarter results. With that, we're adjourned.
Thank you for your participation in today's conference. You may now disconnect at this time. Have a wonderful day.