Welcome to the Westlake Chemical Corporation Q3 2021 earnings conference call. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, you will be invited to participate in a question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded today, November 2, 2021. I would now like to turn the call over to your host, Jeff Holy, Westlake's Vice President and Treasurer. Sir, you may begin.
Thank you. Good morning, everyone, and welcome to the Westlake Chemical Corporation Q3 2021 conference call. I'm joined today by Albert Chao, our President and CEO, Steve Bender, our Executive Vice President and Chief Financial Officer, and other members of our management team. The conference call agenda will begin with Albert, who will open with a few comments regarding Westlake's performance and a current perspective on the industry. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments, and we'll open the call up to questions. During this call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to the master limited partnership, Westlake Chemical Partners, LP, and similar references to OpCo refer to our subsidiary, Westlake Chemical OpCo LP, which owns certain olefins facilities.
Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's beliefs as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. Actual results could differ materially based upon many factors, including the cyclical nature of the industries in which we compete, availability, cost, and volatility of raw materials, energy and utilities, governmental regulatory actions, changes in trade policy and political unrest, global economic conditions, including the impact of the coronavirus, industry production capacity and operating rates, impacts of extreme weather events, the supply-demand balance for Westlake's products, competitive products and pricing pressures, access to capital markets, technological developments, and other risk factors as discussed in our SEC filings. This morning, Westlake issued a press release with details of our Q3 results.
This document is available in the press release section of our webpage at westlake.com. We have also posted a presentation on our website to review the Q3. A replay of today's call will be available beginning today, two hours following the conclusion of this call. This replay may be accessed by dialing the following numbers. Domestic callers should dial 855-859-2056. International callers may access the replay at 404-537-3406. The access code for both numbers is 249-5584. Please note that information reported on this call speaks only as of today, November 2, 2021, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay.
I would finally advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on our webpage at westlake.com. Now, I would like to turn the call over to Albert Chao. Albert?
Thank you, Jeff Holy. Good morning, everyone. We appreciate you joining us to discuss our record quarterly results. In this morning's press release for the Q3 of 2021, we reported another quarter of record net income of $607 million or $4.69 per diluted share, as well as record quarterly records for net sales, operating income and EBITDA. Net income for the quarter increased $550 million from the Q3 of 2020, reflecting the continued strong demand for most of our products, driving a strong pricing environment. I'm very proud of the Westlake team for delivering these results despite the impact from Hurricane Ida on our operations in the Q3, as well as global supply chain constraints on our building products business.
Strong demand dynamics in PVC, caustic soda and polyethylene created a healthy pricing dynamic, which contributed to our expanding margins. The strong and broad market momentum in global construction, driven by tight supply-demand balances across our key products, drove higher pricing and strong margins year-over-year in both our vinyls and building products businesses. Our olefin segment benefited from a continuation of strong margins and solid volume gains year-over-year as the polyethylene industry experienced robust global consumer packaging product demand and tight inventories. This momentum in margins also continued from the Q2 into the Q3 in spite of a plant maintenance outage. The strong long-term prospects of the U.S. housing market and favorable demographics supporting continued housing growth, along with broad demand in U.S. repair and remodeling expenditures provide for the compelling growth opportunities in our building products business.
Our recently completed acquisitions in building products greatly expand our product offering with leading brands to meet these market opportunities. In August, we completed the acquisition of LASCO Fittings, a leading manufacturer of injection molded PVC pipe fittings. LASCO brings additional markets serving the plumbing, pool and spa, industrial, irrigation, and retail markets in North America, and is complementary to our existing product portfolio of PVC pipe and larger diameter fittings. In September, we acquired Dimex, one of the largest processors of post-industrial recycled plastic material in the U.S. This acquisition further expands Westlake's product portfolio to include a variety of consumer products made from processed post-industrial recycled PVC, polyethylene, and thermoplastic elastomer, and sells these consumer products throughout the nation in big box home improvement retailers and online through nationally known e-commerce platforms. In October, we completed the acquisition of Boral North America's building products business.
This acquisition places Westlake into industry-leading positions, serving the housing market in concrete and clay roofing, premium siding, trim and shutters, decorative stone and vinyl windows. These transactions transform our existing building products business into new strategic product platforms, which offer market innovative leading brands of exterior building products designed to enhance customers' satisfaction. These products improve the energy efficiency, durability, and value in residential housing, schools, hospitals, and other buildings. We are pleased to welcome our new fellow employees from Boral, Dimex, and LASCO to Westlake. These transactions are transformative and bring significant value benefits to Westlake through their attractive financial attributes and market-leading product platforms serving the housing markets. The acquisition of Dimex introduces recycled plastic products that serve the consumer markets.
Approximately 50% of our building products business is oriented to the repair and remodeling markets, which have proven to be more stable and predictable over the long term. These newly acquired products and brands, when compared with Westlake's existing leading positions in PVC siding, trim and molding, compounds, PVC pipe and fittings, now provide our residential customers with a comprehensive portfolio of products and solutions which enhance the everyday lives of countless individuals. We continue to look for opportunities to expand our business while driving value for our shareholders. Westlake has made significant progress in our strategic growth plans this year. With a strong demand picture and leading positions in building products, PVC, caustic soda, and polyethylene, we believe our businesses are very well positioned going forward.
I would now like to turn our call over to Steve to provide more detail on our financial and operating results for the Q3.
Thank you Albert and good morning everyone. In the Q3, Westlake benefited from the continuing global economic expansion, resulting in healthy demand with leading market positions for our products resulting in our record performance. This quarter, we reported quarterly net income of $607 million, which is a record for Westlake. In addition, for the Q3 of 2021, we reported record income from operations of $861 million and record EBITDA of $1.1 billion. Q3's year-over-year, $550 million dollar increase in net income is a result of significantly higher sales prices and margins for most of our major products. Q3 2021 net income increased by $85 million from Q2 2021 net income of $522 million.
The increase in net income was largely attributable to higher sales prices and higher margins in PVC and polyethylene, as well as improving caustic pricing. Our building products business, we continue to experience strong results as North American housing demand remain robust while the supply of building products inventories remain tight. Sales volumes in our Vinyls and Olefins segments in the Q3 were lower, reflecting weather-related impacts, planned maintenance, and logistics constraints. Our utilization of the FIFO method of accounting resulted in a $30 million benefit compared to what earnings would have been if reported on the LIFO method. This is only an estimate and has not been audited.
Let me provide some details on our segments, starting with our Vinyls segment. As the second largest global producer of PVC and the second largest global producer of caustic soda when combined, Westlake is the world leader in core vinyls markets. The leading position with strong market fundamentals in PVC and caustic soda enabled us to deliver strong results in the quarter. The solid demand for PVC was anchored by robust year-over-year global demand growth and solid, strong PVC end markets including construction and home remodeling. Our building products business continued to benefit from healthy North American residential construction and repair and remodeling demand. These factors drove higher PVC sales prices in the segment, and we benefit from strong integrated margins during the quarter.
For the Q3 of 2021, Vinyl segment operating income was a record $601 million, increasing $559 million from the prior year period due to significantly higher sales prices and margins, as well as increased earnings in our building products business. Driven by higher sales prices across our major products, Vinyl's operating income in the Q3 increased $166 million over our Q2 2021 results. These increases were partially offset by lower volumes resulting from weather-related outages. In our Olefins business, the continuing robust global demand for consumer product packaging drove polyethylene prices higher in the Q3 and expanded our margins.
Olefins' Q3 2021 operating income of $281 million increased $230 million from the Q3 of 2020 as a result of strong pricing and expansion of margins. For the Q3 of 2021, Olefins' operating income increased $4 million from the Q2 of 2021, primarily due to higher sales prices and margins, while volumes were impacted by planned maintenance events. Next, let's turn our attention to the balance sheet and statement of cash flows. We generated $755 million in cash flows from operations in the Q3 of 2021. Q3 2021 capital expenditures were $144 million.
Our solid balance sheet and our commitment to keeping our strong investment-grade financial metrics provided us the ability to raise $1.7 billion in the Q3 at an average maturity of 26 years with an average coupon of 2.7%. A portion of these proceeds were used to fund our acquisitions in the second half of this year. We continue to maintain our long-dated debt maturity profile with a weighted average debt maturity of 17 years while keeping strong credit metrics anchoring our investment-grade balance sheet. Now, to address some of your modeling questions. We entered the Q3 experiencing higher raw material and energy cost, which could persist through the Q4. We expect our effective tax rate for the full year of 2021 to be approximately 23% and a cash tax rate of 21%.
Our capital expenditures forecast for the year is now expected to be between $600 million and $650 million. The turnaround of our Petro 2 ethylene unit is currently underway and expected to be completed in December. With that, I'll now turn the call back over to Albert to make some closing comments. Albert?
Thank you, Steve. This quarter's record highlights the earnings power of our products and our high level of integration, which extends through the value chain from natural gas liquids and other feedstocks through to consumer building products. We are very excited about the new products and brands that Boral, LASCO, and Dimex bring to Westlake. These leading products and brands will continue to drive our earnings power. As we look forward, with global supply chains and manufacturing beginning to normalize, we are well situated to continue to meet the global strong demand for consumer and industrial products as the U.S. continues to have globally advantaged feedstock and energy positions with ethane natural gas versus high-priced oil-based feedstock utilized by our foreign competitors. We see PVC supply-demand dynamics remain favorable with a strong growth in demand more than offsetting the limited global capacity additions.
We see continued strength in our PVC and chlor-alkali business with healthy demand in caustic soda and chlorine. The strength in global construction and in manufacturing outlook should also be supportive of strength in the downstream building products business. In our Olefins business, demand remains favorable as essential everyday products such as consumer packaging and healthcare drive polyethylene volumes. However, there are global capacity additions in coming quarters. The strategic acquisitions of Boral North America, LASCO, and Dimex expands our building product platform to significantly leverage our participation in a strong housing and repair and remodeling markets.
The proposed U.S. infrastructure spending bill would significantly benefit our other building products business and drive construction demand for many years. Our ongoing growth initiatives in chemicals and building products are driving new and complementary products to our existing portfolio, which when coupled with strong market growth, will deliver long-term value for our shareholders.
We will continue to look at opportunities that both further our strategy of adding complementary products, as well as increasing our vertical product and sale channel capabilities in all of our business segments to deliver strong financial performance. Our continued focus on ESG activities led us to make significant improvements in our operation and supply chain process for the betterment of our communities and where our products serve vital and valuable purposes. We are also developing products to build a more sustainable future as part of our green initiatives, including the introduction of a green caustic soda known as GreenVin. In Canada, we have commercialized and now selling our PVC oriented pipe, referred to as PVCO, which allows us to create a PVC pipe that uses less material while delivering the enhanced strengths and capabilities of our current PVC pipes.
In addition to these new products and those of Dimex, which are derived from post-industrial recycled plastic, we expect to continue to bring to market products that will further our sustainability goals while meeting the needs of our customers and delivering value to our shareholders. In September, we published our 2020 sustainability report. Among many accomplishments, we noted that we have achieved meaningful annual improvements in our carbon footprint over the past 5 years. This has been accomplished through applying technology and optimizing operations, resulting in our CO2 emissions falling by 8.7% from 2016- 2020, and have ongoing efforts to continue to decrease our emissions.
We are confident that Westlake is well positioned to serve the growing worldwide needs of our customers while maintaining financial discipline, which, combined with the strong fundamentals of our business, enables us to deliver long-term value to our shareholders. Before I conclude, I want to take a moment to mention that in September, we celebrate our 35-year anniversary. We have grown significantly since 1986, and I want to thank all of the Westlake employees who made this possible. Thank you very much for listening to our Q3 earnings call. I will now turn the call back over to Jeff.
Thank you, Albert. Before we begin taking questions, I'd like to remind you that a replay of this teleconference will be available two hours after the call is ended. We'll provide that number again at the end of the call. Tamara will now take questions.
Thank you. To ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first response is from Michael Sison of Wells Fargo. Please go ahead.
Hey, good morning, guys. Congrats on the 35 years, Albert.
Thank you. Good morning.
In terms of vinyls, you've, you know, seems like every quarter you got a new record EBITDA margin. Any thoughts on the sustainability of that when you look to the Q4 and the first half of 2022? Looks like most of the consultants see pretty favorable sort of margins for the industry over the next couple quarters. Just kinda any thoughts on the next year or so in terms of profitability for vinyls?
Thank you. The basic fundamentals for the vinyl business is very strong. As we mentioned, there are very limited capacity additions coming online worldwide, and there have actually been reductions in supply, not only from the weather-related, but from capacity reductions, both in North America and in Asia and some in Europe. The demand, however, is continued to be very strong. Vinyl is one of the best products for construction-related applications, whether it's in the infrastructure pipe and fittings for water and sewer or around the house, inside or outside the house. With the strong U.S. feedstock advantage, through its low-cost power compared with power cost in Europe and Asia, low-cost energy and a low-cost ethane-based ethylene feedstock, we have one of the lowest-cost position to supply the growing demand for the vinyl business.
That including caustic soda as well. As world economy recovers, caustic soda demand is increasing, and there's, again, limited capacity available to supply, and hence we have a strong pricing power. Now, I just want to mention that as we head into the Q4, that's typically a seasonally weaker quarter because the winter season, construction typically slows down. However, since this year, there's a lot of disruptions, whether weather related or capacity reductions. Inventory is very low throughout the industry, both from the producer side and customer side. There could be industry inventory building even during the Q4. We will see, but we believe the near term and the longer term going forward, our vinyl business outlook is very positive.
A quick follow-up. With your new building products portfolio altogether now, what do you think the growth rate should look like next year?
Mike, it's Steve. As we think about giving more transparency, we'll be spending more time discussing that. You know, we've just closed these three transactions just over the period of several months, and certainly we wanna give more transparency to that business in terms of its financial performance and giving more specific understanding of how that business is expected to perform. Hang with me a little bit. We do expect to give more transparency to that in the very near term.
Great. Thank you.
You're welcome.
You're welcome.
Thank you. Your next response is from Arun Viswanathan with RBC Capital Markets.
Great. Thanks for taking my question. Congrats on a great quarter and good outlook here. I'm just curious, you know, you just noted first off on caustic soda, there has been some improvement. You know, you've also seen some closures within the industry. Where do you stand on kind of replacement costs, if you could help us with that? Do you think that, you know, just given the increases in chlorine as well, that we're anywhere near, you know, investment coming into the industry, or are we still quite a ways away from that?
Well, as you know, caustic soda is using the electrolysis process, and a lot of copper and materials are used for construction. As we've seen in recent months or year, that commodity prices, such as copper, has really increased a great deal. Replacement cost has also increased for building caustic soda plants, in our opinion.
Okay. I guess on olefins, we have seen some pullback in spot polyethylene pricing over the last month or so. Is that because inventories are now normalized, or how would you kind of rate the supply, demand, and inventory picture in the olefins chain?
Yes. As weather related issues have returned back to normal, some of the plants that were impacted by the weather has come back to operation. As we mentioned also, there are additional capacity that's coming online in the next few quarters. I think the inventory balance has become much better than in the past year when there was a lot of tightness in inventory for the polyethylene business.
I'm sorry, if I may, just real quickly on your balance sheet, obviously still very healthy. Are you still in a position where you are pursuing further M&A, or are you thinking about using the cash that you generate from here on?
Arun, it's Steve. The answer is we're always looking for opportunities, certainly those that provide real bottom-line value. As you know, we always have had a very active corporate development team looking at opportunities, both internal growth opportunities and acquisition growth opportunities. As we think about putting the capital we have to work, that's really where we're focused, is really kind of the bottom-line cyclical average returns that we're looking for. Yeah, there's always an opportunity to put that capital to work, but we're always looking to make sure it provides that real long-term, sustainable, risk-adjusted returns. There's an active role both now, but always has been, in putting that capital to work.
We'll, as I say, as we move forward, stay tuned, but we certainly have not changed our focus at driving long-term, sustainable bottom-line value.
Thanks.
You're welcome.
Thank you. Your next response is from Kevin McCarthy with Vertical Research.
Good morning.
Good morning.
We've seen coal prices rise appreciably in China, and of course, the government there is also implementing its so-called dual control environmental goals. I'd be curious to hear your thoughts as to what impact that is having on PVC production and the PVC market, regionally and globally, if you think it's significant.
Certainly. As you may know, that China has a significant market share of PVC capacity in the world, close to about 50%, but 80% of that is coal-based. What's happening with not only the high price of coal, but a lack of coal, has impacted the production capability of these plants. Some of the coal, PVC-based plants that are not integrated back to coal are forced to shut down. Further, with the dual control, some of the provinces that has exceeded their dual control, the greenhouse gas emissions to GDP ratio, and they were forced to shut down the industries to reduce emissions. We have plants in China, and we have been impacted also, those provinces, and they said you must shut down for several weeks to reduce emissions.
Even though government has put a cap on coal prices and coal prices come down from the lofty heights, it's still quite expensive. Going forward, the energy demand in China is still growing. We will see how China would control the industries and whether the coal-based industry will allow to continue to grow or they will be frozen in the capacities or even shut down some of the polluting, highly polluting plants, older plants.
Thank you for that. As a follow-up, I guess I'd be curious to hear your near-term outlook for PVC resin prices. We've seen U.S. export prices rise in recent weeks and months. I'm curious as to your view there for the Q4 and also on U.S. domestic contract pricing. Do you have any proposed increases on the table for November?
Certainly. As we said, we're heading to the Q4 in the Northern Hemisphere. Typically, it's a weaker cyclical quarter with construction slowing down. However, U.S. is the largest exporter of PVC around the world, and the world demand PVC is still growing as their economies recovers from the pandemic. But because of the high energy cost in China and Europe, some of their production either curtailed or very high cost position. U.S., by far, is the most advantageous location to supply the rest of the world's need for PVC. We see continued strong demand for PVC and hence profitability. Now you mentioned pricing. The industry, IHS, has announced that industry announced a $0.05 a pound price increase for November.
Even though we're heading into the Q4 winter season, we believe there's a strong demand and such price increase will be able to pass through in the U.S., especially when U.S. prices are below the export price the industry is seeing in other countries around the world.
Perfect. Thank you so much.
You're welcome.
Thank you. Your next response is from Michael Leithead of Barclays. Please go ahead.
Great. Thanks. Good morning, guys.
Good morning.
First question on polyethylene. I think IHS is calling for a sizable polyethylene margin cut going into Q4. Two of your main public competitors have offered a more upbeat, less bearish expectation for Q4. I guess, what camp do you guys fall in here?
Well, as you know, polyethylene prices has moved a lot since June of last year. With more capacity, as we discussed, coming up and more plants returning, the inventory balance is much better. Hence, there's a discussion of prices dropping starting of the month October and through December and possibly into early part of next year. The degree of drop really depends on the supply and demand and also depend on our foreign competitor who use primarily oil-based feedstock, naphtha, that's come from oil refining as a feedstock. As you know, oil price is quite high now. Depending on the winter and the temperature, there's the talk about oil price going even higher, depending how the cold winter will be and how high natural gas will be in overseas markets.
That would put a floor as to how low the U.S. price would come down. I think it's the trend is that the price is coming down from the highs we have achieved, but as to how much it will drop depends on several things, as I mentioned. One is based on oil price.
Got it. Fair enough. I wanted to circle back to capital deployment. I guess one of your upstream peers decided to buy in their MLP last week, and their logic for that was it's trading at a 9% yield, and they just felt the market isn't willing to appropriately value this kind of drop-down growth story that it historically was. I look at Westlake Partners, it's operationally performed very well, but it's trading at 7%-8% yield, fairly similar cheap EBITDA multiple to Westlake. I guess, would you contemplate buying back in your MLP, or are you still committed to keeping this public for the long term?
Mike, I think you'll continue to see that the performance of the partnership, and you saw the results this morning, continue to be very robust and very strong in the face of a number of challenges, weather-related challenges over the course of the last year or so. I think the model that we have performs well. It's something that I think the market has appreciated, and the price has stayed right in there. I think if you look at the cycle average trading value of Westlake Chemical and the cycle average trading value of the partnership, it has traded at a premium valuation.
It is clear that being able to exercise that arbitrage in size has been challenged over the last couple of years, but I still remain optimistic that the underlying value proposition remains, and that's something that we'll continue to assess on an ongoing basis. We're, you know, we're pragmatic. We'll look at this on an ongoing basis, but the value proposition still remains.
Got it. Thanks, guys.
You're welcome.
Thank you. Your next response is from Frank Mitsch of Fermium Research. Please go ahead.
Good morning, and congrats on the record results in 35 years. You faced some negative impacts from Hurricane Ida in the Q3. Can you size what that financial impact was?
Yeah. Frank, you're right. It's been a challenging period of time between, you know, the various events that we've had over the course of time, whether it's been Hurricane Ida or even some unplanned outages. You know, order of magnitude in the Q3, it was between $80 million and $90 million between the unplanned outages and Ida.
Between the unplanned outages and Ida, a total of $80 million-$90 million EBITDA impact?
Correct.
Great. You guys have been on force majeure on VCM and PVC. Where does that stand? Where, when do you think you'll be back up if you're not already back up?
Yeah, we are coming out of the force majeure, and we try to apply to regular supply to our customers' needs.
Okay. The force majeure has been ended, correct?
Yes, we're trying to come back, as much as we can. We're still building inventory back as well as a balance.
Gotcha. Thank you so much.
You're welcome, Frank.
Thank you. Your next response is from Vincent Andrews with Morgan Stanley. Please go ahead.
Hi, good morning, and thanks for taking my question. Just, Albert, curious on, you know, with your integrated business, you're able to look at the entire process from chlorine to vinyls. Curious how you're seeing the profitability in the merchant market, you know, in the kind of the upstream side versus downstream, and how that has evolved over the last six to twelve months as, you know, we've seen rationalizations and also just strong demand downstream. How you compare those.
Certainly. As with the recovery of the economy, typically, chlorine related, which is PVC, would lead the economic recovery. We have seen that caustic soda price was lagging behind for quite a while as PVC prices and margins start to improve as demand for PVC products, whether it's infrastructure or housing related activities, demand has really grown very fast. Now, as global economy recovering and expected to recover even next into 2022, demand for caustic, which lags behind the GDP, now is picking up, and we are seeing price increases in caustic as well. I think we are seeing all-time high for ECU values. Among the chlorine derivatives, even given the high chlorine price, the best value for chlorine still goes to PVC.
We are fortunate that, as Steve mentioned, we are number two globally in PVC, in capacities and also number two in caustic. Combined, I think we are the leading chlorovinyl with PVC, chlorovinyl business in the world. We're enjoying the benefit. Going forward, we see this continue as limited capacities adding on. It's expensive to add all these integrated capacities. We are fortunate that we are in a good position to capitalize on the upcycle on this segment of the business.
Got it. That's helpful. Then maybe it's a bit early, but on the Boral acquisition, as you think about, you know, looking, getting a closer look at the business now that you've completed that, any sense for positive surprises, negative surprises, and how you're thinking about that $35 million in synergies and potential for, potentially higher or better synergies than that?
I'll talk to operations, and Steve can talk about the financial synergies. We're very happy after one month of ownership of the Boral business. They have very good product leading positions, very good technologies, and also potential for growth. Some of the plants, the equipment, because of the sales process, they were starved of capital and hiring. The plants were not running at full capacity. Now that we have stabilized, and we're looking at opportunities to increase our production, and demand is very strong in housing materials, as you may know, and also to reduce some of the operating costs with further capital investments and increase production. Very happy with that. Steve.
Yeah. When you think of the run rate, the $35 million of annual cost related synergies is really where we're still guiding people today. As Albert noted, there are, excuse me, a number of opportunities that we see here. As you heard us speak to the significant issue in economies of scale and diversification of our leading building products business that he outlined earlier. We think that enhances our opportunity to really look for improvements above just that $35 million of cost related synergies. When you think of opportunities beyond that, we'll look for those, of course, but there are gonna be opportunities both in the revenue line as well as in the cost line. As we see those and get comfortable with those, we'll certainly telegraph those to you.
Very helpful. Thank you.
You're welcome.
Thank you. Your next response is from David Begleiter with Deutsche Bank. Please go ahead.
Hey, good morning, and Albert, congratulations as well for the results.
Thank you, David.
in the last 35 years. Albert, just on ethane, how do you expect supply and price to evolve over the course of 2022 in ethane?
Yes. Certainly the future prices for ethane for 2022 actually is dropping from the highest in the Q1, which are close to this quarter's price, and dropping down to the mid-low 30s from pricing. I presume that's because of the high oil price and gas price. There's more rigs going to oil and gas fields and more production as not only people are completing wells as DUC wells, but also in new drillings. We are watching the rig counts, which is moving up. With more production, there'll be more ethane available.
Very good. Just back on China. Do you expect a, at a very high level, less capacity to be added in China across the chemical landscape, given the government's enhanced focus on CO2 emissions going forward?
Yes. I think we are watching China very carefully. They are the largest consuming country for many of the chemicals and plastics, and also a producer. They're mainly an importer rather than exporter of chemicals and plastics. Their appetite will be very important in affecting the global prices for chemicals and plastics.
Thank you.
You're welcome.
Thank you. Your next response is from Hassan Ahmed of Alembic Global Advisors. Please go ahead.
Good morning Albert and Steve.
Good morning Hassan.
You know, just wanted to go back to chloralkali and, you know, near-term pricing dynamics. Obviously, a bunch of moving parts in the chloralkali market. You know, you've seen rationalizations of late. We've obviously seen the coal price escalation in China, you know, the natural gas situation in Europe. You know, the commentary that I'm hearing from you both on the chlorine demand and the caustic demand side sounds very positive as you look into Q4 and 2022. Now, with all of that as a backdrop, I see pricing where it is, you know, caustic, according to your pricing stack, at $825 a ton, chlorine at $443 a ton. Obviously, this is backward looking for Q3 when natural gas averaged $4 a MMBtu.
How are you thinking about, A, the sustainability of these pricing levels or maybe even sort of as you look into 2022, you know, from the commentary, it sounds like there's potentially more upside in pricing?
Yeah. I was just looking at IHS, an industry consulting firm forecast. They are looking December and January down $10 a ton for caustic, but April, May, they're going up $10 a ton in caustic. I think people are forecasting the caustic price will stay at this level throughout next year. In chlorine prices, they are looking at another $150 a ton price increase in January of 2022. I think people are pretty positive. As long as the U.S. economy, the global economy continue to recover from the pandemic, demand for caustic and chlorine will be strong. The derivative products also demand will be strong. Pricing would remain favorable going forward.
Very helpful, Albert. You know, as a follow-up, just wanted to go back to some of your commentary about China. You know, Celanese on its Q3 call actually made some very interesting comments about how they feel, you know, the capital cost advantage that the Chinese used to enjoy has waned away, how permitting has gotten much sort of harder. Obviously, you know, we have ESG concerns all over the world. We all know obviously one of the culprits of capacity addition over the last decade was China. You know, can you dig a bit deeper into what your expectations for capacity growth or lack thereof is in China, you know, over the next 5-10 years?
That's a very good question. I think the Chinese government five-year plans wish to upgrade the industrial values going forward, and they want investments in high-tech areas and high-value areas and not the polluting basic industries even though they may have labor advantage of building. But the labor cost is going up higher every year. The wage increase going up double-digit for many years now. They are wage-wise they cannot compete with Vietnam or other countries who have pretty good favorable workforce but at lower rates than in China. I think the Chinese government are also very conscious of global warming.
As we hear, even with the COP26 going on, there are various plans, and we heard India now also wish to have a, I think it's 2070 target of net zero emissions. I think the whole world are working towards the era. As our industry, our goal also is to reduce, as you mentioned in our comment, greenhouse gas emissions in our productions as well. I think this will have impact on new additions on the basic industries in China and around the world.
Very helpful, Albert. Thank you so much.
You're welcome. Thank you.
Thank you. Your next response is from Aleksey Yefremov from KeyBanc Capital Markets. Please go ahead.
Thank you. Good morning everyone. Albert-
Good morning.
You've always emphasized return on capital over just size. In your current building products, would you like to be, you know, significantly larger over the next few years through additional acquisitions? Do you have aspirations to be the bigger building products player?
Alex, when you think about the focus that we have in deploying capital, it's not size that really is important, it's the return opportunities that we see. You can see with the investments that we've made this year, the investments were focused in really putting capital in markets that gave us scale in sales channel, but also brought real compelling value, both in our LASCO acquisition, the Boral acquisition, and the Dimex acquisition. These were all focused at really making sure that we not only had scale, but value being driven, of course, with that scale. It's important to us to make sure that as we grow the businesses, we're doing it with always a value focus. That's our focus. The answer is, over time, certainly there'll be additions to both the building products businesses and the various chemical businesses.
It's really focused at making sure they're all contributing the appropriate kind of returns, given the risk adjustment to invest in those businesses.
Thank you, Steve. As a follow-up, any way you could size for us the cost increase for your business in Europe due to higher energy prices in the Q4?
As you think about it, you know, you've got, of course, higher energy costs and higher natural gas costs. Without kind of segmenting out which is applicable in Europe and in North America, that you know that our sensitivity to higher cost of gas, as an example, is $1 in an MMBtu is about $100 million of EBITDA. We haven't broken that out necessarily in terms of the contribution that, or the impact that has on our European versus our North American businesses. Of course, it's more heavily focused in the North American business, so that's where the biggest footprint we have is.
Sorry, just to clarify, Steve, the $100 million includes Europe?
It does.
All right. Thank you.
You're welcome.
Thank you. Your next response is from John Roberts of UBS Union Bank, Switzerland. Please go ahead.
Morning. This is Matthew Skerry on for John.
Morning.
Given the recent acquisitions to the Westlake portfolio, should we be expecting a step up in capital expenditures in future years?
When you think about our 2022 capital program, we'll be giving that a good hard look this year. As we think about finalizing our 2022 budget, we'll talk about the capital spending budget in our Q4 earnings call, which will be in February, and we'll give guidance for that capital number then. Of course, that business has opportunities to grow and develop the business that we've acquired, both Boral, LASCO and Dimex. Certainly you would expect there'd be some capital deployed in that. Let me wait until we've finished our capital budgeting for 2022 to size it for you.
Thank you.
You're welcome.
Thank you. Your next response is from P.J. Juvekar of Citi. Please go ahead.
Hi, Eric Petrie for P.J. Good morning, Albert and Steve.
Good morning.
What does your order backlog look like in building products versus more typical or, you know, historical levels? And does Boral have a similar backlog?
Yes. I think, for most of the building products business, inventory is very low and demand is very high. As I said earlier, we're heading into the Q4, the winter season, and typically, orders slow down and manufacturers are producing for inventory for the spring season. Because of the shortage of products, there may not be much of a slowdown as typical season would expect. Time will tell. We'll see whether we have a dramatic slowdown or a little bit of a slowdown. Anything specifically on days inventory? Is it, you know, eight weeks versus, you know, more normal is 4-6? No, much less than eight weeks. Today, most building product inventories are quite low.
Okay. Then secondly, on your GreenVin, low carbon caustic soda, how do you see the scale up of tons? You know, what kind of end markets are adopting this first? Is it alumina or other inorganic or organic end markets?
We're still seeing the industry adapting to it. I think a lot goes to the consumer products. As you know, caustics is used a lot in soap and other consumer products. I think those are probably the easiest to get consumer to be attracted to the GreenVin. As we see other industries want to reduce their greenhouse gas emissions, Scope 1, Scope 2, and Scope 3, that this will also help.
Helpful. Thank you.
You're welcome.
Thank you. Your next response is from the line of Steve Byrne of Bank of America. Please go ahead.
Hi, yes. This is Matt on for Steve. Albert, morning. You've been under force majeure in vinyls for a good chunk of 3Q, which kind of presumably hurt your PVC and caustic export tonnage in particular. If we think about the transition to 4Q, what do you expect to see from, like, a quarter-over-quarter increase in available volumes given these FMs have lifted? And then what markets would this additional tonnage find itself?
Yes. As we mentioned that we are getting over the impact for Ida and other unplanned outages. Our force majeure has been removed, but we're still moving towards building inventory and provide as much as we can to our customers' needs domestically. We have not been exporting much at all even though the export prices has been better than local U.S. prices, but we want to make sure our domestic contract customers get the benefit first. As the availability improves, we'll enter the export market.
Okay. Is there any indication? Well, I can ask offline. Conversely, I mean, when we think about the PVC price momentum and the interplay with the global cost curve, right? Like, we spoke a bit about China putting caps on coal prices, and we've seen a pretty significant deflation in the Chinese coal market over the last couple weeks. Where do you expect PVC prices to ultimately settle out when production rates normalize, presumably at some point next year? If we were to look at the IHS benchmark, is this something that we find ourselves back in the $0.60-$0.70 a pound range we've been at, you know, we were at for most of the last decade? Or is it some number that's higher than that?
That's a good question. Looking at IHS's forecast for domestic U.S. price, the average price for 2022 will be $12.8, and average price for 2021, current year, is $5. They're looking at a higher average price in 2022 than this year's. On the export side, they are looking at average of $0.826 a pound for 2022, and for this year, looking at average price of $0.782. The average price for next year is higher than this year. However, the October price, they're looking at $0.919 for export. They're expecting next year's export price to be lower. Time will tell whether that will come to fruition or not.
I guess maybe a better question to ask is, what do you think the normalized price of PVC is? Is it 112 that IHS is suggesting? Or do you think it's
Yeah. These are contract list price. As you know that depending on the customers, there could be discounts over these list contract prices. I think, for a ratio comparison, for 2020, the same contract U.S. price was $0.74. You can see there's large variations. There's no normal price. I think it's partly it's feedstock costs, as Steve mentioned. Power costs in the U.S. are impacted a lot by natural gas prices. Natural gas price goes up, power price goes up, and caustic and chlorine cost goes up, and ethylene as well. PVC, there's no absolute price. It's matter of what ethylene, power, caustic, all that will lead to the cost basis. Supply-demand will judge how PVC price would behave.
Around globally, I think right now, the U.S. and Europe have high prices, but in the past, Europe has the highest PVC price. It's not only cost basis, supply-demand, but also global supply-demand. All that has to play into what the price will be. It's very dynamic.
Yeah. Thank you.
Thank you.
You're welcome.
From Matthew Blair of Tudor, Pickering, Holt & Co.
Hey, good morning, Albert and Steve.
Good morning, Matthew.
Just wanted to check, is the turnaround lasting a little bit longer than expected? Previous notes I have is, you know, about 60-day turnaround. It also looks like your CapEx for 2021 came down by about $150 million. Could you just talk about those dynamics?
Matthew, you're right. The capital expenditure plan is lower than the earlier guidance we gave. The guidance here is between $600 million and $650 million for the 2021 year. As I said, I'll give some guidance for 2022 once we finalize our budgeting plan, and we'll discuss that in February of next year for 2022. For the turnaround of Petro 2, you're right, it is extended a little bit longer than planned and is expected to be completed in December.
I'll leave it there. Thank you.
Thank you.
At this time, the Q&A session has now ended. Are there any closing remarks?
Thank you again for participating in today's call. We hope you'll join us again for our next conference call to discuss our Q4 and full year 2021 results.
Thank you for participating in today's Westlake Chemical Corporation Q3 earnings conference call. As a reminder, this call will be available for replay beginning two hours after the call has ended and may be accessed until 11:59 P.M. Eastern Time on Tuesday, November 9, 2021. The replay can be accessed by calling the following numbers. Domestic callers should dial 855-859-2056. International callers may access the replay at 404-537-3406. The access code for both numbers is 2495584. Goodbye.