Westlake can attract a crowd because I just went out there to get a copy of their presentation, and they're all sold out. You guys are very popular. Westlake had fundamentally transformed the company with the acquisition of Axiall, which occurred on a day I will never forget because it was my 25th wedding anniversary. I can always tie in.
God bless her.
God bless her. Is this thing on? Are we webcast?
Yes.
All right, forget it. I was going to make a comment about my wife, but I love my wife, and I'm not going to go there. With us here, to explain what's going on with the transformation at Westlake, and thank you to the late arrivals. Thank you for coming, late arrivals. Is Bruce Robertson, the Assistant Treasurer, but our featured presenter is Steve Bender. Steve has been the CFO at Westlake since 2008. He originally started his career at Halliburton, where he worked with our refining analyst, Roger Reed. I mention that because once in a while, Roger will say, "Hey, Frank, I'm looking out my window in Houston, and I see a chemical plant on fire." That is actually how we get some of our cutting-edge research. He is an Aggie from Texas A&M with an MBA from SMU. Mr. Bender, the floor is yours.
Thank you very much. Thank you much, Frank. As always, a delight to be here today. Interesting.
They do.
Let me just start off by just kind of outlining who Westlake is. Westlake is a leading integrated plastics producer. These days concentrated in both the vinyls and the olefins space. I think the four points that you see here in our mission are very important. You'll see us continue to pursue these as we go forth, not only in the recent acquisition that Frank outlined, really in kind of how we think about the business. We pursue growth, profitable growth, though. Our focus really is in creating value as we go along the way. We're focused on businesses that we understand and doing business globally where we know we can make a competitive difference. We always act in a financially disciplined manner.
Our olefins business is approximately, as you can see, about 60% of our business. Is concentrated really in the ethylene and polyethylene space. Increasingly, as we move forward down the cycle, you'll see that our vinyls business will increasingly take a larger share of that space. It's focused in not only chlorine, but caustic soda and all the way downstream to PVC into PVC building products. As Frank outlined, we've just closed our transaction with Axiall back in August of last year. Very excited about this deal. It allows us, for a variety of reasons, it allows us really to be well-positioned in this space. Strongly believe in both the industrial and the strategic logic of this transaction. As you can see, we're the number two player in the PVC space, number three globally. Number three in caustic in North America, number three globally.
Certainly, in our important business, in our flexible food packaging business, in the low-density polyethylene space, we again remain in a key position here in the number 1 position in North America. Importantly, as we move forward down this path, you can see that we're focused on really capturing the strategic value of this transaction. Very focused over the last 8 months of integrating the business and chasing the synergies. We're clearly on path. The integration, as I see it, very well underway. Also pursuing those synergies, as I outlined in our first quarter conference call, well on the way to achieving those synergies with $120 million that we believe we'll achieve in 2017, with only spending $25 million to achieve those synergies.
As you can see here, we expect to achieve in total, $100 million of synergies by the end of 2018, with another $100 million related to cost reductions that actually Axiall started before the acquisition started. Both of those, both the synergies and the cost reduction are well underway. I love to show this chart. This is actually a chart of production capacities, you can see a strong history of value creation and profitable growth. What this chart illustrates really is that we've grown in a variety of ways, both organic growth through acquisition, always focused with the bottom line in focus. Over the last 5 years, we've undertaken a variety of transactions. Most recent, of course, was the Axiall transaction for just under $4 billion. Prior to that, investing nearly $2 billion in assets, it really grew hardly the top line.
We're very bottom line focused. Investing in ethylene, chlor-alkali, PVC, were all designed to grow the bottom line value. At some point in time, we built out the chain, at some point in time, you have to invest for further growth. The acquisition of Axiall in August of 2016 was all designed to really add another engine to the already speeding train that Westlake represents, really to create value, bottom-line value. It also changed the portfolio of Westlake in a very meaningful way. As you can see here, our position, while balanced in ethylene prior to the transaction, has changed our portfolio significantly. Today, Westlake finds ourselves positioned to be short ethylene about 1.8 billion-1.9 billion pounds. We're integrated in our ethylene business across the chain from ethylene into polyethylene and the styrene.
That ethylene position that we're short really is for the vinyls business. Certainly, as we think about the prior chart where you see us grow, either through organic growth or through acquisition, allow us to be focused at growing and the integration in our business, both in ethylene back upstream or downstream into chlorinated products or their PVC products. Our focus really is to capture the value chain across the entire chain. While the margin may move back and forth across the chain, we've found that by integration, we've been able to capture the value over the change in cycle. That remains our long-term focus. Our focus is not to get there as quickly as we can because it's quite easy to write a check. It's much harder to get the value out of that investment.
Our focus is being integrated, but always with the right value proposition in mind. With the onset of a lot of the expansion in the ethylene business, there certainly will be a pull on the NGL streams here in North America. Key to our understanding of the business is being able to be flexible. You find that flexibility also in our business in ethylene. You can see here that about two-thirds of the world's supply of ethylene is really not ethane-based, but certainly, as you can see, Westlake today is ethane in terms of its ethylene capacity. You can also see we have substantial flexibility in our feedstocks. We can use propane, we can use ethane, we can use a variety of feedstocks upstream to really feed our ethylene facilities.
As we move forward over the next few years with the additional startup in ethylene facilities, we think we're very well positioned to be able to flex our business as appropriate to capture the margin in ethylene and push that downstream into our business. I thought I'd first start with a quick overview of our polyethylene business. As you can see in the upper left-hand corner here, the global picture of the polyethylene space. You can see about 50% of the business is in the commodity high-density polyethylene, with the remaining 30% really also in commodity LDPE, linear low-density polyethylene. You can see that 75% of the world's capacity in polyethylene is in that commodity space of either high density or linear low density. Importantly, you can see in the pie chart in the lower left-hand corner that Westlake's portfolio is quite different than that.
You can see that nearly 60% of our production capacity is in low-density polyethylene, and 80% of that is in the autoclave space. Importantly, and I'll talk about this in my coming remarks, is it provides opportunity to pick up incremental margin. You can see on the right-hand side of this chart where the margins have been residing over the last 10 years, and frankly, over the last 5 years or so. You can see that product differentiation is really important in this business. While many think in terms of polyethylene as a universal product, in fact, it is quite different in terms of its properties and margins. I mentioned just a moment ago that 80% of our low-density polyethylene is autoclave.
Autoclave is that high clarity form of polyethylene that you think of in the form of the sandwich bag, the bread bag, or that shrink wrapper in a case of water bottles. It brings higher value to our customers who are downstream in the flexible food packaging business and provides incremental margin to those bars I just showed. Substantially, all the capacity you see coming in the marketplace is tubular capacity. Very, very little capacity being added in the autoclave space. Westlake positions itself to really be on the specialty end therefore of the polyethylene business. When you think of the global capacity slide here of what's coming, you can see that we've got lots of capacity coming in linear, lots of capacity coming in high density, and capacity coming in low density.
Importantly here, what you see is substantially all that low-density capacity is in the commodity grade of tubular, not the autoclave capacity. Again, the driver here is the product differentiation that you're going to see in Westlake's product slate, quite different from the capacity additions coming. While many of the consultants out there will tell you that they expect to see margin compression, and we may see some, I think the differentiation in the product slate will be the telling tale as we march forward over the next two to three years. With the recent addition of our business with Axiall, you can see that we now have quite a global footprint. You can see that we were well-positioned in the North American market with our polyethylene assets and our vinyl assets. Our acquisition in 2014 took us into Europe with a specialty PVC business.
Of course, the Axiall assets brought us opportunities to operate also in India as well as in China. Our acquisition in 2014 took us into Europe. This is the Vinnolit business. Westlake is the global leading player in specialty PVC. When you think about specialty PVC, it's a very important business. The additional opportunities we saw in putting together the businesses of Axiall, which is a commodity player, allowed us to be a large player in this space. As you can see in the North American business, you can see that North America PVC, we're the second largest player in PVC. We're the third largest player in North America for caustic, and on a global basis, we're actually the third largest player in caustic as well as PVC. The market has continued to consolidate.
We acquired the Vinnolit business in 2014, it continues the consolidation around the world in the vinyls business. The chain that you see here is an important chain because as you can see where the value stream is, which are the pie charts on the right-hand side of this chart. The pie charts tell you an important picture of where the money is made in this business. The money is made in ethylene and in caustic soda. You can see be able to monetize the margin in ethylene and in caustic soda. You've got to make that product, and that product is PVC. Given where we've been over the last number of years with the housing crunch, you see that the margins in vinyls have been only 9% or so over the overall margins in the business.
You can certainly see that the margins in ethylene and caustic represent the lion's share, over 90% of the overall margin. As you think about our business from an integration perspective, you can well understand why our interest is to integrate both upstream and downstream. Today, as I mentioned, we're short ethylene by about 1.8 billion pounds-1.9 billion pounds, and certainly we're merchant players in both chlorine, VCM, EDC, PVC, as well as in PVC building products. In the PVC building product space, we're the second largest player in North America, largest in siding, as well as in PVC pipe products. I mentioned Vinnolit several times in my remarks, and I thought what I'd do is pause here and kind of talk about what we think is a very interesting and specialty business in PVC.
When I think of PVC specialties, think in terms of that pliable form of PVC. We're, as I mentioned, the largest player in this space, and that application goes into a wide range of applications. Medical applications, automobile applications, wide range of applications, and certainly has meaningfully higher margins than we saw in the prior chart, which is the commodity end of PVC. While we compete with some of the most formidable players out in the marketplace, you can see that we're nevertheless a very strong player in not only the European market but also in the North American market, where we have between 10%-15% of the market share here in the North American market. When we think of PVC, though, we know that PVC goes into building materials to a large degree. We all can recognize the pullback in global demand in 2008 and 2009.
You can see with this chart on a go-forward basis, you can see the growth in PVC demand as we march forward. Outside of the North American market, PVC demand continued to grow very nicely. As you can see, it's continued to climb on between 3% and 3.5%. That orange line you see going through these bars represents North America PVC exports. We were fortunate as North American producers to see the onset of cheap natural gas and cheap ethane to make cheap PVC. Today, the producer in North America is on the low end of the cost curve, well able to serve those markets from North America. You can see with the added capacity that we have with the addition of Axiall, we have an ability to well serve this market as we march forward.
Let's talk a little bit about our focus on the financial side. I wouldn't do my duties fair as CFO if we didn't talk about this for just a few minutes. As I mentioned, a very focused attention to the bottom line. Discipline around financial operations. Strong balance sheet today. Certainly, I think strong margins in the PVC space. As some of you may know, we formed a master limited partnership in 2014. Are able to use that to continue to grow our footprint as we continue to look for integration in our ethylene business. As I mentioned, we've spent a significant amount of capital over time in this business. We've spent over $6 billion to invest in the business. The green portions of this bar represent those investments in the ethylene chain, and the gold bars represent the vinyls chain.
You can see that our focus really is to integrate the business, always with a focus of driving value down at the bottom line. A conservatively capitalized business. As you can see that the bars here represent Westlake's debt-to-cap ratios. The blue dots represent our peer average, and the vertical lines represent the peaks and the valleys of our peers. Even after the acquisition of Axiall, you can see that we're still very well positioned for future growth, be it organic or through acquisition growth. Certainly, the rating agencies certainly have taken note, our focus of using capital this year will be to maintain the assets and continue to delever the balance sheet to position us for future growth.
As you think about the cycle that we've talked about and you think about our focus of driving value, our focus really is always driving value at the bottom line. Where does that come from? Our focus really is in the margins. You can see the three metrics we talk about here, ROA, ROCE, and EBITDA margin. These, as I see it, are our ongoing report card, and the margins that really drive these values are really, again, from the outline that I mentioned earlier before. A focus in bottom-line growth, the quality of the assets, and we're spending capital today to improve the quality of the assets that we acquired with Axiall. The operating rate advantage that we get from the integrated chain from end to end. That chain integration also allows us to bring more value of that fixed cost across the pounds that we're producing.
The product mix, which is very important, being on the specialty end of both the polyethylene space as well as the PVC space. Of course, the feedstock advantage that we see by being well positioned here with the light feedstocks that we have today. Let me also talk about the master limited partnership. We formed this in 2014, and as many of you may know, the IRS approved us and issued us a private letter ruling and then disqualified us within a year after the issuance of the private letter ruling. Earlier this year, they requalified the master limited partnership as a qualified stream. With that new breath of fresh air that we have. We're back in business using the four levers of growth that you see down in the lower right-hand corner. Organic growth opportunities, debottlenecks, drop-down capacity.
You can see that we only have 13% of the operating company dropped into the partnership. An ability to acquire assets to further recharge the operating company. An ability to grow that $0.10 margin that we have over time. We expect to use this vehicle to continue to grow our business over time, and certainly to be able to finance future opportunities and fund that, whether it be through drop-downs, organic growth, or expansions of the existing assets. What I thought I'd do is summarize this by talking about the strategic decisions that we've made to invest. I've gone back and taken a look from 2013 through this year. You can see that as we've stepped forward, we've made strategic investments at each stage of the chain to improve the product integration, which has improved our EBITDA growth.
Our focus is driving bottom-line value and making sure that they provide stability across the chain as we march forward. With that, I'll pause and see if there are questions, either from Frank or from the audience.
I'd be happy to take questions from the audience. While I'm waiting, Steve, I was wondering if you might comment on some of the findings that we got from Charlie Seaver yesterday. We're very happy to have Charlie in town and opining on the vinyls and chlor-alkali and olefins and polyolefins space. He was most constructive on chlor-alkali and caustic soda in particular. Partly, the industry consolidation that has taken place. Obviously, you guys bought Axiall, which previously had combined Georgia Gulf and PPG, then obviously Olin and Dow as a positive, as well as European reduction due to mercury-cell technology and seeing less exports out of China to hit the West Coast. He constructed this scenario that we are in for an extended multi-year upcycle.
I'm wondering, are you seeing evidence in your business that suggests that is the case, and how do you think the next couple of years play out from a chlor-alkali and caustic soda perspective?
Well, Frank, I do see that kind of scenario playing out. Certainly, as we look back just to last year, we saw steady price increases announced and implemented all throughout last year in caustic. You don't typically see that as you go through the year. What you typically see is some seasonality in caustic in the spring and in the fall. With price increases being announced and implemented throughout the year, it tells you that the market is getting tighter. To your point, we've seen consolidation of the industry. We've also seen the ability to absorb the oversupply of the capacity that was added in North America in 2013 and 2014. As you noted, there's been a lot of regulation, which has really shuttered capacity in Europe by our estimate, between 800,000 to 1 million metric tons.
We've also seen a change in policy stance in Asia, specifically in China, which seems to be forcing really those who are operating outside the bounds from an environmental perspective, as well as from a logistics perspective, to be more impactful to the business. What that's really done is bring more rationale to the entire Northern Hemisphere, be it North America, Europe, or Asia. That's teed up to really, I think, provide more market stability and more market opportunities for the producers.
Nothing ends the party.
I'm sorry?
What ends the party?
Well, as we've seen in any market, what ends the party is an opportunity to see margins that begin to get to reinvestment economics. We've not seen that at all. In fact, in the North American and European markets, we're in very early innings in this stage. If you go back and take a look at some of the margins that we saw going back, say, 10 years ago. If you look at caustic prices 10 years ago, you saw that prices got quite high in 2008 and 2009. They weren't sustained, though. They were artificially inflated because of the pullback in chlorine demand, because of pullback in construction. If you look at where reinvestment economics are today, we're a long way from seeing that kind of economic scenario where you're going to prompt additional construction of chlorine or caustic soda in the marketplace.
The demand for PVC further downstream, which absorbs about 60% of the chlorine molecule here in the markets. I do think that we've got a pretty good runway. We're in very early innings in this stage. I think structurally, what we've seen in Europe because of the EU regulations requiring mercury-based production to be shuttered, I don't expect to see new investment going into Europe. It's made that market structurally short. As a consequence, you've got the low-cost producers in North America exporting into the European market. I do see a pretty good long runway. At some stage, you'll see reinvestment economics come into the marketplace. Without announcements today, we probably have at least 3-4 years from announcements if they were made today before we saw new capacity enter.
As I say, I think we've got longer runway than that because we're not at reinvestment economics yet.
The gentleman from Olin, John Fischer, this morning would echo those sentiments. Upon seeing no questions from the audience, I'm going to ask-
Yeah.
Sure acquired enough ethylene capacity that would've, it looks like, completely the short position that you guys currently have. I'm just wondering, is it too soon after Axiall for you guys to be looking at acquisitions that big to shore it up? Or are you just content having a short position for now and in no hurry to close that gap?
Well, as I said, it is quite easy to write a check. It's a much different issue to get a return on that investment. As you would imagine, in areas where we occupy, be it ethylene or other markets, we certainly look at assets all the time. While I think Williams was quite pleased with that transaction, I have to sit down and ask ourselves, how would that asset have fit both from a molecular point of view, would I've gotten the molecules, or would I've gotten the kind of return that I expected? Both from a chemical balance as well as a market return perspective, how would I thought about that fitting? Obviously, NOVA believed that that was a fair value that they're paying for the asset. From my perspective, I certainly don't worry about long-term integration in ethylene.
From my perspective, I believe that really there are a variety of ways to bring ethylene into our equation, whether it be acquire assets, build assets, and we are today jointly building a cracker with Lotte. We have a 10% interest in that cracker in Lake Charles and an option to expand that position to 50% if we choose. I can elect that option up to three years post completion of that plant. No reason to rush necessarily, because the cost of that option doesn't change. I can wait until I see what the actual cost of that option is going to be before I elect that option or not.
I can certainly buy merchant ethylene in the marketplace over time, or look for other opportunities to margin share with producers who may be facing some margin compression in the marketplace, and margin share which requires no capital being deployed. My focus still remains making sure that we can get the best value over the cycle rather than just simply rushing to integrate. Rushing to integrate doesn't give me the assurances or at least the desire to have that long-term value from a return perspective.
Okay.
Certainly we remain focused, but I'm interested in making sure that over the cycle I have the return, not just at some stage in the cycle.
Before we get to that question in the audience, a quick comment and a question. A comment to you is, given the fact that you have the JV with Lotte, are you getting a discount on a hotel here today with that relationship?
Yeah. I'm happy to say that I found a more cost-effective place to stay.
I am not surprised. I am not surprised whatsoever. It is Westlake. Some of you may recall a lunch that I had with Axiall prior to Westlake making its offer, and I made the comment at the lunch that the only reason I do not downgrade Axiall, because its results have been very disappointing, is I knew the day after I made that downgrade, Westlake would announce the bid. It was obvious that Westlake was going to buy Axiall. It makes all the sense in the world, and it's going to work out extremely well from my perspective. The other deal that makes all the sense in the world is for Westlake to buy the Eastman crackers, and it's just a matter of price, but we'll probably see that transaction occur at some point. There's a question over here.
Yeah. I just had a quick question on, you talked about the autoclave capacity. Can you just talk about why autoclave capacity, given it's at a premium, is not going to be part of that expansion? Is there just a limited market despite the premium, or what are the nuances there?
That's a great question. There have been three recent additions in autoclave capacity, though quite small. While it does have a very premium margin associated with it actually also has a high capital cost to invest. The autoclave capacity is a high pressure process as well, 30,000 to 40,000 PSI, typically in a reactor. As a consequence, these walls in these reactors can be 6 to 8 inches thick, so a lot of heavy investment in that. When you also think about the market share that autoclave has, it's roughly about 10% of the total global polyethylene market share. The low density polyethylene market share is about mid-20s. When you think about where the global growth is, it's largely in the commodity end. Linear, high density, and tubular applications.
The autoclave really speaks to really flexible food packaging, and where you see a lot of that really is in the developed world. The developing world will get there. I have no doubt there'll be future additions of autoclave capacity. It's just a matter of where do we reach a point in time where the investment economics are going to be driving that incremental investment.
Steve, two questions. First, how much excess VCM capacity do you have today? What would it cost and how long would it take to bring that capacity through PVC? The second question is, can you talk about the timing of your caustic contracts? Why are they so much faster than Olin's, and approximately how long does it take for, say, if the contract goes through at the end of the month, how long does it take to flow through?
On the VCM question, certainly we're actually the largest VCM producer globally. I do have some latent capacity. If I take that latent capacity downstream, then I have to think about what the reinvestment economics are to expand or build, or debottleneck PVC capacity. As you know, today we're in the mode of really investing to improve reliability and operability of the Axiall assets. Certainly those would be the kind of topics that we'll look and understand, are those economics. You could see from some of the charts that we're looking at likely export economics if you build PVC capacity today. Because today we're exporting as an industry, in the mid to high 20s, even the low 30s, depending on when you choose to look at the charts. You can see that any incremental PVC has to be justified on export economics.
Those are the kinds of things that we'll evaluate and assess as we go forward. When you think about the question about our contracts for caustics, I think you heard Albert and myself say over time that the minority of our contracts are tied to formulas with longer delays. The majority of our contracts have either near term or formula mechanics that allow us to recognize pricing sooner. Part of that is a function of buying a public-facing company. Part of it's a mix of putting together Axiall's businesses and Westlake's legacy businesses.
If you think about Westlake's legacy businesses, we had operations not only on the Gulf Coast, but also in the middle part of the country, whereas Axiall had assets on both coasts up in the Northwest, up in Washington State, and up in Canada, as well as in West Virginia, as well as along the Gulf Coast. Part of that is a legacy of the customer base that we have and our focus at really making sure that we have more realized value faster. I can't speak to the other guy's contracts and why they are where they are.
Just to piggyback on Jim's question right here.
Just hold on a second, please, for the microphone. Thank you.
Yeah, just to piggyback on that gentleman's question about the autoclave. If you're building autoclave capacity, can you not then switch to the high density or linear low density? I mean, is there build a whole new plant, or is it just kind of shutting down and then switching? I'm just curious, as we go through the cycle and the margins start to improve, does the reinvestment, is it a lower bar once you kind of have the polyethylene capacity then be able to switch to where the margins are higher?
Yeah. The manufacturing processes, temperatures, pressures are all quite different. Once you design and build a high density plant or a linear low plant or a low density plant, to a large degree, you're stuck with that technology. There are some swing plants where you can make high density and linear production capacity, but there's just a small overlap of grades of those two products. If you're really talking about some of the autoclave capacity versus tubular, quite different processes manufacturing wise. Once you've designed your linear plant, you can't make an autoclave product out of those plants. There are attempts by many of the producers to make lookalike products as they try to create product slates that mimic the autoclave technology, but none have really had that degree of success.
Terrific. Thank you so much.
Thank you very much for your interest.