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Westlake Corp
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Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Westlake Chemical Corporation Third Quarter 2020 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After speakers' -- after the speakers' remarks, you'll be invited to participate in a question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded today, November 3rd, 2020.
I would now like to turn the call over to today's host, Jeff Holy, Westlake's Vice President and Treasurer. Sir, you may begin.
Thank you, Justin. Good morning everyone and welcome to the Westlake Chemical Corporation third quarter 2020 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 followed by 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 then open the call up to questions.
During this call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to our 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 operating rates; 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 third quarter 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 assist in the discussion of our results.
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 1896958.
Please note that information reported on this call speaks only as of today, November 3rd, 2020 and therefore, you are advised that time-sensitive information may no longer be accurate at 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. Good morning ladies and gentlemen and thank you for joining us to discuss our third quarter 2020 results. In this morning's press release, we reported net income of $57 million for the third quarter of 2020, or $0.45 per diluted share. Before Steve go through the third quarter results, let me provide some insights into our results for the quarter.
Throughout the third quarter, we saw solid demand for our products, with global economic conditions improving as many countries relaxed the state-at-home mandates and business restrictions that have been put in place early in the second quarter due to the COVID-19 pandemic.
Westlake captured this demand growth in the first two months of the quarter, with sales volumes in both Olefins and Vinyls segments, which were either comparable with or higher than the prior year period.
As a result of this robust demand that accompany the recovery in global economic activity, starting June, we saw an increase in price environment for many of our products, especially for polyethylene and PVC.
However, in late August, Hurricane Laura made landfall in Southwest Louisiana, as one of the most powerful storms to reach the U.S. Gulf Coast in the last 40 years. While our plants weathered the storm well, there was extensive damage to the electrical and utility infrastructure in the Lake Charles area. Once power and utilities were restored, we were able to begin the process of restarting operations.
The extensive repairs to power and utility infrastructure caused many of our facilities in Lake Charles, which is approximately one-third of our global chemical production capacity, to remain idle throughout September, resulting in lost production and sales volumes in the third quarter.
This catastrophic storm also severely impacted many of our employees. I would like to say a special thank you to our dedicated employees who worked tirelessly to restart our facilities, while also dealing with the hurricane impact to their own homes.
In early October, as we were completing the start-up process following Hurricane Laura, Hurricane Delta made landfall in the same area, further delaying us from restarting our plants. I'm happy to report that our facilities have resumed operations.
I would now like to turn our call over to Steve to provide more detail on our financial and operating results for the third quarter.
Thank you, Albert and good morning everyone. I will start with discussing our consolidated financial results, followed by a detailed review of our Vinyls and Olefins segment results. Let me begin with our consolidated results.
Westlake saw a solid rebound from the second quarter lows resulting from the COVID pandemic with strong demand and increasing prices for most of our major products.
As Albert just outlined, the effects of Hurricane Laura to the electrical and utility infrastructure in Southwest Louisiana as well as logistic constraints in the area hindered our ability to quickly resume operations, which led to lower production and sales volumes as well as increased maintenance expense and other costs associated with lost production.
We estimate the impact to our third quarter pretax earnings from the lost sales and increased costs resulting from the storm to be approximately $100 million, or $0.66 per share. Of this $100 million estimate, approximately 60% was related to our Vinyls segment with the remainder affecting our Olefins segment.
In September, we announced the closure of a non-integrated stand-alone PVC facility in Schkopau, Germany in connection with this restructuring of our European operations. We incurred charges of $34 million, or $0.19 per share in our Vinyls segment related to the impairment of certain assets as well as other costs associated with the closure of this facility.
These two discrete events, Hurricane Laura and the closure of the Schkopau facility, totaling $134 million, offset the results we otherwise would have reported from these strong markets for our products that Albert mentioned in his opening comments.
For the third quarter of 2020, we reported net income of $55 million, or $0.45 per share compared to net income of $158 million for the third quarter of 2019. The $101 million decrease in net income is a result of the impacts of Hurricane Laura and the restructuring charges just discussed, as well as higher ethane and ethylene feedstock cost in both our Vinyls and Olefins segment. Partially offsetting these effects were higher earnings in our vinyl building products businesses and lower fuel costs.
Third quarter 2020 net income increased by $42 million from second quarter 2020 net income of $15 million. The increase in net income was largely attributable to higher prices for major products, especially with the strength in PVC and polyethylene prices, as well as higher sales volumes for caustic soda and increased earnings in our downstream Vinyl Products businesses. Offsetting these increases were impacts from Hurricane Laura and the higher restructuring costs associated with our European Vinyls business.
Our utilization of the FIFO method of accounting provides a benefit in periods of rising production cost compared to what earnings would have been reported on the LIFO method.
As discussed, the impact of Hurricane Laura in the Gulf Coast led to a large amount of industry ethylene capacity be offline during September. As a result, ethylene at the end of the third quarter more than doubled in price when compared to the end of the second quarter.
The effect of this increase in ethylene prices led to a favorable pretax impact of approximately $46 million, or $0.30 per share compared to what earnings would have been reported on the LIFO method. This is only an estimate and hasn't been audited.
Now, let's move on to review the performance of our two segments, starting with the Vinyls segment. Throughout the third quarter, we saw strong global demand for PVC with industry consultants reporting domestic contract pricing increasing over $0.10 per pound and export pricing in the U.S. increasing over $0.17 per pound from the end of the second quarter.
We also saw strong demand in our downstream Vinyl Products businesses from especially robust demand related to home construction, repair and remodeling, improving demand related to the automotive and appliance industries.
However, the effects from Hurricane Laura impacted our production of PVC late in the quarter, which limited our ability to fully capitalize on this increasing price environment.
For the third quarter of 2020, Vinyls' operating income of $42 million decreased $111 million from the prior-year period, primarily as a result of impacts resulting from Hurricane Laura and the restructuring cost in our European operations, which were partially offset by increased earnings in our downstream Vinyl Products businesses and lower fuel cost.
Now, turning to our Olefins segment. Our Olefins business continued to see strong global demand for polyethylene, which when combined with low industry inventory levels led to reported domestic price increases of $0.15 per pound from the end of the second quarter, as well as strength in export prices.
As the effects of Hurricane Laura limited our quarterly production and sales volumes for both ethylene and polyethylene, our third quarter 2020 operating income of $51 million decreased $41 million from the third quarter of 2019 due to the hurricane.
Next, let's turn our attention to the balance sheet and statement of cash flows. At the end of the third quarter 2020, we had cash and cash equivalents of $1.2 billion and total debt of $3.7 billion.
In June of this year, we issued $300 million of 10-year unsecured notes at a rate of 3.375% and used a portion of these proceeds to refinance $254 million of 6.5% GO Zone and Ike Zone revenue bonds. $100 million of the refinancing took place in August with the remaining $154 million being completed yesterday.
With this refinancing, we now have a debt maturity profile with a weighted average life for 14 years with an average interest rate of 3.5%. This solid liquidity position, coupled with a long-dated debt maturity schedule, allows us to operate confidently in today's environment.
Looking forward to the rest of 2020, as Albert mentioned in his opening comments, effects of Hurricane Laura stretched through September into early October. As we were beginning to resume operations, we had to idle our facilities in Lake Charles a second time due to the approach of Hurricane Delta in the same area.
While Hurricane Delta caused minimal damage, it delayed our recovery a few weeks. While we have now resumed operations, we estimate the effect of the two storms to impact the fourth quarter results by approximately $120 million, given the current price environment due to the lost production and sales as well as higher maintenance cost we incurred.
We expect 2020 full year CapEx spending to be approximately $550 million. We expect our effective tax rate for full year 2020, excluding the effects of the CARES Act, to be approximately 15%.
With that, I'll now turn the call back over to Albert to make some closing comments. Albert?
Thank you, Steve. 2020 has been a challenging time for not only Westlake, but for all of us. The outbreak of COVID-19 late in the first quarter, which was quickly followed by the associated stay-at-home orders and business restrictions, significantly curtailed global economic activity.
As we progressed from the spring lockdowns, we have seen a broad-based economic recovery that drove a strong increase in demand for many of our products, especially those more directly tied to the end consumer. While this economic recovery may continue to be uneven among the industries we serve, we remain optimistic in our outlook.
The pricing outlook remains favorable, with industry consultants noting that demand continues to remain strong, while inventories for PVC and polyethylene remain low, supporting the momentum we are seeing as we enter the fourth quarter.
In our Vinyls segment, supply constraints for PVC continue. Our strong demand from our customers, especially in the construction, auto, and appliance industries, has created tight market conditions. As industrial production has slowly begin to recover, demand for caustic soda in the third quarter improved from the lows seen in the second quarter.
In our Olefins business, we expect the firm demand for polyethylene that we have seen throughout the year to continue. This demand is driven by high end-use demand in the consumer products packaging, healthcare, hygiene, and foodservice markets. Similar with PVC, supply constraints have created tight supply demand balances with low industry inventory levels.
We will continue to remain focused on operating safely, delivering superior operational performance and reducing our costs. While we are monitoring the increasing cases of COVID-19 around the world, we are cautiously optimistic in the improving business dynamics for the balance of 2020 and into 2021, as industry indications look constructive.
We are confident that Westlake is well-positioned to serve the needs of our customers, while maintaining financial discipline, which combined with the strong fundamentals of our business, will enable us to deliver long-term value to our shareholders.
Thank you very much for listening to our third quarter 2020 earnings call. I will now turn the call back over to Jeff.
Thank you, Albert. Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available two hours after the call has ended. We will provide that number again at the end of the call. Justin, we will now take questions.
Thank you, sir. [Operator Instructions]
And our first question comes from Bob Koort from Goldman Sachs. Your line is now open.
Thank you. I had two questions, if I could, Albert. First, I think you mentioned maybe that supply chain seems a little bit lean. Could you give us some quantification in whether you think that could maybe provide some resistance to typical slowing in the fourth quarter?
And then secondly, I was just curious what your latest thoughts are on regionalized differences in ethane costs as we head into the first quarter? Thank you.
Certainly, because of the planned outages we've seen in the polyethylene and PVC industries, people are now coming back in operation and building up inventory back again. So, we believe that the inventories among producers are quite low. I think inventories among the consumers are low to average.
And until the producers build up adequate inventories, we will not see oversupply of the polyethylene or PVC even into the fourth quarter. And demand for polyethylene and PVC globally remains strong. So, the demand will continue we believe as global economies recover and demand will remain strong into 2021.
As far as ethane is concerned, there is talk suddenly that with less oil production as associated gas production, less ethane available, and also with new ethane terminals coming back operations, that export demand will be larger. But time will tell, because the oil and gas balance may or may not have ethane export demand.
As we've seen in April, May of this year, when oil price dropped largely, ethane export has dried up. If you look at the future prices for ethane, they are still hovering in the low-20s to maybe low-30s for next year. So, we are confident that there will be ethane available to supply the U.S. domestic demand for years to come.
Very helpful. Thank you.
You're welcome.
Thank you. And our next question comes from Frank Mitsch from Fermium Research. Your line is now open.
Hey. Good morning, gentlemen. I wanted to get--
Good morning.
Yes, good morning. I wanted to get a little more clarification or some more color. I believe, Steve, you mentioned that the fourth quarter would be negatively impacted by $120 million due to storms. Could you break that down a little bit further, I mean, in terms of where and how you're seeing that?
So, Frank, yes, that's right. $120 million is our guidance for the impact in the fourth quarter related to the storms. And of course -- excuse me, of course, that relates really to both combination of lost margin and some repair expenses.
Obviously, in a higher price environment that we've seen continued from September into October, obviously, the impact of losing some production and sales impact that to a greater degree than it did in the third quarter, which as I said, the guidance was $100 million in the third quarter.
All right. So basically, what you're saying is that the fact that margins have picked up. Prices, obviously, are ending -- ended the third quarter higher than they started at least on polyethylene, certainly in PVC. That's why you're going to see that greater impact in 4Q than you did in 3Q, correct?
That's right. And you do have some cost that flow through and cost of sales in the third quarter flowing into fourth quarter. So, that's also part of the contribution of the impact in Q4.
Okay. All right, very helpful. And then, you obviously took the step to shut down one of the facilities in Germany on PVC. You took the $34 million charge. How do we think about, all else being equal, the fact that you're running those other assets there because you're not losing any volume, right.
You're going to run your other assets there at higher levels. How should we think about the financial impact after next year and beyond, all else being equal?
Well, you're right. As you may recall, we did expand facilities in Germany. And so, we can accommodate this reduction of production in Schkopau. And so, there is no change in our ability to service the customer, so no change in volume capability as a result of this shut down of this plant in Schkopau.
So, as we think going forward, we think we're very well-positioned, now running more integrated assets at higher rates, which certainly is a very constructive way to run the businesses.
So, being able to really pull that unintegrated facility out of the portfolio will be additive to the overall business. We expect that given the strength that we've seen so far, we hope that we see that continue into 2021.
Got you. Thanks so much.
You're welcome.
Thank you. And our next question comes from Mike Leithead from Barclays. Your line is now open.
Great. Thanks, and good morning, guys.
Good morning, Mike.
Good morning.
I guess, first, can you give us a bit more color on the strength of the building products businesses in the quarter and how you think how sustainable this demand is? And relatedly, do you intend at some point to give the financial community more details around this business, given the level of growth that's seen in differentiation for maybe the more commodity chlor-alkali assets?
We'll take that into consideration as we think about this business. And you're right, we did see and I spoke to the strength that we've seen in the business and it was across the board in our compounds business, in our pipe business, and our exterior siding businesses. So, all of them were very nice contributors to the overall EBITDA of the quarter.
And as I say, we don't give specific breakdown guidance, but all three were nice, very solid contributors and we continue to see that repair, remodel and new construction markets continue. So, we're very excited about the robust strength we've seen in all three of those pieces of the business.
Great, that's helpful. And then, question on natural gas. Obviously, prices moved higher in October. And I assume because of your FIFO accounting, you'll still be rolling through some of that lower cost September gas in your 4Q results. So, could you maybe just give us an early framework how to think about that 4Q FIFO benefit or maybe just an overall sensitivity how we should think about natural gas prices?
Well, you have seen, it's not only the FIFO, it's not only natural gas. Of course, it's feedstock. So, ethane and ethylene and you've seen on the increase and pricing of ethylene from 2Q to 3Q. And so certainly, it's a combination of gas, ethane and ethylene coming into the FIFO calculation and carrying through. Those higher cost will flow through into fourth quarter.
And so, certainly, will be some headwinds as we see it. It was a headwind as I noted in my comments in the third quarter and pretty significant headwind both in price and in volume for those feedstocks, but they will continue to be a headwind, if prices continue and it's a function of really ending Q3 and then Q4 price at the end of the year will really be that way to benchmark what that impact is.
Great. Thank you.
Welcome.
Thank you. And our next question comes from Alex Yefremov from KeyBanc. Your line is now open.
Thank you. Good morning, everyone.
Good morning.
Good morning.
Could you tell us where pricing is for building products relative to PVC in the third quarter or maybe year-to-date? Is there an opportunity for building products to enhance margins further in Q4, or maybe next year by raising prices?
Yes. Building products have been increasing prices to reflect the PVC raw material price increases. And with a strong demand even into the winter season, we will see that the prices will be maintained at this level. And depending on -- again the economic conditions in the spring time, typically spring time is a strong building season, but as people are building inventory now in the winter season, depending on the economic condition, we'll see when -- what price levels will be at that time.
Thank you, Albert. And you've recently announced a price increase in chlorine, fairly significant one. At the same time, IHS Markit index increased over the last few months, but much more modestly. Can you maybe tell us how your merchant chlorine pricing works, to what extent it's tied to IHS versus freely negotiated and also maybe explain this seemingly large difference between the nominations for merchant chlorine that are out there and what IHS says the pricing action is?
Certainly, we have to reflect market conditions and we sell our merchant chlorine. But as we said, we are vertically integrated to our PVC business, and the PVC demand is very tight. So, we want to make sure that our PVC production impacted because of Hurricane Laura and Delta, a large part of our PVC -- our vinyls feedstock in Lake Charles plants have impacted.
So, we're now building that inventory for vinyls and PVC and EDC. So, -- but any contractual sales on the -- on chlorine-related products, we had to reflect market prices.
And thank you. And our next question comes from Hassan Ahmed from Alembic Global. Your line is now open.
Good morning, Albert and Steve.
Good morning.
Good morning.
Just wanted to revisit the chlorine price hike side of things. Obviously, for the last couple of years, chlorine pricing has been fairly steady and cognizant of the fact that we've seen some outages over here. We've seen some outages out in Brazil as well, but it seems that capacity is slowly coming back online.
So, the question I have is, how sustainable do you feel this recent sort of chlorine price hike is, be it as one sort of goes into Q4 and then 2021 as well with obviously, the backdrop of what seems to be a pretty tight sort of PVC market as well as a relatively sort of healthy housing market?
Yes, that's a very good question. As I said earlier, we've integrated PVC and PVC is the best margin for all of the chlorine divergence [Phonetic] markets. And merchant chlorine sales probably is among the lowest margin for the chlor-alkali business. So, we are trying to maximize our chlorine assets and hence that we have announced a pretty large price increase for chlorine.
As I said it earlier that we had to reflect the market conditions and there are other producers. They have different needs for their chlorine pricing. And so, we have contractual areas that we had to reflect market prices.
Understood, understood. And now sort of moving on from certain product areas. Just -- as I take a look at your balance sheet, it seems pretty healthy. It seems that the worst of the demand side of things and pricing side of things is behind us. Q2 seems to look like a trough and it seems that market conditions have improved quite nicely thereafter. Now -- and as that's happened, it seems -- M&A seems to have picked up again.
And on the chlorovinyl side, there is an asset that's available. So, how are you guys thinking about the near-term side of things as it pertains to M&A, particularly on the chlorovinyl side of things?
So, Hassan, we always are interested in looking at opportunities in our space. And so I would say that as we assess opportunities, we'll look and see do they fit, are there compelling synergies and are the value propositions compelling there. When we look at our balance sheet, we think that we have a very strong balance sheet, but of course we never want to overstress the balance sheet.
So, we'll also take those issues into consideration. You saw that we made the acquisition back in 2016, we quickly pared down the debt. So, our focus is maintaining strength financially as well as being able to build on the business and grow the business.
So, we'll assess all the opportunities that are in our space, and if they are compelling, have good synergies and a good fit, then they become increasingly more interested. And then it's a function of, can we run those assets effectively and integrate them into our business and provide the synergy that we think we can. So, it's really about value creation at the end of the day.
Very helpful. Thank you so much.
You're welcome.
You're welcome.
And thank you. And our next question comes from Steve Byrne from Bank of America. Your line is now open.
Hi, it's Matt DeYoe on for Steve. Volumes were down 18% in Olefins and only about 2% in Vinyls, particularly despite the maybe 60% headwind from the storm also being on the Vinyl side. So, why was the Vinyls business seemingly less scathed on the volume side? Is it just a function of building products? Can you kind of fill in the blanks there?
Yes. So, certainly, as -- certainly the Lake Charles facilities certainly have both Vinyl and Olefins assets of course. But to your point, we had a strong contribution by our downstream building products businesses. Those business continue to work very well. You may recall that we also declared a force majeure in many of those products to make sure that our customers were fairly dealt with, and that affected our downstream products as well.
But certainly, as we saw the strength in our downstream products business, and you've seen that both in housing starts and housing permits, and I spoke earlier about the strength we've seen both in compounds, pipe and fittings, and exteriors really spoke to the strength we've seen in our Vinyls businesses.
Matthew, it's -- I want to add also that end of last year, 2019, we added more capacity in our PVC business. So, we had more production and we had more inventory. So, this is sales, not production. So, we sold from inventories level and hence we spoke earlier about rebuilding inventory back as well.
Okay. And then $120 million in outages in 4Q. Is that kind of be the same 60/40 mix across segments that we saw in 3Q or does it change for some reason?
I would expect that same mix to be appropriate -- to be approximately correct.
Thank you.
And thank you. And our next question comes from Kevin McCarthy from Vertical Research. Your line is now open.
Good morning. I was wondering if you could comment on supply/demand dynamics in caustic soda. You mentioned that you saw some sequential improvement in the third quarter. Where do you think demand is currently relative to normal?
And then related to that, on the supply side, we saw one of your major U.S. competitors declare force majeure at two different locations over the past three or four business days. What is your read on the supply side of caustic and how tight or not that's become recently?
Certainly. As we speak, even though the global economy has recovered from the lows in the second quarter, we have by no means returned back to pre-COVID-19 levels. Manufacturing economies are still recovering, and GDPs, many countries are still negative for this year. So, until GDP recovers, caustic demand will not return to its health before COVID-19.
And same time, as we mentioned, a lot of construction in especially in U.S. building, remodeling, repairs are going very strong. People are staying home and they have lots of disposable income they're not spending, traveling or entertaining locations. So they want to fix their homes and also, they want to move to single-family homes in the suburbs.
So, demand for PVC is very strong, demand for chlorine very strong. As you know, every pound of chlorine produced, it produce 1.1 pounds of caustic. So, the supply, as the plants coming back on operations and force majeures on production problems, you will see more supply of caustic. So, that's the imbalance between PVC and caustic.
And hopefully next year, when the pandemic subsides or behind us, the global economy will return in a stronger position and caustic demand will return to its healthy position as in the past.
That's helpful. And then secondly, Albert, I want to ask about your recent experience in polyethylene pricing. A couple of the consultants have marked the price in October as flat versus September. Has that been your experience? And how would you compare and contrast the outlook for low density versus linear low at this point?
Certainly. Low-density demand has been very strong. I think year-to-date, reported that low-density demand has increased over 4% compared with year-to-date of 2019. And usually, low-density demand growing at most 1% to 2% a year and this is domestic demand. So, it tells how strong the domestic demand is for LDPE.
But you're right, I think the industry consultants and the market reflect that we had about $0.20 a pound price increase since last -- since June, and October now, price has held flat by the market.
Thank you very much.
You're welcome.
Thank you. And our next question comes from David Begleiter from Deutsche Bank. Your line is now open.
Thank you. Good morning. Albert, on the same--
Good morning.
Good morning. Same questioning. How much price erosion do you expect to see over the next few months in both polyethylene and PVC given you've gotten $0.20-odd of price increases since -- since about May in both products?
Yeah. Actually, I misspoke. LDPE was $0.19, not $0.20. If you look at HIS -- IHS looking at prices to reduce November and December and as well as January but then in March, it increases again. But the outlook for IHS that next year, 2021 average price is higher than this year, 2020's, average price. So they are seeing improvements in demand as well as the prices for polyethylene.
For PVC, that's the $0.20 price increase since June and all the way to October. And then IHS looking at a $0.04 decrease in December and starting increasing prices in February again.
So, time will tell, but we believe that with a low interest rate and we believe there will be continued monetary and fiscal stimulus to the economy for the employed and with the -- over time, with all the work being done on vaccine development and therapeutic drug development, we will get a handle on COVID-19 and the economy will recover.
Hence, we believe -- I think general people consensus believing that next year GDP will bounce back from the low of this year.
Very good. And just lastly, what's your outlook on styrene as there is some capacity coming on stream in China over the next period of time there?
Right. Yes, styrene is an interesting business. As you know, we have a small styrene business. It's doing -- have been doing quite well. The newest and smallest styrene plant is in the U.S., started in the 1990s. So, you can tell, there is no new styrene capacity added in U.S.
And because, as you mentioned, the capacity in China, I think it's a -- styrene business is really a combination of ethylene price and benzene. Benzene goes up and down with oil, and U.S. has enjoyed lower cost ethylene price, so we can export ethylene, not directly to China but to the rest of the world and U.S. has been doing quite well. I think U.S. continue to have this cost advantage. But as you said, with new capacity in China, the export markets will be reduced.
Thank you.
You're welcome.
Thank you. And our next question comes from Arun Viswanathan from RBC Capital Markets. Your line is now open.
Great. Thanks. Good morning.
Good morning.
Good morning.
I guess I just wanted to go back to caustic soda and the outlook there. It sounded like your sense -- making the point that construction looks pretty strong and should look to remain that way for a little while and potentially outpace industrial production.
I guess with that backdrop, maybe you can just give us your thoughts on caustic soda and the price evolution over the next little while. We will go into a period of maintenance here and maybe lower operating rates.
So, do you expect caustic soda to kind of start moving back up over the next couple of months, especially just given the recent outages and we've gone through a period of price declines here? So, do you think that will -- will reverse in the next couple of periods?
Well, industry consultant IHS is projecting caustic soda to -- because of the strength of PVC and chlorine and also going to the winter months, caustic soda will continue to slowly weaken and then recover in prices in April next year. This is their projection.
That's helpful. And then I guess I just also wanted to get your thoughts on the Olefins side. I mean, you've really grown your Vinyls business over the last several years through acquisition and an otherwise. Do you have any thoughts on potentially growing the Olefins side of the business as well? There's been a couple of recent transactions there. There may be some others that become available. Is that an area of potentially inorganic growth for Westlake?
Yes. And we've spent a fair amount of capital last year in investing in Olefins. We spent significant capital investing in the LACC joint venture to bring more ethylene into the equation. So again, it's always about really where the opportunities reside. And if we can see -- and you've seen that our portfolio has performed well with the large contribution from the low-density -- especially the specialty end of that low-density portfolio.
So, we certainly are interested in investing where we think we can make great values, and we think the investment in the cracker that we made with our partner last year is one of those, very low-cost opportunity, bringing up additional ethylene in the portfolio.
And so we think that investment in Olefins was a very smart one and a nice timely one from an investment basis perspective. And certainly as we think about other investments in the Olefins business, it really is about opportunity to add and grow value. So, our interest there is to do so, and if there opportunities to do so, as you've seen last year, in 2019, when we made that investment, we'll continue to do so.
Great. Thanks Steve. And then lastly, if I may, could you just give us a rough estimate of maybe how much of your portfolio is geared toward infrastructure and if there is a sizable benefit if we see an infrastructure bill passed in the next year or so?
It depend on what you mean by infrastructure. We are not in a concrete or steel business. But in water pipe, a lot of the U.S. water supply are outdated and corroding as you're seeing in many municipalities.
So water sewer, we're the second largest PVC pipe manufacturer in the U.S., and we have special technology, can replace the underground pipes without picking up on the top because through tunneling methodologies. So, if U.S. municipalities will replace outdated and corroding water and sewer pipes will be a big supply to that market.
And second part is the -- is the high-voltage transmission systems. You can see the -- the fires caused by shortening of high-voltage tension wires -- wires causing wildfires. If those will be coated with PVC to be insulated there should be another infrastructure investments that we could benefit from those initiatives.
Thanks.
You're welcome.
Thank you. And our next question comes from P.J. Juvekar from Citi. Your line is now open.
Hey, good morning, Albert and Steve. It's Eric Petrie on for P.J.
Good morning, P.J. [ph]
Good morning, Eric.
On your comment on lean inventory levels. Typically in cycles you see converters building inventory ahead of price increases. So, what's the difference this go around. Is it just the producer not being able to produce that level of demand or could you help size industry outages for both PE and PVC this year and do you expect more normal mid-single-digit outages in 2021?
Well, nobody wants to have unplanned outages other than planned turnarounds. And usually, they are associated more with upstream by ethylene and VCM [Phonetic] and those activities. And those outages tend to be longer than -- polyethylene or PVC outages tend to be much shorter in time.
And with all the price increases, I'm sure the converters are very careful how much inventory they will keep which also sell into the tightness when they are un-foreseeing seeing outages, it will make producers' inventory tight and converters' inventory even tighter.
Okay. And for my follow-up question, granted, both PE and PVC chains have been impacted by the pandemic and hurricanes. Are you more bullish on sequential earnings growth in PE or PVC?
Well, I think we've seen incredibly strong rebound in the construction repair and remodeling side of our business. That's certainly -- it's been many, many years since getting back to their housing starts and permits that we've seen in that space.
And certainly our investments that we have both in resin as well as in our downstream products really lend themselves to being able to leverage off that strong robust demand growth. I think also when you think -- and so that's obviously, as you know, the largest component of our business.
When you also think about what we've -- the packaging demand that we've seen in over this pandemic, over the last many months, it's been very, very strong demand, both in hygiene and consumer product packaging as well.
So, the performance that we've seen, especially in our low-density polyethylene packaging applications have been I think very -- highlight really the importance of that business and the specialty nature of that business.
So, I'm actually -- I look forward to really being able to continue to serve the construction and repair and remodeling business. And as long as the packaging industry continue to see the strength, I think the Olefins business will continue to participate well in that demand growth.
Thanks Steve.
Thank you. And our next question comes from Mike Sison from Wells Fargo. Your line is now open.
Hey, guys. How you doing?
Hey, Mike. How are you doing?
The $100 million in the third quarter and the $120 million in the fourth quarter, do those negative impacts come back in total in 2021 assuming you don't have any hurricane issues next year?
Well, certainly that's lost sales and production and some repair costs. And so certainly we hope that we are spared hurricanes as we think about 2021. So, certainly with the demand strength that we've earlier spoken to both in the Olefins and Vinyls space, the ability to get traction and see that should be part of the outlook that we certainly have.
Got it. And then, if I add back the $100 million to EBITDA in the third quarter, your EBITDA margin would have been 20% roughly. So, is that sort of the run rate type of profitability you're seeing now? And does that technically go up, excluding the $120 million in the fourth quarter given you've got more pricing and maybe volumes return?
Well, of course, certainly the strength that we're seeing in both segments of the business continue to be firm. Of course, there is some seasonality in various segments of the business as well. But as we look forward, we've seen, and you've heard us to speak to this today, a pretty good backdrop in demand, both in the Vinyls as well as the Olefins business. It's hard to speak to any particular guidance we give.
We don't, as you know, give guidance. But I would say that the backdrop that's seen in strength in demand is supportive of what you've seen in pricing. And certainly as we look forward, that strength in demand continues to be very, very good as we look forward into the rest of this year and into 2021.
Got it. Thank you.
Welcome, Mike.
And thank you. And our next question comes from John Roberts from UBS. Your line is now open.
Thank you. Is there a fourth quarter force majeure effect at the Partnership as well or is all of the impact Westlake repair costs and downstream operations?
John, the benefit of the ethylene sales agreement that we have and the offtake arrangement for 95% of the production really provide strength to the Partnership. And so we've been very fortunate to really see the strength and the robustness of that ethylene sales agreement.
I'm not going to give projections again for the Partnership. But I think it speaks volumes and very clearly about how well structured that ethylene sales agreement is for the Partnership and the degree of protection that that cash flow and earnings stream has in the operating company and therefore the Partnership.
Thank you. And our next question comes from Matthew Blair from Tudor, Pickering, Holt. Your line is now open.
Hey, good morning Albert and Steve.
Hi Matthew.
Good morning Matthew.
Maybe just to stay on that point. So right -- so Westlake LP reported that $41 million, essentially like a take or pay benefit. How should we think about that from Westlake C Corp's perspective? Is this the case where you paid in Q3, but you will recapture some of those volumes later down the road?
Well, certainly, as we think about the demand that -- that the Partnership's saw implicitly through the ethylene really is an illustration of the strength that you have really heard us talk about today. And so, while we didn't produce because of some of the hurricane related outages, and we certainly see that demand strength in our ethylene derivatives, both PE as well as PVC.
And so, that integrated results that you saw us report today for Westlake Chemical is inclusive of course of that $41 million buyer deficiency payment you saw in the Partnership. And so as we think forward about the strength that we've seen in the ethylene derivatives, it speaks, again, volumes to the expected demand pull that you'll see from Westlake from the operating company, OpCo.
So, as we said earlier, the ethylene sales agreement that OpCo has is quite strong in terms of its protections of cash flow and earnings. And I think that integrated relationship between the Partnership -- Westlake Partners and Westlake Chemical remains robust and strong.
Okay. Sounds good. And then I'm just kind of surprised to see that your inventory levels actually held pretty steady in Q3 -- I mean only down a little bit. Is there an opportunity or were you able to perhaps sell down a little bit of your inventory in October to potentially mitigate some of that -- some of the -- some of the downtime headwinds?
Well, certainly as you would imagine, we've sold and met as much of the -- as much of our customer needs. While we do have force majeures for many of our products out, we have been able to meet most of the demand that we've seen from our customers both domestically.
Certainly, there have been some -- some impact in some of our customers in some of the export markets. But certainly as we've tried very hard to really meet all of the customer demand and as you saw from my comments earlier, we weren't able to meet all of it because there was some lost sales as a result of the outages, both in third quarter and the guidance I gave for the fourth quarter.
Great. Thank you.
You're welcome.
[Operator Instructions]
And our next question comes from John McNulty from BMO.
Hi, good morning. This is [Indiscernible] for John.
Good morning.
Good morning.
So if we're -- good morning. So, if we're looking at certain areas in Europe going back into lockdowns, are you seeing any early signs of demand impact to your export market? On the other hand, are you in fact seeing higher demand from customers potentially restocking higher?
Yes, we see that generally speaking, Asia is doing quite well, and the demand for polymers are quite strong. And so the demand globally -- export price actually has been going up, especially for PVC going up quite -- quite a lot -- it's also shortage.
Unlike polyethylene, there's very little PVC capacity added in the world. Demand is still very strong. U.S. has been the main exporter of PVC to the global market. And when U.S. supply situation is reduced, it is what drive up PVC export price around the world.
Got it. And then as you go through some of the repairs in your assets related to the hurricanes, are there any changes to your turnaround timing or cost for next year and how should we think about just general CapEx for next year?
Yes, as we finish the budgeting plan for 2021, we'll give more guidance in terms of our capital spending. The only turnaround we had scheduled for a major unit was our ethylene cracker.
And at this stage, there is no change in guidance. But as we finish our 2021 budgeting plan, we'll talk about that later as we finish that process, and that will really be into early 2021 once the Board approves it and we can then speak about the approved plan for capital spending and major maintenance.
Got it. Thank you for your time.
Welcome.
Thank you. At this time, this 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 fourth quarter and full year results.
Thank you for participating in today's Westlake Chemical Corporation third quarter earnings conference call. As a reminder, this call will be available for replay beginning two hours after this call is ended and may be accessed until 11.59 Eastern Time on Tuesday, November 10, 2020.
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 186958. This concludes the call.