Rising Costs Turn JPMorgan Bearish On LyondellBasell

The bearish case for chemical company LyondellBasell Industries NV (NYSE: LYB) rests on expectations for declining financial performance in 2019, according to JPMorgan.

The Analyst

JPMorgan's Jeffrey Zekauskas downgraded LyondellBasell from Neutral to Underweight with a price target lowered from $110 to $95.

The Thesis

LyondellBasell is faced with the prospect of flat-to-lower consolidated EBITDA in 2019 along with pressure to its integrated margins due to input and commodity prices, Zekauskas said in the downgrade note. (See his track record here.) 

The recent uptick in feedstock costs and an increase in ethane prices from 40 cents a gallon in August to 60 cents a gallon today is a move that's "entirely uncontemplated by the market," the analyst said. 

The supply and demand dynamics of ethane appear to be "much tighter" than previously expected, and the market may not see any relief until new fractionation plants come online in 2020, Zekauskas said. The near-term volatility is likely to undermine confidence in LyondellBasell's business forecast, he said.

Coupled with concerns over whether the company will be able to "keep pace" with its peers, the new uncertainty warrants a bearish stance, according to JPMorgan. 

Price Action

LyondellBasell shares were trading near-flat at the time of publication Wednesday at $102.18. 

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