Stricter Sustainability Standards Will Cripple Legacy Petrochemical Margins

Key Takeaways

• Shifting regulations, consumer preferences, and alternative materials threaten long-term demand and pricing power for traditional chemical and plastic products.
  
• High legacy costs and oversupply challenges limit flexibility and margin expansion, raising the risk of persistent earnings instability.
  
• Structural cost advantages, sustainability initiatives, strategic portfolio management, and operational efficiency position LyondellBasell for resilient margins, cash flow, and future growth.

Catalysts

Operates as a chemical company in the United States, Germany, Mexico, Italy, Poland, France, Japan, China, the Netherlands, and internationally.

• The accelerating global push for sustainability and the circular economy is likely to impose stricter regulations on single-use plastics and fossil-fuel-based chemicals, which could result in shrinking long-term demand for LyondellBasell's core polyolefin and petrochemical products, putting consistent downward pressure on revenue growth.
  
• Escalating regulatory and consumer pressures on carbon emissions are likely to drive up compliance costs and necessitate ongoing capital expenditures for emissions control and reporting, directly threatening long-term net margin stability and eroding future earnings.
  
• The rapid pace of adoption for alternative materials such as bioplastics, degradable options, and recycled polymers threatens to displace demand for LyondellBasell's traditional product lines, with the potential for lasting market share losses and reduced pricing power, which would negatively impact top-line revenue and operating margins.
  
• LyondellBasell's legacy production footprint and high capital intensity hinder its ability to shift quickly toward lower-emission or recycled feedstocks, raising the probability of higher relative maintenance and transition costs versus newer, more nimble competitors, thereby depressing potential margin expansion over the long run.
  
• An increasingly oversupplied global chemical market-driven by new capacity additions in Asia and the Middle East-will likely create a sustained environment of margin compression and pricing volatility for the company, potentially resulting in chronic earnings instability and underwhelming free cash flow generation.

LyondellBasell Industries Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on LyondellBasell Industries compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming LyondellBasell Industries's revenue will decrease by 12.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.4% today to 6.0% in 3 years time.
• The bearish analysts expect earnings to reach $1.5 billion (and earnings per share of $4.66) by about August 2028, up from $150.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, down from 105.2x today. This future PE is lower than the current PE for the US Chemicals industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 1.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.9%, as per the Simply Wall St company report.

LyondellBasell Industries Future Earnings Per Share Growth

Risks

• Structural advantages in North America and the Middle East, such as access to low-cost natural gas liquids and energy, support LyondellBasell's ability to sustain higher operating rates and attractive margins throughout the cycle, which can drive steady revenue and net income growth.
  
• Significant investments and leadership in advanced chemical recycling (MoReTec) and sustainable circular solutions position the company to capture rising demand and regulatory preference for recycled plastics, contributing to future earnings resilience and providing entry into higher-margin markets.
  
• Ongoing disciplined portfolio management, including divestitures of less competitive European assets and expansion in advantaged global regions, is designed to improve cost structure and profitability, supporting margin expansion and free cash flow generation.
  
• Strong focus on operational efficiency, fixed cost reductions, and working capital management-outlined in a specific cash improvement plan-strengthens balance sheet resilience and improves the ability to maintain shareholder returns, such as dividends, even during cyclical downturns.
  
• Global and regional secular trends-including steady demand for packaging, consumer goods, and automotive applications amid growing middle-class consumption, urbanization, and anticipated eventual rebound of the cycle-could support higher revenues and sustainable long-term earnings.

Valuation

• The assumed bearish price target for LyondellBasell Industries is $44.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of LyondellBasell Industries's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $90.0, and the most bearish reporting a price target of just $44.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $25.9 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $49.06, the bearish analyst price target of $44.0 is 11.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.