Chemicals · Commodity Chemicals
Reading the Petrochemical Cycle
Spread mean-reversion, utilisation as early warning, trough language across the peer set, and why valuations use long-run prices, not spot.
Selborne Research · Commodity Chemicals coverage: 7 guides, 6 company profiles, a primer and Excel model
Educational analysis for professional use. This guide is not investment advice or a recommendation to buy or sell any security, and it is not personalised.
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Spreads Return to Their Average; Operating Rates Turn First
A petrochemical producer earns a spread, its selling price less its feedstock cost, on each tonne it sells. Spreads compress when new capacity outruns demand and recover when demand catches up. Operating rates (utilisation, the share of capacity actually running) fall before spreads hit their low and turn up before spreads do, which makes them the earlier signal.
FY2025 was a broad downturn: ethylene and polyethylene (PE, the most common plastic), PVC, methanol and acetyls (acetic acid and its derivatives, used in paints, adhesives and fibres) were all weak at once. The analyst’s first job is to say where a year sits in the cycle; the second is to rebuild earnings at mid-cycle prices, the long-run average between boom and bust.
What Management Said About FY2025
The filings use different words for the same economics:
| Company | Cycle language in FY2025 reporting |
|---|---|
| Dow | ”Unprecedented industry downturn”; “prolonged industry downturn” (10-K). Operating EBITDA of $3,256M, below the $6B ceiling its 2024 Investor Day set for a trough year |
| LyondellBasell | ”Margins reflecting cyclical trough”; industry margins across its businesses ~45% below 2013-22 averages |
| Olin | ”Trough market environment”; “extended trough”; “historically long industry trough” |
| Westlake | ”Global overcapacity in certain PEM materials” (its performance and essential materials segment); no “trough” label |
| Methanex | No cycle label; realised price below the level it calls mid-cycle (March 2026 investor presentation) |
| Celanese | ”Prolonged, industry-wide down cycle”; below-normal demand |
Only LyondellBasell and Olin call FY2025 a trough. The others describe the same conditions in their own words.
How Far Spreads Fell
| Spread / price | 2025 | Reference | Gap |
|---|---|---|---|
| North American integrated PE margin (ethane through to finished plastic) | $580/t ($750/t in 2024) | $830/t 2013-22 average | 30% below (calculated) |
| Methanol realised price (Methanex) | $361/t FY2025 average | $400/t, which Methanex calls mid-cycle | 10% below (calculated) |
Both sat below their reference levels, the PE margin three times as far as methanol. The PE margin is Chemical Market Analytics data from LyondellBasell’s Q4 2025 earnings slides. LyondellBasell’s headline figure in the first table blends several businesses, so keep it apart from the PE figure.
Utilisation: The Early Warning
LyondellBasell’s segment rates show the pattern:
| Disclosure | Rate | Period |
|---|---|---|
| Olefins and Polyolefins Americas | ~75% | 4Q25 |
| Crackers within Olefins and Polyolefins Americas | ~90% | 4Q25 |
| Intermediates and Derivatives | ~75% | 4Q25 |
The crackers ran harder than the polymer and derivative plants they feed. Track rates like these quarter by quarter beside the spread. Olin is the exception to read with care: it runs its chlor-alkali plants (salt electrolysis into chlorine and caustic soda) only as hard as demand for the less wanted of the two co-products allows, so its volumes stay soft by design.
Why Valuations Use Long-Run Prices
A model built on the latest price carries that price’s place in the cycle into every future year. Mid-cycle work uses long-run prices instead, set between downturn-year figures and long-run averages, so earnings, multiples and leverage stay comparable through the cycle. The Selborne Excel model’s $650/t integrated PE margin, for example, sits between the 2025 margin and the 2013-22 average. The full set of long-run prices is on the ethylene spreads guide.
How the Downturn Hit Each Chain
- Ethylene and PE (Dow, LyondellBasell, Westlake): cheap ethane feedstock softens the fall without preventing it.
- Chlor-alkali and PVC (Westlake, Olin): chlorine and caustic soda come out of one electrochemical process together. Power is the biggest raw-material cost; Olin sources about 76% of its electricity from gas or hydro.
- Methanol (Methanex, and Celanese through its Fairway methanol joint venture in Texas): gas is the feedstock, so gas prices move the margin alongside methanol.
- Acetyls (Celanese): rates were cut at higher-cost sites, and group operating EBITDA fell to $1,893M from $2,353M in FY2024.
Feedstock position decides who keeps running; see cost curves and ethane vs naphtha.
Reading the Cycle in a Model
- Place the year from management language and spread benchmarks.
- Track segment operating rates, such as LyondellBasell’s, as the volume early warning.
- Apply long-run spreads.
- Rebuild EBITDA and screen leverage on mid-cycle earnings, as the mid-cycle EBITDA guide sets out.
Commodity Chemicals Sector Primer
Three hypothetical producers, in polyethylene, methanol and PVC, valued year by year as spreads recover from the trough, set beside the through-cycle multiple screen.
- 15 sections, from how a spread business earns to a year-by-year reversion DCF and leverage on mid-cycle EBITDA
- 42 pages
- an ethane-advantaged polyethylene producer, a methanol producer and a chlor-alkali and PVC producer
- 3 producer engines
- listed producers across the ethylene, vinyl, methanol and acetyls chains on filed FY2025 figures
- 6-company screen
The Excel model is the primer's cycle-normalisation valuation live across 12 sheets: three producer tabs (ethane-advantaged polyethylene, methanol, and chlor-alkali and PVC), each reverting its spread and utilisation from trough to mid-cycle through a ten-year free-cash-flow schedule with working capital and sustaining capex; a valuation summary setting each DCF beside the through-cycle multiple screen; cycle scenarios, a cost-curve position, a leverage screen on mid-cycle EBITDA and two live sensitivity grids. Change the spread, the WACC or the exit multiple and the value moves.
See what's in the Commodity Chemicals Sector Primer →£25 PDF · £59 with the Excel model · £159 for all three Chemicals industries
Frequently Asked Questions
- How do you tell where the petrochemical cycle is?
- Read three signals together: spreads against their long-run averages, operating rates, and what management says. In FY2025 reporting, LyondellBasell and Olin used the word trough; Dow called it an unprecedented industry downturn; Westlake and Celanese described overcapacity and a prolonged down cycle. The North American integrated PE margin was $580/t in 2025 against a $830/t 2013-22 average, and LyondellBasell's Americas olefins and polyolefins plants ran at about 75% in 4Q25.
- What is the early warning signal before spreads bottom?
- Operating rates fall before margins fully compress. LyondellBasell disclosed 4Q25 rates by segment: Olefins and Polyolefins Americas ~75% (its crackers ~90%) and Intermediates and Derivatives ~75%.
- Why does a valuation use long-run prices rather than last year's?
- Spreads return towards their average, so a valuation built on one year's prices carries that year's place in the cycle into every later year. The long-run assumptions in the Excel model that comes with the Selborne primer sit between downturn-year figures and long-run averages: an integrated North American PE margin of $650/t against $580/t in 2025 and $830/t for 2013-22, a 12¢/lb ethane cracker margin against a ~15¢/lb long-term average, and a $380/t realised methanol price against Methanex's $361/t FY2025 average.
- How long can a petrochemical downturn last?
- LyondellBasell's CEO called conditions 'one of, if not the longest downturn' in the industry on the 4Q25 call. Olin referred to a 'historically long industry trough.' Duration differs by chain (ethylene and polyethylene, PVC, methanol, acetyls), but in FY2025 all of them were weak at once, which points to a broad petrochemical downturn.
Read next
Mid-Cycle EBITDA for Commodity Chemicals
Why LTM fails at cycle extremes; company frameworks from Dow, Olin, MEOH, LYB; ~6-9x EV/EBITDA on normalised earnings; leverage on mid-cycle EBITDA.
Ethylene and Polyethylene Spreads
Cracker margin vs integrated PE margin vs colloquial spread; FY2025 NA PE at $580/t vs $830/t history; illustrative ethane cracker margin 12¢/lb.
Reported vs Adjusted EBITDA in Chemicals
What six producers add back to reach adjusted EBITDA, why write-downs and closures dominate a bad year, and which figure answers which question.
Chemical Industry Cost Curves
Feedstock as the primary axis of the ethylene cost curve; oil-vs-gas shifts; naphtha co-products; marginal producers idle first in downturns.
See it applied
These company profiles apply the concepts from this guide to real public companies.