Interview with Massimo Covezzi, Senior Vice President at LyondellBasell: Out of Chapter 11 by the end of the year, but it won't be painless.

LyondellBasell Industries is going through financial restructuring, which has led the American company to apply for Chapter 11, an article of American bankruptcy law that protects companies from creditors for the minimum amount of time required to adjust accounts and to get back on their feet, under the condition that they have a serious plan for recovery. The plan announced by the company during the last couple of weeks calls for cutting US$ 700 million in costs with the closure of more than 20 offices and plants, with the termination of 3,000 direct employees and 2,000 contract employees.

We discussed this and other issues with Massimo Covezzi, Senior Vice President at LyondellBasell, responsible for the group's Research and Development.

LyondellBasell has applied for Chapter 11 for its American business. What does this actually mean?
At the beginning of January, the American companies in the group applied for protection under Chapter 11 from the New York Courts. This is a procedure that differs from those in Europe and that allows companies with financial or operational difficulties to reorganize without worrying about recourse from their creditors. The difficulties began at the end of last year due to the overlapping of the economic crisis, with the company's financial exposure, followed by the purchase, by Basell, of the Lyondell chemical group. In Europe, the extension of Chapter 11 has been requested for two financial holding companies: the German Basell Germany Holding and LyondellBasell Industries AF S.C.A. in Luxemburg. These are financial tools that have no operations or employees. Protection was only requested for technical reasons: in the first case, to allow transfer of European funds, and, in the second case, to protect the company from any actions by their American creditors. None of the other European businesses are involved in the procedure, even if – obviously – the financial and operational restructuring and the relative cost reduction, involves the entire group.

When do you expect to come out of Chapter 11?
We received financing, as a DIP (debtor-in-possession) for about US$ 8 billion. The objective, which is ambitious but concrete, is to complete financial reorganization under Chapter 11 within this year and to present the plan before the end of the summer. Reorganization of the assets and cost control will require more time.

The cost reduction plan that you mentioned calls for savings of about € 700 million with the termination of about 5,000 employees, direct and contract, and the closure of about twenty plants. Have you already identified the dead wood to cut?
The financial crisis created excess capacity. Therefore, the obsolete and less productive plants must be closed, basically the "weakest" ones. A few of these units have already been identified, including a cracker in North America (Chocolate Bayou, Texas) and a LDPE plant in France (Fos-sur-Mer). We are still evaluating what other plants we will shutdown.

Can you exclude the closure of the production plants in Italy?
I cannot exclude closures in Italy, as I cannot for any other country where the company is present. The decision about the plants to be closed will be made through the year.

The Italian chemical industry has a worrisome outlook, as the chaos reigning in the Porto Marghera petrochemical industrial park demonstrates. Do you believe that these events may influence the group's decisions for the plants located in our country?
I will not comment on the decisions made by other players in the Chemical Market, even if there is a strong tie between the plants in Ferrara and the Porto Marghera petrochemical industrial park in terms of raw materials supply. Certainly, the cost structure does not benefit Italy: raw materials cost more, energy costs 30 to 35% more compared to France or Germany, and for some sites it is more expensive to move the goods, with a difference that can reach even € 35 to 40 per ton, which in many cases represents the profit margin for commodities products. Overall, we are the least competitive in terms of the "basics".

In terms of the demand for polypropylene, have you seen recovery over the past few weeks?
If we want to be optimists, there are signals that the demand is stabilizing. We cannot talk about recovery per se, but the downward trend appears to have stopped, in Italy and in the rest of Europe. With all due hairsplitting: markets related to consumer goods are doing a bit better, such as packaging, while the situation is still critical for durable goods, such as automotive and pipes, where a drop of 40% was seen in plastic consumption during the deepest time of crisis. Furthermore, the latter markets have been our primary targets over the last few years as they are the most highly evolved technically. But there is some light among the darkness. For example, in terms of margins, operational, the Italian businesses in the group have benefited from the fact that more than 50% of the EBITDA is related to research, to the sale of catalysers, and technology licensing.

For once Italy is not the "Cinderella Story" of research...
Few people know that the largest research and development center for plastic materials is located in Ferrara, with more than 500 engineers involved in these activities, with an investment of about € 60 million per year. "Giulio Natta" is the center of excellence for polypropylene on a group level for the development of catalysers, technologies, and new materials. It is a real knowledge factory. Thanks to this centre, which won the Nobel Prize in Chemistry for first synthesizing polypropylene, about 50% of the researchers employed by LyondellBasell work in Italy. And few know that more than 40% of the polypropylene manufactured worldwide (40 million tons) uses technology and catalysers developed and manufactured in Ferrara.

Another current topic is the sustainability of plastic materials. How are you proceeding?
We are committed to the continuous improvement of processes and materials. When speaking about sustainability, renewable resources often are cited and few talk about the benefits research of research for materials savings: a reduction of 15 to 18 % of the plastic used in conduits, such as our polypropylene that recently obtained ISO PP 125 classification for water pipes, translates into a significant savings in weight, resources, and emissions; but it doesn't make the news. We can say the same thing for the step-by-step improvements made in packaging. Reducing the weight of a packaging film by 5% appears to be insubstantial. But if you calculate this amount over the millions of tons of film produced the story changes...