Celanese Corporation (CE) Q3 2021 Earnings Call Transcript

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Celanese Corporation (CE -0.69%)
Q3 2021 Earnings Call
Oct 22, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Celanese Q3 2021 Earnings Call and Webcast. [Operator Instructions]. A question-and-answer session will follow the formal presentation. [Operator Instructions]. It's now my pleasure to turn the call over to Brandon Ayache, Vice President, Investor Relations. Please go ahead.

Brandon Ayache -- Vice President, Investor Relations

Thank you, Kevin.

Welcome to the Celanese Corporation's third quarter 2021 earnings conference call. My name is Brandon Ayache, Vice President of Investor Relations. With me today on the call are Lori Ryerkerk, Chairman of the Board and Chief Executive Officer; and Scott Richardson, Chief Financial Officer.

Celanese Corporation distributed its third quarter earnings release via Business Wire and posted prepared comments about the quarter on our Investor Relations website yesterday afternoon. As a reminder, we will discuss non-GAAP financial measures today. You can find definitions of these measures, as well as reconciliations to the comparable GAAP measures on our website.

Today's presentation will also include forward-looking statements. Please review the cautionary language regarding forward-looking statements, which can be found at the end of the press release, as well as prepared comments. Form 8-K report containing all these materials have also been submitted to the SEC.

Because we published our prepared comments yesterday, we'll go ahead and open the line for your questions. Kevin, please go ahead open the line.

Questions and Answers:

Operator

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions]. Our first question today is coming from Vincent Andrews from Morgan Stanley, your line is now live.

Vincent Andrews -- Morgan Stanley -- Analyst

Thank you, and good morning everyone. Just in Engineered Materials, you only had a modest volume hit sequentially despite obviously the auto situation got more challenging in the quarter. And you found other high-value places to put that volume. So I guess, as we think about 2022 and 2023, when that auto volume comes back, presumably, you're not going to, I guess my question is, is that incremental on top of where you've already put this other volume? Or do you anticipate shifting some of that -- having to shift some of that volume back to your auto customers?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. Thanks for the question, Vincent. If we look at Q3, auto builds were down pretty significantly globally, like 12% down from the prior quarter. And certainly that had some impact on us. What I would say is though it had less impact on us, as just given the nature of where we are. I mean, if we really look at our Q3 volumes, they were down into auto, only about 1%. And, there's a couple of reasons for that. One is, if you look at -- we have shifted our portfolio more to electric vehicles. Electric vehicles are actually up about 35% year-on-year in terms of builds, and we expect that to continue into next year.

And, because we have so much more exposure now to electric vehicles, so think about lithium-ion battery separator film which has grown 40% year-on-year. Even though only about 10% to 15% of our portfolio now goes to electric vehicles, that still did -- went a long way in kind of negating the impact we saw from the overall decline in auto builds.

So what I would say is, yes, while we did shift some volume out of auto, we also have the shift within auto which allowed us to keep -- really get through the quarter with very little volume loss into end markets. And we did see some more shift into other applications like industrial and electrical which were strong during the quarter, but I would say actually a more of the shift was probably within auto into the EV, which is consistent with the strategy that we laid out at the end of 2019.

Scott A. Richardson -- Executive Vice President and Chief Financial Officer

Yeah. And we wouldn't expect to give that volume up as auto recovers in '22 and '23. So think about the auto recovery kind of being on top of that.

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. And then if you think where that volume is going to come from, because we did run pretty full in Q3, but we did lose about 8 kt of production in Q3 due to the unavailability of raw material, be that resin or glass fiber or flame retardants. So as we -- as those issues resolve themselves, hopefully through the end of the year and into next year, that's the additional volume that we'll be able to put into both auto and our other end use applications.

Vincent Andrews -- Morgan Stanley -- Analyst

Great. And then, if I could just ask on the $100 million, $50 million in EM and $50 million in AC, how does that trend? In your sort of '22 and '23 assumptions, does that -- are you assuming that sort of normalize when you get it back or you just sort of assuming it stays the same?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. I think, just as we assume product prices and EBIT margins are going to normalize as we move through Q -- 2022, so probably toward in the second half of 2022, and we're assuming normalized prices in 2023. We also assume that those inflationary pressures in energy and in raw materials will also normalize in that time.

So think about it as margins normalizing through the second half of 2022, and be normalized for 2023.

Vincent Andrews -- Morgan Stanley -- Analyst

Okay, makes sense. Thank you very much.

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah.

Operator

Your next question today is coming from John Roberts from UBS. Your line is now live.

John Roberts -- UBS -- Analyst

Thank you. Do you or your syngas supplier in Nanjing need to make structural changes to avoid the industry curtailments in the future?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. Look, I mean I think it's an interesting question. I mean, it's hard to know what structural changes you would make, simply because the entire economy of China is based on coal gasification. So, we don't really know what to expect in terms of energy curtailments in the future. What I would say is, look, we have seen this happen in China from time to time, as a result of their Blue Sky initiatives, whether it's for the Olympics, or some other thing.

And so, we're not going to speculate on what's driving this energy curtailment. But you know, while we expect the curtailments to be moderate in the fourth quarter, we don't really know what to expect yet for next year. So I think it's a little early to address this. What I would say is, we are a little different than some of our competition in China, just in terms of what else our syngas provider does. So they have some choices that they can make about where the syngas go, whether it comes to us or whether it goes into olefins and frankly right now economically it makes more sense for it to come to us.

John Roberts -- UBS -- Analyst

And then back on the Engineered Plastics question. It takes a while to get specked into new applications. So I assume that rapid pivot to make up the lost auto volume that was existing applications that you've had that just surged?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. Look, we're seeing strong demand across all sectors of Engineered Materials. So I would say, any volume we can make, we can sell to an existing customer for an existing application. You know, that said, in the Q3, we had 815 project wins. We continue to grow quarter-on-quarter in terms of the number of project wins we have, and the value of those project wins in Q3 was up 11% versus the prior year.

So we are getting new projects all the time. They tend to be higher margin projects that we're able to close and higher volume project. So if you look at that going forward, it just says, you know, our ability to shift between areas as we're essentially in a sold position will continue to be where we can continue to ship volumes into high margin products.

Scott A. Richardson -- Executive Vice President and Chief Financial Officer

Yeah, John, if you recall, a couple of years ago when Lori came in, one of the first things we did was do a robust strategy refresh. And what came out of that was the high growth program focus that Tom Kelly and Engineered Materials team talked about at our Investor Day.

And so, a lot of that effort around 5G electric vehicles, medical, etc, was started two years ago and we're really starting to see the pipeline pay off from that here now, a couple of years into that work. And so, I would say, it's -- there is always some short-term stuff, but a lot of this is things we've now been working for a couple of years.

John Roberts -- UBS -- Analyst

Thank you.

Operator

Thank you. Your next question is coming from Jeff Zekauskas from JP Morgan. Your line is now live.

Jeffrey J. Zekauskas -- JP Morgan -- Analyst

Thanks very much. Are average acetic acid prices in China and Europe and average VAM prices in China and Europe, likely to be higher in the fourth quarter than they were in the third or comparable?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. It's -- great question, Jeff. We hope we can answer that. As we look toward the fourth quarter for pricing, I think we did see Q3 moderate from Q2, I mean, down about 15% in China. Similarly though we saw Western hemisphere prices for acetic acid go up 15%. So I think right now, after the brief surge we had in prices following the energy curtailment, acetic acid has settled in now to kind of that $1,000 per ton price. So that's a little above Q3. But I do expect it's going to continue to moderate over the quarter.

So I guess, on average, our best view at this point is probably Q4 will look similar to Q3 in terms of averages for acetic acid. I think VAM is a little trickier. We have seen a surge in VAM pricing following the energy curtailment as not just our VAM capacity which was shut down for a few weeks, but others VAM capacity was shut down, because these are more highly energy intensive processes in the Acetyl Chain.

So we have seen more loss of VAM capacity in China with the higher raw materials. We've seen some of that capacity slow to come back or additional capacity stay down. So VAM prices remained quite high. I mean, record levels well over $2,000 this time. And I think we're not seeing any fall off in demand for VAM and for downstream VAM derivatives, just because there are such low inventories as you may be hearing from others on their calls in the chain.

So I would expect VAM pricing to -- it's quite high in Q3. But I would expect that to stay at that level or possibly even a little stronger as we go into Q4, which would offset any further softening we see in acetic acid.

Jeffrey J. Zekauskas -- JP Morgan -- Analyst

So, there have been all kinds of outages in 2021 from weather, and then we had outages in China or curtailments in China. Have all of these different events led you to have a different view of where acetic acid and VAM pricing might be at the end of next year? That is, have they structurally changed the way that you expect the industry to evolve?

And then secondly, with all of the outages that you've had this year, how much more, you know, Acetyl volume can you produce next year than you produced this year at a normal operating rate?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. So how the outages affected my view of the industry? I think the answer is no. What continued to change is the supply demand balance gets tighter and tighter. And we've been calling that out for a few years. I mean every year, demand goes up 600 -- 600 kt. And so that's like one plant every year and nobody has been building plants.

So we are steadily now in that structural utilization kind of mid 80s to 90s which means instantaneous utilization when you account for turnarounds and unplanned downtimes and everything is in that high 90s, mid-90s to a 100%. And that's going to continue. So it is that structural change in the industry which affects where I think we'll settle. I don't think we're going to settle acetic acid prices down in the 300 range where we used to see it settle. But I think it is going to be higher than that because structurally, it's just a much tighter industry.

And I think what you see is the outages really reinforce that point, because we very rapidly see the run-up in pricing anytime there's a slightest wobble. So, I think it's not the outages that have changed my view. It's -- I think the outages have reinforced our view that structurally this is a tightening market, that is going [Phonetic] to enjoy good margins for some period of time. And we've talked about it in other quarters that as -- there is not, we had a little bit of capacity come on in China this year with [Indecipherable]. We have our capacity coming on in 2023, which of course we will run to meet the market demand and have a lot of flexibility to take it up and down depending on what's going on with the markets.

But there is nothing else currently being built. And so, and yes, demand is going to continue to grow. So it is going to settle higher. But I think it's really the overlying structure versus say the outages. So what does that mean in terms of availability? I mean, yes, we were down this year for the freeze event. And of course, we had some supplier issues for some time following the freeze event. Other than that actually our units run very reliably this year.

I do think, as we move into future years, we will be back at a normal pattern of turnaround. So while I think there's some incremental capacity available to us next year, I wouldn't say it's probably really significant from a volume standpoint.

Jeffrey J. Zekauskas -- JP Morgan -- Analyst

Okay, great. Thank you so much, Lori.

Operator

Thank you. Your next question is coming from Duffy Fischer from Barclays. Your line is now live.

Duffy Fischer -- Barclays -- Analyst

Yes, good morning. Maybe a little bit to follow on the last question and also tying into several of your big customers on the quoting side that actually called out emulsions as being problematic from our pricing and sourcing standpoint. So when you look at how tight you see things over the next couple of years, when you look at the size of those customers, should we expect some meaningful sized new announcements over the next year either on VAM, where you would maybe ship in acetic acid or would there be anybody that would look at doing kind of a integrated acetic acid in the VAM project in the US?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

It's an interesting question Duffy. I mean, let me kind of take the last part. I really wouldn't expect anybody to do an acetic acid to VAM to VAE kind of new build. I just don't think economically, I mean, that's probably just the acetic acid part of that is probably at least a $2 billion investment. And then we add on the VAM and VAE, it might even double that depending on the size of the facility.

So I think that's a pretty big lift for just about anybody, not to mention the space, the infrastructure, the permitting and everything. This is a 5 to 7 year prospect, if someone were to start now. So that's a ways out there. So I'm not -- I'm not worried about that. Like I said, we have 1.3 million tons coming on in 2023, which is basically the equivalent of two world-scale plants for acetic acid. And you'll recall we've announced a series of VAM and VAE expansions globally around the world, trying to meet what we do see as continuing strong demand.

I mean, part of the problem right now of course is, with the freeze, with other outages, things have gotten behind. At one point, as people restock, the world will normalize again. As we can see acetic acid prices come down, that will lead eventually to lower VAM prices and lower VAE prices. Energy is a big factor. So, I mean, I think it's going to normalize even short of a lot of new capacity being added. But we do see the need for more capacity to come online, which is the need we think we're best positioned to meet, given our great technology, our lower -- our energy efficient technology and our integration, not just within our plants, but also our networks globally that allow us to really optimize and provide secure supply to our customers around the globe.

Duffy Fischer -- Barclays -- Analyst

Great, thank you. And then maybe just a second one on the $15 for next year, can you walk us through, are there any meaningful changes that would be in that number? Cash flow that would get spent on a buyback, maybe a change in the tax rate. I'm just trying to understand kind of like what's the base assumptions for that $15 for next year other than where spreads go?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. Let me just kind of walk through it and comment some of the things we're assuming in that number. So what we've said is next -- adjusted EPS next year of at least $15, that is based on belief our acetyls business will have an EBIT between $1.2 billion and $1.4 billion.

As I said a little earlier in the call, that assumes we see relatively strong pricing we're expecting in the fourth quarter, continuing into the first half of the year where you are in that range indicates where it might -- the different places we think it might start to moderate, whether it's a little bit before the -- you know, the third quarter, whether it's into the third quarter. We do though, expect to see moderation to normalized pricing, sometime midyear.

And as I said, similar volumes to what we did this year because we think with turnaround, normalized levels of turnarounds and everything, I just assume kind of similar volumes. For EM, we are expecting $700 million to $800 million of EBIT. That does include Santoprene. It does include the organic growth, both from our project model and our growth model, but also the Bishop GUR expansion.

But I would say it's also dampened a bit by our expectation that auto builds will not recover next year. So we're expecting auto builds at the same level we're seeing auto builds in 2021. And that affects our normal materials into auto and -- but, it also will affect Santoprene because it is 65% into auto.

And then in total, we expect it to be pretty consistent with this year, because we expect it to continue to be challenged by acetic acid pricing, at least in the first half of the year, and also by energy pricing. I will say if you add all those up, you might come up with a number slightly over 15. So what you should be aware of is, is we do expect [Indecipherable] other to go up as we expect less pension income next year with maybe a softening in the market which will then raise our [Indecipherable].

So if you look at that in terms of free cash flow, I mean, free cash flow, we're basically saying even with a lower expectation on EBIT earnings, driven primarily by moderation in acetyls, we do expect about the same level of free cash flow.

So lower earnings, but we do would then get that working capital normalization that shows up as free cash flow on our books if we see the moderation in asset sales. And we do expect slightly higher capex. We're still pegging [Phonetic] capex around $600 million next year, but we won't have the EU payment. So kind of looking at all that, that washes out to basically free cash flow in the same level we expect to see this year.

Duffy Fischer -- Barclays -- Analyst

Great. Thank you.

Operator

Thank you. Our next question is coming from Hassan Ahmed from Alembic Global. Your line is now live.

Hassan Ahmed -- Alembic Global Advisors -- Analyst

Good morning, Lori. Lori as I take a look at your sort of prepared remarks and the guidance you gave for the Acetyl Chain, you know, you're looking for sustainably sort of over $1 billion in '22 and '23 EBIT. You cited rightly -- saw a bunch of different reasons why you feel that's doable. One of them was the sort of uplift in the cost curves. So just wanted to sort of get your thoughts around what's going on over there. Obviously, I see what's happening with the raw material side of things and the like. And you cited sort of escalation in pricing for catalyst and the like, as well. So just on a relative basis, I'm trying to get a better sense of how much -- how we should think about your cost advantage relative to competitors, improving in this sort of new raw material/catalyst cost world.

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. I think, I'll just back up a little bit, Hassan. If you look at like a decade ago, our foundational earnings for Acetyls were in that $300 million to $400 million. And then if you go as recently as even last year, we were saying, we think our foundational earnings are around $800 million.

And that was based on continued rationalization of our footprint, expansion activities we had done, work we had done to improve the productivity of our sites, whether it be energy efficiency or catalyst recovery systems and things that lowered our cost of production. And now we're saying we think that base level is greater than $1 billion.

And so, it's really the same thing. I mean, it is productivity, it is energy efficiency, but it also is this market dynamic that I was talking about. I mean, if you go back a decade, we had really over built in China. We -- but the industry had overbuilt in China, and we were at low utilizations.

I mean, mid-60s to growing [Phonetic] to mid '70s. Now we're at much higher level of utilization with no new capacity, other than our own on the horizon, and maybe a few other little things around the globe. And so, we are just in a much tighter area of supply demand, which we expect will continue for the next five to seven years, unless someone else build new capacity. But it will take them that long. And that's really why we're saying that foundational earnings is really kind of a low as we think we will achieve in any given time is now at about that 1 billion level.

Now obviously, that could change if we had a global economic recession or something. I mean, but I'm just saying in normal economic conditions, we think that's the floor. And I think that's -- I think it really demonstrates also the power of the model that we've developed over these last ten years, where we are able to -- as we did in the third quarter, we had a 15% decline in the price of acetic acid in China, but we were able to recover that with the price in the Western hemisphere, because we still had tightness in the Western Hemisphere.

And we had 8% less earnings from acid globally in the third quarter than we did in second quarter. But we were able to recover that in margins for VAM and VAE and other downstream derivatives because -- and having that flexibility to shift geographically, and having that ability to flex in the chain is what gives us confidence that unlike many of our competitors who don't have that flexibility, we will be able to deliver that $1 billion of foundational earnings, going forward.

Hassan Ahmed -- Alembic Global Advisors -- Analyst

That's very helpful, Lori. Very helpful. And as a follow-up, again reverting back to your prepared remarks, your commentary about relatively tepid long term sort of supply growth, I found it super interesting, particularly as you sort of talked about China. Would love for you to dig a bit deeper into that. I mean, you're talking about how the whole sort of capital cost advantage in China has dwindled the whole permitting process is far more complex. I mean, to me, that sounds super bullish, not just for the Acetyl Chain, but for commodity chemicals in general.

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

No, I think that's right. I mean, look, we're -- not that many years ago, we would have said there was a large advantage to building in China, just from a speed of build and a cost of build. As China has developed, as they've developed a stronger working class, I would say that, that advantage doesn't exist anymore, not in the same way.

Now look, we're still bullish on China. We still are bullish about our operations there. But you know, that advantage of being in China just from -- just as a place to be because of lower cost materials doesn't really exist anymore. Now, there are other reasons to be in China, like we are which is making things in China for the China market, which continues to be a great market. But making things in China for export, not so attractive anymore.

And I think that's true for other commodities as well, and for other regions of the world as well. And I think also with the supply chain issues that we've all experienced this year I think our strategy of making locally for local demand has proven to be a good one and probably one we'll see others start to follow as well.

Hassan Ahmed -- Alembic Global Advisors -- Analyst

Very helpful, Lori. Thank you so much.

Operator

Thank you. Your next question is coming from Michael Sison from Wells Fargo. Your line is now live.

Michael J. Sison -- Wells Fargo -- Analyst

Hey, good morning. Nice quarter again. In terms of your comments here on the cost curve for the Acetyl Chain, where are we now in terms of the advantages? Is the rest of the world, three, four times more expensive or higher, just curious how that has changed relative to the footprint you have in the States.

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. Look, still although we've seen increases in natural gas in the United States, Acetyls produced in the United States, especially for us at Clear Lake with our technology, with the economy of scale is still very much on the lower end of the cost curve. And I would say quite significantly. China coal had gotten more expensive, even than Singapore for a while, because Singapore was oil based. But coal has gone up, oil has gone up. So I would say what we've seen is while the entirety of the cost curve has gone up, it hasn't really changed the dynamic about the very large advantage that we have in the Gulf Coast of the US, versus the rest of the world.

Michael J. Sison -- Wells Fargo -- Analyst

Got it. And then, for your outlook for 2022 in EM, I think you commented organic growth of mid to high single digits in '22 and maybe in '23, that assumes auto doesn't grow in '22 and then in '23. Do you think auto growth in that growth rate is higher?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. I think on a simplistic level, yes. I mean, I think, look we have growth in 2022 just not in auto. We have growth in medical, we have growth in electrical. But I mean, we also do expect to have some lingering impacts of the shortages of resins, glass and flame retardants as we go into 2022.

So I would expect a higher level of growth in 2023 based on the regrowth in auto and hopefully the full resolution of all those supply chain issue.

Michael J. Sison -- Wells Fargo -- Analyst

Great. Thank you.

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Thanks, Mike.

Operator

Thank you. Next question today is coming from Ghansham Panjabi from Baird. Your line is now live.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Thank you. Good morning, everybody. I guess, Lori relative to your outlook for the AC segment from three months ago, is it purely the curtailments in China and the impact on pricing that is driving the upgraded view on 4Q EBIT or is there anything else as it relates to demand or mix sort of in higher feedstock costs?

And then related to that, just your thoughts on how you see curtailments playing out for 4Q specifically and the risk on the first quarter as well.

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah, look, we have baked in already for fourth quarter. So let me start there. I mean, look, we're seeing moderate, very modest curtailments in 4Q. I mean, the differences in 3Q, it had it all happened in about 15 days. And in the fourth quarter, the provinces know the number they've been able to optimize more and so, we're seeing only really modest curtailments in fourth quarter. And it's a period typically wary of seasonality and we weren't expecting much this year.

But, I would say that's fully baked into our fourth quarter. But clearly those curtailments and the impacts are having on others as well, as well as the curtailments we had in third quarter has changed our view of how long this pricing situation is going to last. People are not going to be able to rebuild inventories now in the fourth quarter. And so, I think it just pushes that higher range of pricing further into 2022, as we do fully expect people once prices start to moderate even still fairly high prices, they will want to rebuild inventory, especially because we're already be going into the next construction season at the end of 1Q.

So I think that really accounts for the change in our outlook for 2022. It's just this continued level of higher pricing, higher margins for Acetyl extending longer into the year now, than what we thought a quarter ago.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Got it. And the thesis points you -- sorry? I was going to say that the thesis points you laid out in your prepared comments, specific to China and the capacity additions and the unlikely nature of that just based on the world haven't changed over the past decade, along with the economics, does that also impact on the same basis your own supply chain and your own access to material, etc? How are you sort of thinking about that risk aspect?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. Like I said, we've had -- I mean we had some issues around materials for additive, that applies to powders and things as well, things you never even hear about or think about. But I would say in a major way, we make 35% to 40% of our own CO.

We start very far up in the value chain, and we go very far to the end. So again, I think what we're seeing now in raw material, I mean while it certainly has impacted us, I think we've also had more ability to deal with that because we have more choices in the chain where we can make decisions that ultimately help maintain or even in some cases, improve our margins relative to others.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Thanks so much.

Operator

Thank you. Our next question today is coming from P.J. Juvekar from Citi. Your line is now live.

P.J. Juvekar -- Citi -- Analyst

Yes. Hi, good morning, Lori. A couple of things on your Acetyl Chain commentary that sort of peaked my interest. First, you talked about catalyst cost going up due to precious metals pricing. How big is the catalyst cost? And is it just the raw material inflation issue with precious metals or is there an availability issue of catalyst?

And the second question there, you talked about the capital advantage to build capacity in China versus US is now negligible, which is very interesting, because steel cost are the same everywhere, and they always had cheap labor and China was exporting deflation all these years. Do you think that's behind us? Or is it permanent? Thank you.

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. So let me talk about catalyst costs first. I mean, we haven't really shared the numbers. But earlier in the year, let's go back to like first quarter, second quarter, we actually saw costs for some catalysts we use precious metal, pink rhodium, pink platinum, these sorts of things, we actually thought increased by ten times versus what we had in previous year.

Now a lot of these [Phonetic] materials go into other applications, they go into catalytic converters and back when auto was really picking up, we really saw a lot of competition for that limited supply of precious metals. Interestingly enough, not surprisingly also, with the reduction in auto build -- so many catalytic converters being built, we've actually seen some moderation back to maybe not only five times what it is.

So I would say, precious metals [Speech Overlap]. That's -- but, we have seen some moderation. And I think the volatility we're seeing in pricing there is just typical of the volatility we're seeing around the world where a lot of pent-up demand people really wanting to produce, but a lot of the -- I would say almost worsening issues around supply chain logistics and other and everything else, which is keeping all of these markets quite volatile. But I would say volatile at a much higher level than we enjoyed say just even two years ago.

P.J. Juvekar -- Citi -- Analyst

Okay. And then on the steel side?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. On the steel side, you're right, steel kind of cost the same around the world. I mean, it used to be an advantage in China probably due to some government support. I think that's a lot of that is gone now. So I think cost of materials in China is really not that much less, labor -- not necessarily versus the US, but versus maybe other parts of Asia, the labor has more normalized. I mean, I think labor is still a bit more expensive in the US, but you also get a bit more productivity in the US.

So I'm just saying that the difference in where it used to always be a 2 to 1 advantage to build in China versus the US for any other part of Asia and you could do it and you could get through permitting and things more quickly that benefit advantage, is there still a 10% advantage? Maybe. But it's not as large as it used to be. And that's really what I was referring to in my previous comments, but again, it still makes sense to build in China, if you're building for [Phonetic] materials that are going to be consumed in China because you get around any tariff issues or any trade war issues, transportation logistics issues.

So it can still make sense to build in China. I'm just saying you're not. We would not see the advantage of building in China for something we're going to export to some other parts of the region or some other part of the world.

P.J. Juvekar -- Citi -- Analyst

Right, right. With the demographics in China, do you expect sort of these labor costs rising that will continue in the future?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Look, I think as the war for talent continues in all parts of the world now, I expect we are in for a period of inflating labor costs really in every region of the world.

P.J. Juvekar -- Citi -- Analyst

Great, thank you for that color. Thank you.

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Thank you. Next question today is coming from Bob Koort from Goldman Sachs. Your line is now live.

Bob Koort -- Goldman Sachs -- Analyst

Thanks so much. Good morning. Lori you mentioned, you thought maybe autos will be flat. Is that an industry comment or because your EV mix is getting richer you can still grow, and what's the latest on the medical stuff? I know during the peak of COVID you had some diminished demand because of deferral and elective procedures, how is that end market trending at the moment?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. Look, I would say, we expect auto builds to be flat year-on-year. If you look at the industry and globally. Now, I think that changes region to region. I think Asia is doing a bit better. I think Europe is doing a bit worse. I think the US has been between there. I think that's pretty consistent though with an industry view on auto builds. I think while we all hope that chip shortage was going to improve, I think now every most things you read by knowledgeable people say it's probably the end of next year before that starts to improve.

So our expectation is auto builds will continue to be flat year-on-year, our own what that means for Celanese though, maybe I should call that out, because I think it's important is actually, we expect our auto volumes to be up 15% next year versus where they were this year just really as driven by the mix that we have, again, the higher exposure that we have in EVs than we used to have. EVs have a higher kilogram per vehicle, the presence we have in lithium-ion battery separator films enhanced by the expansion in Bishop that will finish here at the end of the year.

So again, industrywide, we expect flat auto builds. We expect though our volume into auto to continue to grow by 15%. And I think your last question, Bob, but I had little problem hearing it, I think was really around elective procedures and medical -- for medical and what we're seeing there? [Speech Overlap]

Yeah. So what I would say is on medical, elective procedures have been flat this year. We kept calling out we expected them to increase, we also didn't expect the Delta variant, and so. What we're really seeing is, they're still flat. We're seeing a little bit of pickup in some regions. But I would say nothing of significance in terms of our orthopedic side of the medical business.

What I will say though is, we have seen a notable pickup in our business for other medical and pharma. And it's really on the back of our focus we put on this and our strategy in 2019 trying to expand our presence in other parts of medical and pharma. And we did see an increase in that in third quarter, which is really what helped kind of keep our mix pretty steady versus second quarter. And just, as an example of the kind of projects that we're bringing in now in medical outside of orthopedics, we've actually just closed the deal to provide POM into dry powder inhaler for a company in India. So this is for an inhaler, uses dry powder, uses our POM, this is a high value application, with pretty good, not just good margins, but good volume going forward.

So, that's really where we're starting to see more growth, higher margin business, things like inhalers, things like wearable diabetes devices, obviously still continuing to grow our vital dose, long dose delivery platforms. I mean, we are seeing really good growth in these segments and expect that to continue into next year and beyond.

Bob Koort -- Goldman Sachs -- Analyst

Perfect. Thanks so much.

Operator

Thank you. Next question today is coming from David Begleiter from Deutsche Bank. Your line is now live.

David Begleiter -- Deutsche Bank -- Analyst

Thank you. Good morning. Lori, going back to your cost curve comments in China, how much of this change you think is permanent? Is any of the 20-odd plants there you think are at risk for perhaps permanent shutdown?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Well, I mean, this is my personal belief. I mean, I think the advantage to build in China has disappeared, and I think that's probably permanent. I think it's like we see generally as you know, as developing economies get more developed and get -- and strive to get a bigger middle class, strive to increase wages, strive to improve the quality of life for people in that company, they do lose their cost advantage over time.

Now they've gained in productivity, so I don't think it's bad, it's going to switch, I don't think it's going to be cheaper to build in other parts of the world. But I don't think China is ever going to go back to being the super low cost producer that it once was. And that's not necessarily a bad thing. We see China also moving to create more high value materials, more things in China to meet the growing demand of the population in China.

So I just don't think they'll always be the huge, low cost exporters that they once were. But we seen many economies go through that, right. And so who knows what the next economy will be. But they're still the second largest economy in the world. So there's no doubt China will remain a very important part of the world balance and certainly the chemical and polymer world balanced in terms of where things come from.

Scott A. Richardson -- Executive Vice President and Chief Financial Officer

You know, David, and I think if you really looked at technology difference that we've talked about for a long period of time on just the straight variable costs, the advantage that we have is still there. And, with some of the challenges we see in coal and just fundamental usage of coal, and that being more and more restricted over time in China, those plants operate at a slightly lower level.

Lori talked about catalyst. Catalyst -- usage of the disadvantaged technologies is higher than what ours is. So we're seeing the costs increase, they're seeing the cost increase at a greater rate. And so that should hopefully, and that's kind of why we've signaled strength as we work our way into 2022 is we do think that there is some changes here that we do believe are sustainable, when then you layer on the fact that supply demand utilizations are getting into the 90% range.

David Begleiter -- Deutsche Bank -- Analyst

[Technical Issues] On the back half of the year due to the cost you mentioned, you mentioned there should be similar pressures next year, do we return back to maybe in 2023 prior levels of earnings once these costs normalize?

Scott A. Richardson -- Executive Vice President and Chief Financial Officer

David, we lost about half your question. Do you mind reasking that for us?

David Begleiter -- Deutsche Bank -- Analyst

Sorry, I'm actually told you had a step down in earnings here in the back half of the year due to inflation. You've -- I guess you've highlighted additional pressures continuing into next year. Would you expect to return to normalized levels of Tow earnings perhaps in 2023?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. Look, I think that's a very reasonable assumption. I mean, the real issues other than the issue we have with losing Belarus volumes this quarter, but we'll place those volumes into other applications next quarter. The things really driving the lower level of Tow margins is acetic acid pricing is natural gas pricing. So as we get to 2023, just as we expect normalization for acetic acid, we would expect normalization in pricing, and we would expect to see margins for Tow come up to the level we've seen, as well as of course, that will give us two years to pass through pricing actions on multi-year contracts.

David Begleiter -- Deutsche Bank -- Analyst

Thank you.

Operator

Thank you. Next question is coming from Kevin McCarthy from Vertical Research Partners. Your line is now live.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Yes, good morning. Lori, I had a few related questions on natural gas. I think you made the point in your prepared remarks that due to low levels of inventory, the costs are flowing through maybe a little bit faster than would otherwise be the case. And so, with regard to your 4Q earnings guidance, do you think that natural gas or energy inflation will be net positive, negative or neutral? And then the second part would be related to recovery of those costs, I think you mentioned that you're implementing surcharges, so perhaps you could comment on where you're doing that if it's Europe or other places and which products?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. So if we look at natural gas, I mean, obviously, natural gas is an issue in the US where we purchase about 55 million BTUs annually. But it's also a real issue in Europe where we don't necessarily purchase much natural gas directly, but we certainly see it as a factor in many of our raw material costs, as well as a factor in our steam and other things that we purchase from others.

And so, it has been a significant factor this year. Third quarter is a step up from second quarter. In fourth quarter, we do expect to see another call it 25% increase in the US, and a nearly doubling of natural gas prices in the EU. So this will be a significant factor for us in the fourth quarter.

Now with the surcharges, with other things we do expect we'll be able to recover some of that. I think though, we will see for example in EM another 20 million increase. With the surcharge we're recovering some, but it means we're probably just going to be flat to third quarter to fourth quarter. Not every contract can we put a surcharge on, not every molecule will have a surcharge. Some contracts are fixed for a short period of time.

So, we won't be able to recover everything, but we do think we'll be able to basically mitigate these impact of the increase from third quarter to fourth quarter. If we stay in the winter months, next year, we'd expect first quarter to be kind of the same level of pricing we see in the fourth quarter. But again, we'll -- have been able to pass more of those costs on, so we should see a bit of help as we move into next year, as it comes to the impact of natural gas pricing on our overall margins.

Kevin McCarthy -- Vertical Research Partners -- Analyst

I see, that's helpful. And then secondly if I may, wanted to ask about the 8 kilotons of production lost in the EM segment. You commented on availability issues around glass, fiber, flame retardants, resins. So wondering if you could kind of talk through those. And are they getting any better or worse as far as you can tell in the fourth quarter and beyond, what's your outlook there in terms of ability to produce?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah look, unfortunately, I think it's going to be similar in the fourth quarter. We don't really see an improvement. I mean, glass fiber demand has surged and the ability of the providers to respond to that, especially post freeze. It is just hard to get them back on and get the production up.

So I don't really see probably an improvement in glass fiber in the fourth quarter. We do expect to start seeing some improvement next year. Similarly, flame retardants, I mean, that one is a little even more complicated, because pretty much all of the yellow phosphorus that's used to make flame retardants comes out of Yunnan province in China, which was curtailed as part of the energy curtailments in Q3 and will probably be impacted in fourth quarter.

So that situation is not going to get better, probably again this year. Hopefully we'll get better next year. But there right now, it's just a single source of this raw material, and it happens to be in China. So we need to -- we need a bit more time to understand what the energy curtailments are going to mean, going forward to really know when that issue is going to resolve itself.

And resins I would say are mostly resolved at this point in time. I don't expect resin availability to be as much of an issue in the fourth quarter and certainly not as we move into next year.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Perfect. Thanks so much.

Operator

Thank you. Our next question is coming from Matthew DeYoe from BoA. Your line is now live.

Matthew DeYoe -- Bank of America Merrill Lynch -- Analyst

Thanks. I don't expect you to comment on market rumors but, there was one earlier this summer about more or less ceramics for medical and industrial products companies. And without talking about that one more specifically, I guess, can you help us frame out the scope at which you're looking through valuation -- M&A and kind of what would fit into the model and what wouldn't fit? Because, it seems like the search is fairly wide I guess, lets start there?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. Look, I think, as it comes to M&A, whatever you're hearing, I would assume we're looking at everything, anything that is related to end markets that we currently serve, anything that's related to resins that we currently produce or might want to or polymers that we might want to produce.

I would just assume if there's a rumor, if something's -- if you see something, we're probably looking at it. Now that said, we look at everything with a lot of discipline, and we look at it through the lens that we laid out at investor day. So we look at -- we really focus on can we achieve synergies with it, what do we think is our unique ability to get value creation from it, so is it something that we can provide our business models, our project pipelines, our growth models to.

All of those criteria, where do we think it is on the value chain, we look at -- but we look at everything. We choose very few things to pursue. And so, maybe I would just stop at that. What I will say though is, we think we have a lot of managerial and financial bandwidth in order to complete transactions of any size or multiple transactions of a smaller size.

So, at the time of the Investor Day, we said we outlined about a $6 billion, having $6 billion available on our balance sheet in order to do M&A. I will tell you even with the expected close of Santoprene here in December, we still think we have about $6 billion available to us on our balance sheet, because of our higher earnings that we've had this year, and what that's meant in terms of cash generation, and where our balance sheet is at.

So I mean, assume we look at everything, assume we continue to look at it through the criteria we laid out at Investor Day, and know that we have a very large pot of money ready to go when we find the right opportunity. And we have a management team that's ready to both negotiate and integrate.

Matthew DeYoe -- Bank of America Merrill Lynch -- Analyst

That's helpful. Thanks. Just wanted [Phonetic] to talk about a little bit on the EM side with the nat gas costs, I guess I was a little surprised that downstream ops would have that much exposure directly to nat gas. Is that just a reflection of like European energy costs moving up or is there some -- is nat gas more directly a feedstock to or is it just the acetic pass through I guess, just wondering.

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Well, I mean, if you think about it, in the US just about everything is a derivative of natural gas. So, even in the US we've seen almost a doubling of natural gas costs from say last year to this year, to the current price this year. But if you think about CO, if you think about methanol, I mean, in the US these are all natural gas derivatives. So there is a kind of direct correlation to raw material feedstock.

Having natural gas though for Acetyl from an energy standpoint, like [Indecipherable] this is very small, because actually acetic acid is exothermic, it is heat integrated with others downstream. So not kind of the inverse of what you think. It is a big deal for raw materials, we tend to be able to pass that through, not such a big deal in terms of direct cost of energy in our US operations.

In Europe, again more EM exposure. Most EM tends to be lower energy intensity, so then compounding really doesn't require much energy. But something like POM requires a lot of energy. So you think about POM, right, you have to heat it, you have to crystallize it, you have to dry it. That takes a lot of energy.

So there, we really do see the direct impact of natural gas, which is almost doubled from third quarter to what we expect in the fourth quarter. And its kind of four times what it was in the third quarter or in the second quarter. There you see a very direct relationship, and one that's a little harder to pass through, because it really has to do with steam, steam costs and electricity costs, and all those sorts of things.

Matthew DeYoe -- Bank of America Merrill Lynch -- Analyst

Understood, thank you.

Operator

Thank you. Your next question today is coming from Frank Mitsch from Fermium Research. Your line is now live.

Frank Mitsch -- Fermium Research -- Analyst

Hey, good morning and congrats on the nice results. Just curious with the step down that we're seeing in the Acetate Tow market, can you comment on where you feel that fits within the Celanese portfolio?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. Frank, I mean, as you know, we constantly look at everything in our portfolio and look at where we think the long term trends are, and what does that mean for long-term margin results and [Phonetic] the fit in our portfolio. What I would say on Tow and similar to my previous comments, is the step down we're seeing right now is, we think uniquely tied to the price of acetic acid and energy prices around the globe. And clearly, the biggest piece of that being energy prices in Europe and for our [Indecipherable] plant. So, we do believe that we'll see a normalization of pricing both raw materials and energy. And with that, we expect to continue to enjoy high margins in Tow. But, like all of our portfolio, we will continue to watch that and make strategic decisions accordingly, as we move through the next few years.

Scott A. Richardson -- Executive Vice President and Chief Financial Officer

Yeah. And Frank, I mean, I think it's important to remember, I mean, this is still between both the base business and the dividends that come out of the JV. This generates a lot of cash for us. And that cash can then be deployed for higher growth application. So, we saw last year the importance of having this business when we saw the downturn, very solid results, very solid cash flow generation. And yeah, we're seeing some near term compression, but as Lori said, we do expect some level of normalization.

Frank Mitsch -- Fermium Research -- Analyst

That's very helpful. And just a clarification, in terms of your energy costs year-over-year, just reading through the prepared remarks, so it's $20 million negative impact in Q3, an additional $20 million negative in Q4. So we should assume like year-over-year, higher energy is going to cost you $40 million, is that correct?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. Look, those -- that's for EM. I would say we've also seen the impact of those higher energy, impacts on raw material, and that's probably closer to $250 million year-on-year. But we've been able to offset all of that, except anticipate offsetting all of that, except about $20 million in EM [Phonetic] through pricing initiative and other initiatives.

Matthew DeYoe -- Bank of America Merrill Lynch -- Analyst

Got you, very helpful. Thank you.

Scott A. Richardson -- Executive Vice President and Chief Financial Officer

Kevin, let's make the next question our last one, please.

Operator

Certainly, our final question today is coming from Laurence Alexander from Jefferies. Your line is now live.

Laurence Alexander -- Jefferies -- Analyst

Good morning, two quick ones then. Can you touch on given the improved structural outlook for acetyls, why not pull forward capex to sort of fill in the pipeline, the industry pipeline in 2026 to 2028? And on the carbon pricing, to the extent that carbon prices move higher, are your EM customers giving you any sense of how that factors into pricing for your products? Are you seeing any kind of favorable mix shifts or negative from that. And similarly, within acetyls, is there a certain level of carbon prices where some of the Acetyl Chain becomes disadvantaged relative to substitutes?

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Yeah. Look, I think in response to your first question, not just for acetyls, but for EM, we continue to look at our ability to pull forward all of our products. Because, my margins are high [Technical Issues] and we believe that, that structural demand is there. Similarly in EM, we can sell everything we can make right now. And we expect that to continue as the desire for high quality unique products like we make continues to grow.

So we actually look at -- we constantly have been looking at, how do we pull all of these up. The limitations are really the actual time it just takes to do a project between permitting which unfortunately has been slowed down in most parts of the world, because of COVID. All the while it's just the ability to get raw materials. And we talked a little bit about steel, but concrete everything, there's so much demand right now for construction projects, that we're finding it difficult to pull our projects up in a meaningful way. But we'll continue to look at that and we'll continue to update you as we move through the year.

And then on your second question, what I would say is, for most of the high value products that we produce in EM, customers just want the product. I mean, we've had three consecutive quarters of price increases in EM, kind of the first time in our history. And what we find is that is not impacting the desire by customers to take products. So I think in the inflationary environment, we're all experiencing on everything. People understand, they may not like it, but they understand why we're having to push through these price increases to cover raw materials and energy.

And again have not seen any loss of volume due to pricing. I would say the same thing really in acid and downstream, Acetyl Chain derivatives. The demand for construction products and packaging and all these things that acetyls go into is only increasing and even at the higher prices. I mean, people maybe have been a bit slower to refill inventory at these prices, but there's no material anyway available to refill inventory. So again, we've not -- our customers would take more at these prices if we could produce more. We'll just leave it at that.

Laurence Alexander -- Jefferies -- Analyst

Thank you.

Operator

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.

Brandon Ayache -- Vice President, Investor Relations

Thanks, Kevin. We'd like to thank everyone for listening in today. As always, we're available after the call if you have any further questions. Kevin, please go ahead and close up the call.

Operator

[Operator Closing Remarks].

Duration: 62 minutes

Call participants:

Brandon Ayache -- Vice President, Investor Relations

Lori J. Ryerkerk -- Chairman of the Board and Chief Executive Officer

Scott A. Richardson -- Executive Vice President and Chief Financial Officer

Vincent Andrews -- Morgan Stanley -- Analyst

John Roberts -- UBS -- Analyst

Jeffrey J. Zekauskas -- JP Morgan -- Analyst

Duffy Fischer -- Barclays -- Analyst

Hassan Ahmed -- Alembic Global Advisors -- Analyst

Michael J. Sison -- Wells Fargo -- Analyst

Ghansham Panjabi -- Robert W. Baird -- Analyst

P.J. Juvekar -- Citi -- Analyst

Bob Koort -- Goldman Sachs -- Analyst

David Begleiter -- Deutsche Bank -- Analyst

Kevin McCarthy -- Vertical Research Partners -- Analyst

Matthew DeYoe -- Bank of America Merrill Lynch -- Analyst

Frank Mitsch -- Fermium Research -- Analyst

Laurence Alexander -- Jefferies -- Analyst

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