INSIGHT: Nova still running hard to gain pace

25 July 2007 17:13  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Nova Chemicals still seems capable only of running hard while effectively standing still.

Improved styrene margins helped it a great deal in the second quarter. The so-called Alberta advantage worked in the company’s favour as it did at the same time last year.

But Alberta spot gas costs were still 20% higher compared with the year earlier reporting period.

Higher priced oil has also had a negative impact on the olefins/polyolefins chain as Nova, alongside other North America based producers, were not able to pass on higher input costs in product prices fast enough.

Nova’s second quarter olefins and polyolefins operating profits were just $3m ahead compared with last year at $228m on revenues up 3.5% at $1.68m.

Second quarter polyethylene profits were essentially flat, the company showed in its second quarter results released on Wednesday.

Ethane-fed Joffre olefins profits at $121m were down 9.7%, largely because of the higher comparative gas costs.

Earnings from the re-vamped Corunna flexi-cracker were $58m against $41m driven higher by co-product values.

The olefins/polyolefins business has improved throughout 2007 and could go further so the outlook is not necessarily negative.

Higher ethylene prices have largely reflected higher feedstock costs but it is proving tough to hold on to prices in downstream polyethylene.

Polymer price increases were implemented in the second quarter and there are further increases in the pipeline. 

Nova says export markets in Europe and Asia provide an attractive alternative to the domestic market so there is little pressure on producer inventories.

North America polyethylene operating rates that averaged 96% in the second quarter are not necessarily sustainable.

Nova says its polyethylene sales were up 10% in July compared with July last year.

The second quarter numbers look much better for styrene and for the new Styrenix joint venture with INEOS which is expected to launch in the third quarter.

Nova admits, however, that margins on the retained expandable polystyrene (EPS) business are still thin. Aggressive cost reductions are expected to take effect soon. Sales of Arcel packaging have not grown as expected.

The styrenics business could suffer further in the seasonally weak (for styrenics) third quarter. By contrast, Nova remains bullish about olefins and polyolefins.

The Alberta advantage is widening – Nova says it was 17 cents a pound in July compared with 13 cents a pound in the second quarter and 7 cents a pound in quarter one.

“Polyethylene market fundamentals are all lined up,” CEO Jeff Lipton, said on Wednesday. Markets are growing faster than analysts have predicted. “Our view for the third quarter is very upbeat,” he adds.

Moving into its usually strongest quarter in North America, Nova can build further on an enhanced Alberta gas cost advantage compared with is competitors based on the US Gulf coast.

Lipton is also confident that the current olefins/polyolefins up cycle can persist through 2010 and possibly beyond if robust demand growth continues.

By: Nigel Davis
+44 20 8652 3214

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