INSIGHT: Europe players have to drive efficiencies

05 August 2008 17:26  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--European and North American polyolefins producers have no choice but to continue to drive operational excellence and productivity. As they face slowdowns in vitally important end-use markets like construction there are few places to turn.

The BRIC (Brazil, Russia, India, China) nations offer strong market growth but growth at home is constrained, more so given the current uncertain economic climate. Producers want to be able to sell effectively into these fast-expanding markets while they become better-positioned in feedstock advantaged production locations.

Hence the flurry of announcements in recent months for new compounding facilities in China, South America and elsewhere to help push growth of more technically-specialised polymers.

Polymer producers are trying to capture added value growth. They foresee a time when commodity products are supplied largely on a feedstock cost driven basis. And they know that only the most feedstock advantaged players will be able to compete effectively in that game.

It is all about competing effectively. Borealis on Tuesday showed just how much higher naphtha costs could hurt liquids based olefins and polyolefins producers, recording a 48% fall in second-quarter net profits.

Borealis’olefins and polyolefins plants are in Europe. The company has been striving over the past few years to improve plant and wider business efficiencies. Production units have been closed while replacement capacities have been aimed at more sophisticated, potentially higher value markets.

It is a simple game even though it can be difficult to execute. Borealis is not alone in having a relatively clear view of the future. Management rightly worries about volatility and the uncertainty that brings.

As energy and feedstock costs decline in the relatively quiet European summer period that can only make the going tough for the fourth quarter when producers will be wanting to hold on to prices and margins so hard won in the middle of the year.

But while the impact of oil and feedstock price movements can be something of a double-edged sword, there is little argument about affect of changing supply/demand balances in polyolefins. The industry is facing a capacity-driven downturn which Borealis, and others, believe will last for two years and more.

Plastics producers from Europe and North America want to capture growth in China, India and elsewhere as effectively as possible and they want to capture more than a degree of sustainability in potentially difficult times.

Borealis, for instance, wants to boost its presence in the Middle East - by 2015 it expects to be making 4.5m tonnes of plastics, petrochemicals and plant protection products in Abu Dhabi, a production base equivalent to that which it has in Europe.

It does not want to build close to fast growing markets like China and India but focus on assets where feedstock is cheap.

It is building a polypropylene (PP) compounding facility in Shanghai which CEO Mark Garrett says will be sufficient to take output from the second phase Borouge project. There are no firm plans yet but the company will have to look at further compounding capacity as part of Borouge 3.

Borealis wants to produce more specialised polymers and is driving innovation hard. It started construction work to expand its plastics innovations headquarters in Linz, Austria, in July. Linz will become the international hub for the company’s research activities.

Borealis makes much of the fact it produces more specialised polypropylene (PP) and polyethylene (PE) products. But less than 50% of its turnover is derived from these more performance-oriented materials so that is having to change.

In end-use markets like wire and cable, for example, the company’s offering is all about purity in production and compounding and the business continues to be driven by innovation.

European producers like Borealis have no choice but to continue to drive productivity and operational excellence while pushing ahead with innovation. Borealis is in a strong position too given its close relationship with Abu Dhabi and its plans to make plastics, petrochemicals and plant protection products in the Emirate.

The Vienna, Austria-based group’s view of the future is well-founded: the next few years are gong to be difficult and operating efficiency is going to have to be driven hard. But there are opportunities to grasp now and well into the future. Companies have to aim to be in the right place at the right time.

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By: Nigel Davis
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