InterviewTransitional year as Borealis readies Borouge 3, acquisitions

16 August 2013 16:00  [Source: ICIS news]

LONDON (ICIS)--Borealis’ full-year net profit for 2013 is likely to be below the €480m ($640m) posted in 2012 despite the potential for a slight uptick in overall sales, as the company prepares its flagship Borouge 3 expansion project in Abu Dhabi and integrates recent acquisitions into its fertilizer business, CEO Mark Garrett said on Friday.

The company reported on Friday that its net profit for the second quarter of the year was €83m, an improvement on the first quarter’s €61m, but down by 26% from the second quarter of 2012. In total, net profit for the first half of the year is more than €100m below the €252m generated during the first half of 2012.

“We will have sales slightly up versus 2012 and we’ll certainly have profit down. If you take the first half [of the year] and multiply it by two, you won’t be far off. There might be a slight improvement  in profitability [during 2013], and that’s about it,” said Borealis CEO Mark Garrett.

Garrett has long stated that the company’s economic performance in 2013 will be muted, as the company prepares for Borouge 3, a 2.5m tonne/year expansion to its Borouge olefins and polyolefins production joint venture with Abu Dhabi National Oil Co (Adnoc), to come onstream in mid-2014.

The company is also to spend the next few months integrating fertilizer companies GPN and Rosier – both acquired in early July  – into its fertilizer business.

“We have significant investments in the next six months that will only yield results next year. We’ve owned the GPN and Rosier assets for one month, and we’ve got six months of integration work and a lot of stuff to get done before the Europe growing season starts in February-March next year. And that costs us some money, for which we don’t get a return this year,” Garrett said.

Aside from its capital expenditure programme, which helped to drive down profits despite a slight increase in sales both for the second quarter and the first half of 2013, the Austria-based plastics, chemicals and fertilizer producer also saw its performance weighed down by prevailing weakness in the European polyolefins market, a situation Garrett does not see changing in the near future.

“The reality is that for the European polyolefins market, there are two key factors. The first is that [the European industry] is a high-cost raw material producer. The Middle East has lower-cost feedstock, Russia and eastern Europe have lower-cost feedstocks, and North America has lower-cost feedstock. So there are imports coming in that put pressure on the European market.

“The European market is not growing, because the economic and financial situation in Europe is not really very good,” he added.

Garrett remains pessimistic on the European economy in general, backing his prediction to ICIS late last year that the region is facing a decade of stagnation.

“The strongest market in Europe is going to be tourism for the next ten years,” he said, on recent murmurs of an economic recovery in Europe. “I’m not a guy who gets excited about 0.2% growth [recorded for the Austrian second-quarter economy this week]. I know how national statistics are calculated, and there’s a room for error larger than the thing you’re getting excited about.”

“We see the market as largely flat, so it is structural – the industry is going to be in some difficult times but, for us, our ability to weather it comes from the innovation and the way in which we push our products into the higher value applications,” said CFO Daniel Shook.

Despite the company’s bearish sentiment on Europe, the company has been investing heavily in ramping up its exposure to the region’s fertilizer sector, which Garrett attributes to a growing demand for food in the region, and the need to increase crop yields in eastern Europe to meet that demand.

Economies of scale offered by cheaper land prices in eastern Europe are also attractive for producers, according to Borealis.

“We’re seeing agriculture grow strongly in eastern Europe, and we believe that, if Europe wants to feed itself in the future, eastern Europe is where that will happen, because the productivity gains in agricultural production in Europe really have the greatest potential in the east,” Garrett said.

“We’re seeing productivity improvement in eastern Europe combined with economies of scale leading to step changes in agricultural production,” he concluded.

Cracker start-up for Borouge 3 is expected before Christmas, but will take around eight months to come onstream from that point, as a result of the scale of the project. The expansion will increase olefins and polyolefins production capacity at the Abu Dhabi site to 4.5m tonnes/year.

While pessimistic about Europe’s prospects, Garrett is sanguine about the slowdown in China’s rate of economic growth, and believes that the green shoots in the US economy do constitute a genuine recovery.

“[China] is largely an export nation and if the rest of the world’s economies aren’t going very fast, it’s logical that they can’t continue to grow at 9-10%,” he said.

“The [US] recovery could have been quicker if [politicians] would stop bickering among themselves, but they’re [the economy] making a slow recovery and the market tends to have greater flexibility in North America to be able to drive that recovery,” he added.

($1 = €0.75)


By: Tom Brown
+44 208 652 3214



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