InterviewUS shift to ethylene offers opportunities for naphtha: Borealis

08 November 2013 14:13  [Source: ICIS news]

LONDON (ICIS)--The US chemical industry’s shift to ethane and ethylene on the back of the shale gas boom may offer opportunities for naphtha producers as a fall in naphtha feedstock-derived co-products hits the market, the chief financial officer of Austria-based chemicals company Borealis said on Friday.

A change in US feedstock trends over the next few years on the back of numerous producers contemplating or pursuing additional cracker capacity in North America to capitalise on cheap ethane reserves will result in a shifting product slate in the region, which is something Borealis has been moving to capitalise on, according to CFO Daniel Shook.

“We are more skewed towards polypropylene than most, and that was a conscious decision we took several years ago. We need to see if that gives us an advantage as crackers get converted more to ethylene and ethylene derivatives such as polyethylene, and the lack of the co-products that come out of full naphtha cracking hit the market,” he said.

The company reported on Friday a 2% year-on-year increase in net profit for the third quarter to €131m ($177m) following several consecutive weaker quarters weighed by weak polyolefins earnings.

Olefins and polyolefins buoyed results for the quarter, according to Shook.

He said: “We did see some shift of profitability from the olefins side... and into polyolefins. We did have a rising price environment so we also had the benefit of some positive inventory effects as well,” he said.

The improved performance may be due in part to the anticipated shutdown of a significant amount of polymer production capacity in Europe.

Shook said: “In the third quarter we did see some margin improvement. It’s difficult to say whether that’s the beginning of an overall trend. Over the course of this year, about a million tonnes of polymer capacity has been announced for closure in Europe...  even though those plants still are operational that provided some backdrop for it.”

However, the western recovery remains “modest and still very volatile,” he added.

“The markets remain subdued,” Shook said. “We’re not really seeing an uptick [in infrastructure sector demand] there on pipes or wiring cable. [The] automotives [sector] is a challenge but our global footprint enables us to weather it.

“On the advanced packaging side, I think the innovations we bring in also support our results,” he added.

Fertilizer earnings - a driver of growth in recent quarters - also weakened on lower margins.

“The fertilizer business saw margin deterioration in the quarter, and that, combined with some plant reliability issues both in our newly acquired assets in France, as well as in our operations in Linz, hurt the performance,” he added.

The company experienced complications with a planned turnaround for parts of its Linz, Austria, facility in 2013, with hiccups in bringing capacity back onstream, according to Shook.

The company’s bottom line was also impacted by the process of integrating recently-acquired assets and bringing them up to a consistent level of reliability, Shook said, adding that if all assets had been running well, €10-20m could have been added to the company’s quarterly earnings.

Borealis acquired French fertilizer company GPN and a 56.86% stake in Belgian mineral fertilizer company Rosier during the second quarter of 2013.

The producer is likely to post softer results in the fourth quarter of the year as demand winds down,  Shook added.

“We typically see the fourth quarter being a little bit softer, and December is usually not a full month of sales for all the normal reasons, it tapers off a little bit,” he said.

A softer quarter indicates that the company’s full-year net profit is likely to be significantly below the result for 2012. Borealis’s total net profit for the year to the end of the third quarter was €275m, compared to €380m for the same period in 2012.

Borealis says that market conditions in the third quarter were worse than the same period in 2012, despite the continuing recovery of the US economy and a slow recovery in Europe, which is predominantly driven by thinner margins in the fertilizer sector and weakness and supply overhang for polyolefins, according to Shook.

He said: “When you look at our portfolio, we do see margins lower on the fertilizers side than they were a year ago.

On the polyolefins side, we’re pleased that Europe seems to be not in recession anymore and is ticking up a little bit, but there is still weakness and supply overhang in the marketplace that will take some time to come out,” he added.

The company’s net debt decreased during the third quarter, reducing its debt/equity gearing to 47%, within its target of 40-60% gearing, according to Shook. Manageable debt maturities and comfortable gearing leaves the company flexible to act on opportunities as and when they present themselves, he added.

"Stripping out the money we have used for acquisitions and dividends, our core business generated over €100m of free cashflow [in] the year to date. That’s good for us, and enables us to maintain our strategy of being opportunistic in these markets,” Shook said.

($1 = €0.74)

By: Tom Brown
+44 208 652 3214

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