Borealis margins up on crude, Europe demand improving – CEO

Interview article by Jonathan Lopez

LONDON (ICIS)–The fall of crude oil prices is affecting Borealis positively as the commodity values went down quicker than those of polymers, returning improved margins, the CEO of the Austria-headquartered polymers and fertilizers producer said on Monday.

Mark Garrett said after the initial “uncertainty” regarding how the fall in crude oil values could affect those of polymers, improved demand in Europe in the end turned out to be a positive and prices did not decline as much as the crude values did, bringing better margins.

Borealis presented its first-quarter financial results earlier on Monday, showing sales during the period had fallen 12% to just under €2.0bn, although reflecting the better margins net profit jumped 34% to €137m.

The CEO said he is not concerned about the potential obstacles product coming out of Borouge 3, the company’s joint venture with ADNOC in Abu Dhabi to produce 4.5m tonnes of olefins and polyolefins once it is fully in operation, might find in the markets as the manufacturing sector slows down in China and other emerging economies.

Even though Garrett recognised that China’s demand is increasing at a slower rate than in the past years, although it is not decreasing in any case, he also said Borouge 3 has not found any problems to sell what it has produced so far, as three out of five polyolefins plants at the facility have already started up.

“I think maybe you can say we are a bit lucky, but Borouge 3 is the big start up of the last 12 months. Some other volumes might be coming from North America, but Borouge is the last big ethane project coming on stream on the Gulf. Anything else is based on mixed feed or naphtha, and the same goes for the Far East. So everybody else has a much higher cost structure [than Borouge], so the volumes [coming out from it] will move [sell] into the market,” said Garrett.

Moreover, Borealis’ CEO also found a positive on how demand in Europe has improved in the last few months, a fact he attributes solely to the fall in crude prices, which made consumer confidence increase as business and households found more disposable income to spend.

“The fall in oil prices achieved what many governments in Europe haven’t been able to achieve: a broad tax cut, somehow. If you pay less for your heating, or transport, that has a positive effect in demand. By November or December we didn’t know how much that would be and it turned out to be quite good. Demand has been okay, although supply has been difficult,” said Garrett.

He said supply had been dampened by one of Borealis’ monomer suppliers, whose cracker had been out of operation for a long time, causing problems at the company’s facilities in Kallo, Belgium. The tight supply forced Borealis to import some product from the Middle East “to try and cope” with the situation.

Garrett has always been in favour of Europe exploiting its shale gas reserves in order to keep its manufacturing sector competitive against other major economies like the US or China, although he admitted the fall in prices of both oil and natural gas has changed the views of those producers of shale oil and gas, as profitability has been greatly reduced.

“The rig count [in the US] has gone down and I expect US production numbers to start dropping in the second half of 2015. Nevertheless, the US had a set of circumstances which made shale feasible and a financially comfortable proposal, like the access to oil pipelines installed across the whole of the country,” said Garret.

“Moreover, in the US the shale is tight but still looser than in Europe. When you frack the rock, you don’t know how much you can yield out of the rock. The shale gas extraction [trials] in Poland, for instance, were very tight so it was very disappointing, they haven’t been to date successful.”

Garrett added two other countries in which shale gas production could work would be Ukraine and the UK. However, “who’s going to dig holes in the Ukraine with the war going on” whereas in the UK shale gas extraction would face the problem of land ownership which, opposite to the US,  is mostly not in private hands but public and managed by institutions.