MADRID (ICIS)--Higher fertilizer prices after Russia’s invasion of Ukraine helped Borealis to achieve an improved price for the divestment of its fertilizer division to Agrofert, the CEO of the Austrian polyolefins major said on Monday.
Thomas Gangl added that weaker demand is pushing polyolefins – including polyethylene (PE) and polypropylene (PP) prices - lower in Europe, a move that had been expected as prices start “normalising”.
The head of Borealis was unable to specify what proportion of the company’s target of nearly 2m tonnes/year of “circular products” produced by 2030 will come from mechanical or chemical recycling, but added that without deploying the latter at scale, the target would be unachievable.
HIGH PRICES, BETTER DEAL
Earlier in June, Borealis said it would divest its fertilizers division – including the production of melamine and nitrogen products, as well as fertilizers – to the Czech food and agricultural conglomerate Agrofert for €810m.
The price represented an increase in the enterprise value (EV) for the division of 78% compared with a previous offer in February from Russia’s EuroChem, which at the time valued the division at €455m.
In Q2, already-high fertilizer prices rocketed further as both Russia and Ukraine are key suppliers to the world's markets, but importers were unable to secure volumes from either country because of the war.
In the interim, Borealis managed to find another bidder with a better offer.
“At the time [February], the situation for fertilizers was a different one, and €455m then seemed a fair price… A big part of the global imports from the two countries were not available in the market, and demands for fertilizers rose, prices went up significantly, up to four times,” said Gangl.
“This is why we see that, for a certain period of time, the profitability [of fertilizers] will be significantly better than it was and, therefore, earnings and cash flow will rise: a new price had to be defined.”
The war in Ukraine also pushed energy prices higher, with inflation in the eurozone – of which Austria is a member – reaching 8.1% in May, its highest level since the 19-country currency union was formed.
Higher inflation – and expectations of interest rate hikes – have made consumers wary of large-ticket purchases, which could slow growth. This has left central bankers scratching their heads about how far interest rates have to rise to rein in inflation, and whether they risk a downturn if they raise them too far, too fast.
Within this environment, demand for key polyolefins such PE and PP was due to slow and prices fall, an outcome confirmed by the Borealis CEO.
“We see demand is not continuing at the same level, it is coming down – by how much, it depends on the different business segments. However, we are now coming from an environment of extremely high demand and high margins [for polyolefins producers],” said Gangl.
“We knew we should not get used to that. Right now, enough supply is meeting demand, so prices are weakening… Moreover, logistics issues should also start normalising – we will see a slightly different picture [for the polyolefins markets] in the second half of this year.”
MECHANICAL OR CHEMICAL
Last week, Borealis presented 'Strategy 2030' which, among other targets, aims to produce 1.8m tonnes/year of circular polymers by that year.
Borealis currently produces 100,000 tonnes/year of circular polymers, including recycled PE (R-PE) or recycled PP (R-PP).
Although mechanical recycling is well-deployed throughout the industry, chemical recycling – which the industry insists will be key to making all polymers fully circular – is in its infancy. For additional support, future EU policies should consider chemical recycling as a key part of its Circular Economy, said Gangl.
Gangl would not commit to what total of the 1.8m tonnes/year will come from mechanically or chemically-recycled product, but stressed that chemical recycling is essential for the plastics industry to become fully circular.
In the 27-country EU, only Spain has passed a regulation – linked to its plastic packaging tax – exempting chemically-recycled content from the €450/tonne tax, effective 1 January 2023.
“Chemical recycling is the needed part [to achieve the EU’s recycling content targets]. Not everything can be mechanically recycled – in recycling, the process cascades down from mechanical recycling first to the residual parts: chemical recycling is the only way to recycle those,” said Gangl.
“The pushback [against chemical recycling] comes from the fear that those parts that can be chemically recycled are not used that way. However, this does not make sense for us: it really makes sense to use the most efficient way to recycle as much product as we can.”
Borealis is majority-owned by Austrian energy and petrochemicals major OMV. In 2021, sales, including joint ventures, stood at €10.15bn, with net profit at €1.40bn.
OMV has a 75% stake in Borealis; with the remainder owned by Abu Dhabi-based holding company, Mubadala. Borealis also holds a stake in Abu Dhabi’s Borouge polyolefins complex, which has a PE production capacity of 2.7m tonnes/year, and a PP production capacity of 2.2m tonnes/year.
In May, Borealis and joint venture partner ADNOC launched an initial public offering (IPO) for 10% of Borouge’s issued share capital to raise $2bn in proceeds. The enterprise value (EV) for Borouge is around $20bn.
After the IPO, ADNOC will hold a 54% stake in Borouge, while Borealis' stake will be around 36%.
Front page picture: A wheat field in Russia
on 10 June; global supply of fertilizers has
been disrupted since the war in Ukraine started
Picture source: Arkady Budnitsky/EPA-EFE/Shutterstock
Interview article by Jonathan Lopez