INSIGHT: Borealis unafraid of polymers overcapacity, ferts still the Achilles heel - CEO

Source: ICIS News

2018/02/13

LONDON (ICIS)--Fertilizers continued to be the Achilles heel at Borealis in 2017 as selling prices remained low although that did not impede the company's “fantastic” year overall, according to the CEO at the Austrian polymers and fertilizers major.

Mark Garrett added that the polymers capacities to come on stream in 2018 in North America and India will put pressure on prices in the short term, but the cycle will be on the up again by the time Borealis brings its own, large-scale polymer capacity expansions online.

The company published its annual results on 11 February, showing net profit flat in 2017 at €1.10bn and sales at €7.56bn, up 3% year on year.

Borealis’ Base Chemicals division includes nitrogen-based fertilizer operations, melamine and AdBlue, the urea-based product used in diesel combustion engines to reduce emissions of nitrogen dioxides (NOx).

Asked whether Borealis should simply divest its fertilizers operations in order to free the firm from that burden, Garrett said that Base Chemicals would have to be sold as a whole, adding AdBlue and melamine are “very profitable” – a full divestment would be counterproductive.

“Lots of the problems we had in fertilizers in 2017 were home-grown. The market wasn’t good, but we compounded that by not running our plants well… We suffered production shutdowns and breakdowns in exactly the period of time you have to be running your plants,” said Garrett.

The CEO added that after two major turnarounds production reliability has improved, a key aspect for fertilizers: products availability is fundamental in the planting season, which in Europe runs from November to May.

He conceded that the company’s ageing fertilizers assets also suffered from a backlog of maintenance “over many years”, which ended up putting a strain on production.

“We are perfectly willing to accept our own fault. We believe if we had been able to run the plants reliably we would have made more money.”

Privately-owned Borealis does not publish financial results by division. Its CFO Mark Tonkens, also present at the interview, would only disclose that fertilizers accounted for “less than 20%” of total sales in 2017.

“AdBlue and melamine are extremely profitable. Then fertilizers: You gotta have something to keep you busy at night,” joked Garrett, pictured right.

Borealis does not joke about polymers overcapacity. Presenting its financial results, the company admitted that prices will be under pressure this year and next as large expansions come on stream, although it added a lift in fertilizers prices would offset the former.

European polymers sources are expectant to see to what extent new capacity additions will affect the regional market, and how less profitable producers within it will fare versus ethane-based capacities in the US.

European crackers are mostly naphtha-based, as crude oil has traditionally been its main feedstock, as opposed to natural gas.

Garrett’s take on overcapacities is that, like Borealis did with its Abu Dhabi-located Borouge complex, its start-up dates will occur when other producers have already digested the overcapacities – what he calls being “anticyclical”.

Borealis announced in 2017 expansions at Borouge together with its joint venture partner Abu Dhabi National Oil Company (ADNOC, with a 60% stake), to take total production capacity to more than 10m bbl/day, and on the US Gulf Coast, where it will build a 1m tonne/year ethane cracker together with its sister company Nova Chemicals and France’s Total.

Nova Chemicals and Spain’s Cepsa are owned by Mubadala, the Abu Dhabi sovereign fund. Mubadala has a 64% stake in Borealis, with the Austrian energy major OMV owning the remaining 36%.

On top of those expansions, Borealis is to announce a final investment decision (FID) for a propane dehydrogenation (PDH) plant in Europe in the first half of this year, the location of which is likely to be at the company’s facilities in Kallo, Belgium, the CEO confirmed.

“We have been successful in the past [because we were anticyclical]: We landed Borouge 2 when all the competitors were staring news projects [and] we landed Borouge 3 exactly the same way. Borouge 4 and the Gulf Coast plant will be the same,” said Garrett.

Asked what economies would devour the major polymers output to be produced in coming years, Garrett was not too concerned and said that Asian – and particularly Chinese – relentless urbanisation would guarantee the demand.

Borealis has been one a few European chemical majors to revamp facilities in order to import ethane from the US and its cracker operations at Stenungsund in Sweden have been receiving US-produced feedstock for over a year.

However, those deliveries were purchased in the spot market as Borealis’ agreement with US’ Antero Resources failed to deliver on contractual obligations on the back of technical issues at pipelines around the Marcus Hook terminal in the US east coast.

CFO Tonkens (pictured right) said: “We still believe Antero is a good partner, and [the contract is] still beneficial for us. [However] We are not a charity, so you can be sure that when we renegotiate contracts we will put pressure on them.”

Garrett’s position as the CEO of a privately-owned company allows him to speak his mind more freely, to a certain extent at least.

His strong opinions about the EU and the eurozone's structures and fundamental principles are well known, as well as his out-of-line stance among European chemical peers about how a free trade deal with the US – negotiated in 2016 – was a representation of the EU working "against the will" of the people.

His position on EU and eurozone problems has not changed, and the way complacency has made a comeback in Europe on the back of a strong economic performance simply amuses him.

“They are all happy now, but I wonder what’s going to happen in the next 12-16 months. [In the US] they are at the end of the cycle and debt is higher than it was in 2008. Some analysts think the current frothiness in the markets is like a pre-tremor before the big earthquake comes,” said Garrett.

“The Fed [US Federal Reserve] has to increase interest rates, probably what [President Donald] Trump doesn’t want to happen because he has just put this turbocharger into the economy by lowering corporate tax and he is hoping to drive the economy on steroids through to his re-election.”

According to Garrett, however, Trump’s plan may derail just before the November 2020 election, potentially jeopardising his re-election.

Needless to say, Garrett thinks the European recovery is unsustainable, because the 19-country eurozone still struggles in debates between German-led partners who praise austerity to come out of a crisis, and the southern states like France, Italy or Spain that support higher investment as a way to create growth and improve productivity.

“I can tell you the Germans are very nervous. They don’t like the ECB [European Central Bank] policy [of low interest rates and quantitative easing], they never did. Now they are asking for it to stop,” said Garrett.

“[ECB president Mario] Draghi is saying no, because he has a double-edged coin: he has to help the Italians, the Spanish, the Greeks, then you have the Germans on the other side, who don’t need any help.”

Pictures sources: Borouge, Borealis

By Jonathan Lopez