Borealis’ lower polyolefins margins in Asia to persist as overcapacities bite - CEO

Author: Jonathan Lopez

2019/08/08

LONDON (ICIS)--Borealis’ polyolefins margins in Asia suffered in the second quarter the effects of aggressive competition from the US producers, a situation unlikely to change in the short-term, the CEO of the Austrian polyolefins and fertilizers major said on Thursday.

Uncertainty regarding several geopolitical issues – the China-US trade war or the impending, unresolved UK exit from the EU, among others – are causing a slowdown in demand globally as uncertainty becomes the norm, according to Alfred Stern.

Borealis' fertilizers division – which accounts for around 20% of the company’s sales – continued improving profitability on the back of higher capacity utilisation and healthier markets in Europe.

Moreover, polyolefins margins in Europe improved during the second quarter, bucking the industry’s slowing trend, thanks to its mixed-feed cracker operations, according to Stern.

The company released earlier on Thursday its second-quarter financial results, with profit up more than 10% and sales decreasing only marginally.

POLYOLEFINS OVERCAPACITIES - HERE, NOW
The addition of large capacities for polyolefins in the US on the back of cheap shale gas-based ethane has been haunting global markets for years – demand would need to tick up at higher levels to absorb all the product, and avoid a general fall in prices.

US producers always targeted Asia’s emerging economies as a destination for the product, especially China.

Borealis had been doing the same for some time through its joint venture Borouge in Abu Dhabi, of which it owns a 40% stake, with the remaining 60% under control of Abu Dhabi’s crude oil major ADNOC.

The complex, with production capacities of around 4.5m tonnes/year of different polyolefins grades, also has Asian markets as its main destination, and the arrival of US capacities has affected the market share of producers like Borouge.

Borealis is also privately owned, a reason why it is not obliged to release detail financial information like publicly-listed companies do. Austria's crude oil major holds a 36% stake, while Abu Dhabi's investment fund Mubadala holds the other 64%

“Indeed, we are seeing the effects of a couple of years in which complexes [in the US] have started up or about to start up, bringing more volumes into the market. [The slowdown in Asia for Borealis]  has had to do with two things: new capacities and the US-China trade war, which is affecting demand,” said Stern.

“The combination of more imports from other regions, and a shaky demand picture, has put pressure on prices in Asia, a trend we expect to continue in the second half of 2019. At Borouge, however, we have not been focusing our efforts on one country alone [China]. We have a solid marketing strategy that is allowing to react to changes in the market.”

Stern, a calmer CEO than predecessor Mark Garrett, mentioned world uncertainty several times in the interview, arguing that mid- or long-term forecasts can become worthless within weeks.

Only in May, Stern (pictured) said that there had been a slight improvement in polyolefins prices in China for a few weeks, but added that the uncertainty surrounding the US-China trade war could finally run over to the second half of 2019, jeopardising that increase in pricing.

Stern’s most pessimist scenario came true, and only two months into the second half, most analysts have dismissed previous forecasts of a global manufacturing recovery before 2020.

“It’s very difficult at this stage to make any prediction, at least from our perspective, because the things happening in trade policy are not helpful for our business,” said Stern,.

“We support free trade, and we believe it will optimise the system as a whole. We think that it not clear anybody is profiting from the situation we have today.”

PROFITS AT FERTILIZERS, FINALLY
Lower natural gas helped lower costs at the fertilizers division, which uses the commodity as feedstock for several products, helped the division continue making a profit, a trend started in the first quarter after years of losses.

At the same time, after years of decreasing prices, fertilizers values are on an upward trend.

A third factor contributing to the improvement at the division was, according to Stern, the upgrades in outdated European plants, which is allowing them to work at capacity.

The company had separated the fertilizers division into a different legal entity in October 2018 aiming to “recalibrate the strategy” for a business segment which is completely different to that of polyolefins.

CIRCULARITY: ACHIEVABLE?
Borealis’ has been quite proactive in the circular economy initiatives that have been started up in the last two years, and has acquired some recycling companies.

The Austrian producer is convinced that polyolefins would be one of the materials easy to make circular, but also seems to assume that even major companies like itself will need to change business models as more waste is reused, giving way to circularity.

Stern said there was a lot of scope for action, as plastics – polymers – represent 12% of the global waste accumulated.

“I think what I am starting to see with our circular economy efforts that indeed we are in a completely linear economy system, and it is the responsibility not only of society but of companies as well in making things more circular,” he said.

As the world becomes aware of the waste problem, increasing the social backlash against plastics, many experts are becoming pessimistic about the solution and how a true circularity could be achieved.

The necessary materials have not even been invented yet, according to the head of the EU’s chemicals regulator ECHA in an interview with ICIS earlier this year.

In the same interview, he also insisted that materials and waste regulations should go hand in hand in that hypothetical circular economy, in a continuous loop – indeed an overhaul of the economy as we know it today.

Borealis' Stern said: “I do think it’s possible to close the loop, in plastics in particular, because the materials are suitable. But it does require a change on how we conduct our business. This is the difficult part, but I appreciate difficult things.

“In Europe in particular, society and legislators are supporting these efforts and it’s the right environment to take this forward. But nothing is easy.”

Top picture: The Borealis co-owned petrochemicals complex Borouge in Abu Dhabi
Pictures sources: Borouge, Borealis

Interview article by Jonathan Lopez