INSIGHT: Borealis’ polyolefins hit by low pricing, fertilizers worsen in Q3

LONDON (ICIS)–Borealis had to battle in the third quarter on two fronts as polyolefins prices remained low, hitting margins, and fertilizers’ healthy performance in the past quarters took a turn for the worse, the CEO at the Austrian major said.

Alfred Stern however described the financials metrics in Q3 as “solid” given the sequential improvement from the second quarter when, together with the lockdowns-induced industrial slowdown, Borealis also had to deal with a fire at its Stenungsund, Sweden, cracker.

Sales and profit posted sharp falls in the third quarter, year on year.

Conditions for fertilizers – which account for around 20% of Borealis’s sales – worsened in the third quarter as prices fell, with several markets depressed.

This week, Borealis said it was putting on hold its joint venture project with BASF and Abu Dhabi National Oil Company (ADNOC) in India to build a renewable energy-fed large-scale petrochemicals complex; India’s Adani was the utility partner.

AUTO HIT HARD
“We had a solid quarter; we recovered significantly but we are still behind 2019 levels; but we are actually seeing good demand across most of the industry segments. The main expectation is automotive – there was a significant recovery in the third quarter,” said Stern.

“However, sales to the industry are not back yet to 2019 levels, but it was actually very respectable how fast automotive went up in the third quarter: we achieved the same level of sales volumes as last year [in the same quarter].”

Stern said subsidies approved in many major EU economies for the purchase of vehicles could have helped the industry to get back on its feet; prospects however continue to be bleak and EU car producers expect a fall of 25% in vehicle sales in 2020, compared with 2019.

However, in this unusual year the mini boom experienced by automotive in the summer months and into the fourth quarter could be linked to industry restocking, more than booming end consumer demand, and could be short-lived were the epidemiological situation to worsen, sources have said to ICIS.

Europe’s beleaguered economy is also facing a virulent pandemic second wave which could dent confidence further as lockdowns are reimposed, potentially causing a “double-dip recession” in some countries, according to analysts.

“I don’t have an insight on incentives [for vehicles purchase], but what I can tell you is that it is also clear we have to work hard [to improve operating conditions] and not just wait for the recovery of automotive,” said Stern.

“In every significant crisis, the pattern is always the same: demand reduction during the crisis and then of course, growth comes back at some point, but it can also develop in parallel [with some industries improving while others lag behind].

“It will take some time before we recover from the effects of this crisis.”

Stern did not want to put a date on the potential full recovery, understood as the point at which the European economy would reach the pre-pandemic levels. In an interview in August, he said the recovery would not occur until at least the beginning of 2022.

“How long it will take is a guess for everybody. In our case, the key challenge we are facing is low prices and low margins in polyolefins,” said Stern.

MORE SUPPLY, DEMAND HIT
The oversupply in the polyolefins market was expected; North American companies have set up large-scale plants on the back of the shale gas, ethane-induced energy boom, while large capacities are also being brought on line in the Middle East and Asia.

The investments made sense before the pandemic as prospects of relentless urbanisation in Asia, Africa, and Latin America were they key factor companies looked at for growth.

The pandemic, however, has hit emerging economies hard and social and economic crises are adding to the health crisis; urbanisation will not stop, but it may slow down until the world gets a grip on the pandemic.

Mark Tonkens, Borealis’ CFO and also in the interview, spoke however about a “very fine balance” between supply and demand, adding the company is managing to sell “good volumes”, albeit at low prices.

“The price environment is not the most favourable; low prices for crude oil and naphtha [petrochemicals feedstock predominant in Borealis production] are not supporting the business, especially for Borouge,” said Tonkens.

Borouge is Borealis’ 50:50 joint venture in Abu Dhabi with local crude major Adnoc. Destined mostly to Asia and especially China, the facilities can churn out up to 4.5m tonnes/year of different polymers grades.

“Our operations in Europe are less dependent on crude or naphtha prices, but on gas-based propane or ethane, and as such I don’t think our operations in the region are in bad shape in terms of supply and demand,” said Tonkens.

“But if you have that dip in GDP [caused by the pandemic], it is not strange we are below the original line. I am perhaps less optimistic than a year ago, but we are not negative from a demand perspective.”

FERTILIZERS ROLLER COASTER
Operating conditions at Borealis’ fertilizers division worsened in the third quarter as global prices for most products fell and feedstocks prices rose, hitting margins.

The fertilizers division has gone through downturns and revivals over the last years; in past immediate quarters, it was on the up and nicely topped up the overall company performance at a time when polyolefins struggled.

Borealis is privately owned and does not have an obligation to publish detailed financial metrics, but Stern’s commentary denoted fertilizers was again facing headwinds.

“We had pretty good operating conditions in the first half of this year. It looked like the fertilizers markets were less affected by the first wave of the pandemic,” said Stern.

“But in the third quarter we saw more volatile conditions, prices have not developed positively and, on the other hand, feedstocks prices have gone up.

“The market environment has become more difficult again for fertilizers.”

Borealis carved out the fertilizers division in 2018. Companies often carve out operations to trim costs and restructure, preparing the ground for a potential divestment.

Company executives have contemplated the idea in the past, but this week Stern did not want to comment on a potential divestment.

Borealis’ ownership changed this year after Austrian energy major OMV, formerly with a minority,  increased its stake to 75% in a €4.7bn deal.

It acquired the stake from Abu Dhabi’s investment fund Mubadala, formerly the largest shareholder, which retains a 25% stake in the company.

By Jonathan Lopez

Front page picture: Borealis’ joint venture Borouge in Abu Dhabi, producing polyolefins destined for export
Source: Borouge

Clarification: Re-casts headline