OUTLOOK ’22: Central, east Europe chemicals awaits Poland’s PKN Orlen move into mega merger territory

LONDON (ICIS)–PKN Orlen remains a whirl of projects. Quite apart from efforts in biorefineries, wind power, and steps toward deploying small nuclear reactors, in its old core businesses of oil and petrochemicals, the Polish major remains intent on creating a central and east Europe (CEE) leviathan by absorbing its biggest domestic rivals.

Pandemic impacts have clearly slowed the state-controlled group’s moves to realise its planned mega-merger process.

However, in mid-January Orlen is to meet a European Commission deadline to agree competition remedies that will be made necessary when the group, Poland’s biggest refiner, swallows second largest Polish refiner Grupa Lotos.

The remedies may include some disposals.

IT’S ALL ABOUT POLAND
Next up will be progressing Orlen’s proposed acquisition of Polish oil and gas exploration and production and gas distribution company PGNiG, like Orlen and Lotos, a state player.

“I expect the merger of the three Polish players, Orlen, Lotos and PGNiG, to materially progress in 2022. We should also see PKN selecting a partner for the acquisition of Lotos and to get the green light from the local watchdog for the acquisition of PGNiG,” said Oleg Galbur, an analyst at Raiffeisen Centrobank (RCB).

As regards the Green agenda, Orlen lately launched Europe’s second and largest installation for the production of ecological propylene glycol and is committed to rolling out six renewable energy-powered hydrogen hubs and 102 hydrogen refuelling stations for individual, public and cargo transport in central Europe by 2030.

Also in Poland, Grupa Azoty – another state-held group, which is Europe’s second largest fertilizer producer – remains under pressure from politicians and farmers’ unions to keep up fertilizer production despite the Russian gas supply crunch that in recent months has seen record-breaking gas feedstock prices.

The company says it has gone to great lengths not to shut down output capacity during the difficulties and has limited exports to redirect products to the domestic market.

Even so, it lately faced protests when fertilizer shipments bound for export customers that Azoty was contractually bound to supply were observed.

Given the difficulties with gas prices and knock-on effects felt by fertilizer producers, Azoty has urged Polish farmers not to delay placing orders for fertilizers they expect to need for the spring season.

“We constantly analyse the required level of supply for farms against means of production, for instance for fertilizers, and we observe that currently a large number of domestic farms do not have security of supply for the first, spring fertilizer requirement,” said Piotr Zarosinski, director of Azoty’s agro products corporate trade department.

“In the current situation, postponing fertilizer purchases to the period just before their application is a risky decision, with supply problems in the spring a very possible consequence,” he added.

A stabler business outlook for 2022 is forecast by Poland’s Ciech, the second largest European soda ash producer.

A combination of the ongoing post-pandemic economic recovery, growing demand from lithium battery and photovoltaic panel producers and China’s transformation from soda ash exporter to importer were boosting demand for soda ash, the company said.

Like fellow oil and petrochemicals company Orlen, Hungary’s MOL recorded all-time high petrochemical margins this year, with Q2 bringing the latter an integrated petrochemical margin of €949/tonne due to higher naphtha quotations in line with rising Brent and lower polymer prices.

Tamas Pletser, a Budapest-based equity analyst at Erste Investment, who follows MOL, said he believed petrochemicals “can again have a good year” in 2022.

“First of all, natural gas-based petrochemicals do not represent a danger to naphtha -based producers at the current natural gas price level. Second, global logistics issues are likely to persist for a while, something which maintains high margins in Europe as this market is protected from large volumes of Asian imports,” said Pletser.

“The question is with general economic activity and the price of crude oil. I expect lower [petrochemical] margins overall, but still above the 10-year average. High volatility is likely to persist due to the volatile crude oil feedstock market.”

CONTROVERSIAL NORD STREAM 2
On the continuing controversy over whether Russia’s Nord Stream 2 pipeline to Germany should be cleared by the German authorities for launch, Pletser noted that the gas supply from Russia is getting to be “more a political issue” than an economic one.

“Honestly, I do not understand why Nord Stream 2 is not approved fully like Nord Stream 1. It seems to me that it is not only due to US pressure, but the current government in Germany with the Greens is somehow opposed to this pipeline,” the analyst said.

“Germany and the whole of Europe should have a significantly more pro-natural gas policy, otherwise we cannot provide a stable supply of this material in the future. I do not see a solution other than agreeing with the Russians, otherwise we face exorbitant gas prices not only for this winter, but for the coming two years.”

In Austria, MOL’s rival across the border from Hungary OMV continues with its transition into a chemicals group that increasingly uses less crude oil as feedstock.

Looking south, in the Balkans, the most interesting petrochemical story in the coming year could be the privatisation of Serbian company HIP Petrohemija.

It has taken multiple failed sell-offs over more than two decades to arrive at the point where Belgrade finally has a deal to hand over control of HIP Petrohemija to the private sector, namely to NIS, the Serbian oil and gas company.

NIS is 56.2% owned by Russia’s Gazprom Neft, and it will be required to invest €150m into the capital of the company, a maker of products including low density polyethylene (LDPE), high density polyethylene (HDPE), propylene, and styrene butadiene rubber (SBR).

In tandem with the announcement of the deal for the privatisation of HIP Petrohemija came a guarantee from Moscow that Serbia will not face a price hike on Russian gas in the new year, a rather handy perk in these times of soaring natural gas prices.

Front page picture: A PKN Orlen logo at one of its gas stations; archive image 
Source: Mateusz Slodkowski/SOPA Images/Shutterstock

Focus article by Will Conroy