Market outlook: US and Mideast threat worries CEE

31 January 2014 10:01 Source:ICIS Chemical Business

Cloud of concern hangs over central and eastern Europe as plans for a world-scale cracker in Poland may not make sense if cheap imports start to flow

An air of anxiety hangs over the petrochemical industry of central and eastern Europe with 2014 likely to deliver further evidence of a real competitive threat from US and Middle East producers that benefit from cheap feedstock, analysts say.

 Questions raised over major investment plans for Poland

Copyright: Alamy

“The overall outlook for the CEE petrochemical industry remains rather bleak,” commented Dominik Niszcz, an analyst at Raiffeisen Centrobank.

“It is hard to see any specific trends for 2014, it is rather that the trends related to the higher capacities in low-cost regions like the Middle East and the US and closures in Europe may continue,” he added.

The litmus test of how hard the regional petrochemical industry is prepared to push back against the growing Middle Eastern and American rivalry may come with the scheduled decision on whether two state-controlled groups in Poland, second-largest refiner Grupa Lotos and largest chemical producer Grupa Azoty, go ahead with an envisioned €3bn ($4.1bn) petrochemical complex.

Analysts, including chemical industry observers at Prague-based investment bank WOOD & Company, have questioned the wisdom of going ahead with the ‘mega-investment’, to be rolled out either solely in Gdansk, northern Poland, or to be split between Gdansk and Azoty’s main production base in Tarnow, southern Poland.

The bank has warned investors that they should probably steer clear of the stock of both Lotos and Azoty until more details about the project and its economics are visible.

With a preliminary decision to centre the petrochemical complex on an ethylene cracker rather than an aromatics extraction plant having been taken, Piotr Drozd, an analyst at WOOD said the rationale for the investment was “highly questionable” given the massive petrochemical investments set to take place in the US over the next five years on the back of cheap shale gas-derived feedstock.

However, Niszcz noted that the region’s petrochemical industry might anticipate attempting to protect its competitiveness by relying on forms of state backing for their strategic sector.

Polish ministers have thus far backed the Gdansk investment by citing Poland’s chemicals and primary plastics trade deficit, which officially stood at minus zloty (Zl) 16.7bn ($5.47bn, €4bn) in 2012.

Despite state enthusiasm for the petrochemical complex – initial agreements for investment loans of up to Zl 750m for the project have been made with state-owned infrastructure financing vehicle Polish Investments for Development (PIR) – Erste Group Bank ­analyst Tamas Pletser said he saw several threats to it including “the risk that several US and Middle East players are now investing into NGL-based [natural gas liquid-based] petrochemicals, and they could dump the market with cheap polypropylene from 2016-2017”.

PKN Orlen, the existing major petrochemical player in Poland and, through subsidiary Unipetrol, the Czech Republic, in 2013 saw the profitability of its petrochemical business counterbalance the poor performance of its refining business, which suffered from low margins partly caused by European over-capacity in refining, Pletser said.

“But I see clouds now gathering for the petrochemical business as well with margins likely to be under pressure from the appearance of US and Middle East polymers on the market,” he said.

Analysts and CEE petrochemical companies will be keenly observing any regional market impact made by the early 2014 start-up of the first plants at the 2.5m tonne/year Borouge 3 installation in Abu Dhabi which is expected to raise Borouge’s olefins and polyolefins capacity to around 4.5m tonnes/year.

Asia will continue to be the primary export target of Borouge, but the company is ­also planning significant exports to Europe and Turkey.

Another event planned for early 2014 is the renewed attempt at privatising largest Romanian petrochemical producer Oltchim.

Having seen an attempt at selling off its controlling stake in the indebted company collapse at the end of 2012, and the company entered into insolvency by state officials in January last year, the Romanian economy ministry will in early February attempt to select a viable bidder for a debt-free version of the firm named Oltchim II.

The new year should also bring a solution to the ongoing spat between Hungary and Croatia over whether Hungarian oil, gas and petrochemical group MOL can find an acceptable way forward for Croatian state refiner INA, over which it retains full management rights.

MOL has filed a request for international arbitration over its claims that the Croatian government has breached obligations in relation to its investments in INA, with

MOL sources saying the group believes it has a viable claim that it has suffered hundreds of millions of euros in losses because the Croatian state has not honoured a pledge to buy INA’s lossmaking natural gas business.

Back in Poland, there is some hope developing among analysts that Orlen may finally resolve the several-year-old question of whether or not it will sell all or part of its Anwil polyvinyl chloride (PVC) and nitrogen fertilizer subsidiary.

Sources at Azoty say the group may move to acquire the Anwil fertilizer division through a non-cash transaction that would simultaneously see Orlen take a stake in Azoty.

Azoty, having through acquisitions become Europe’s second-largest fertilizer producer behind Norway’s Yara International, said that in 2014 it would continue to invest in diversifying its fertilizer range and would find further savings in synergies offered by its acquired subsidiaries, such as fertilizer, melamine and caprolactam (capro) producer Zaklady Azotowe Pulawy (ZAP).

PKN ORLEN has adopted a “rather modest 2014 work programme” for shale gas exploration, an investment bank said on 9 January.

The programme “may possibly indicate an increasingly cautious approach from Orlen, given more and more question marks surrounding the Lublin shale prospects [in southeastern Poland] in the light of the past couple of years’ drillings”, noted Robert Rethy, an analyst at Prague-based WOOD & Company.

In an appearance before the treasury committee of the Polish parliament, the CEO of state-controlled Orlen, Jacek Krawiec, disclosed that Orlen had opted this year to drill four horizontal shale gas wells, and one vertical.

Poland hopes to exploit its shale gas reserves in order to reduce the over-dependence of strategic industries, including the chemical industries, on natural gas imported via pipeline from Russia.

However, results from companies exploring the reserves have so far been mixed, WOOD said.

Nevertheless, in late November last year, the Polish environment ministry said Poland looked set this year to win the race to become the first European country to extract shale gas in commercial volumes.

Refining and petrochemical groups in central and eastern Europe (CEE) face a dilemma over what to do with their naphtha because of shrinking gasoline demand in Europe, given the rising popularity of diesel, a bank said on 10 January.

According to Erste Group, CEE groups are caught between aspiring to divert surplus naphtha into new petrochemical operations and wondering whether such production might prove unprofitable in the face of strengthened Middle East and US competition in years ahead.

The option of using it as feedstock for newly-constructed petrochemical plants has been made somewhat less attractive by the cheap gas-based feedstocks that have led to a surge in petrochemical investments in the Middle East and the US, noted Tamas Pletser, an analyst at the Vienna-based bank.

“This is exactly the story,” said Pletser, pointing to how Poland’s Grupa Lotos and Grupa Azoty must this year face the decision of whether to go ahead with a €3bn petrochemical complex in Gdansk on Poland’s Baltic Sea coast.

“Lotos has the advantage of being able to sell its surplus gasoline overseas, but it is an inferior option to selling locally,” he noted.

“The other option is to turn the naphtha into petchem, that’s what they are considering right now,” Pletser said.

Grupa Lotos, Poland’s second largest refiner, and Grupa Azoty, the country’s largest chemicals producer, are exploring the option of inviting a foreign partner with technological know-how to take a stake in their petrochemical complex joint venture, but Erste has said it is unlikely that any suitable investor would be interested.

However, the Polish government, which controls both Lotos and Azoty through shareholdings held by the treasury ministry, has expressed enthusiasm for the project, saying it could help to cut Poland’s chemicals and primary plastics annual trade deficit of around €4bn.

Will Conroy, London

By Will Conroy