Borealis aims to dodge oversupply with US PE project

Borealis’ planned large-scale joint venture polyethylene (PE) plant on the US Gulf Coast will avoid the upcoming oversupply in that market, which will return to more balanced supply and demand conditions by the time it starts up, the chief financial offier (CFO) at the Austrian polymers major said on 5 May.

Mark Tonkens conceded the upcoming wave of PE plants to start up in the Gulf will flood the markets with material, but added that a “not too bad” US economy, as well as exports to Latin America or Asia, will help balance the markets by 2021, when Borealis plans to start up its own 625,000 tonne/year plant.

On potential disruptions to those exports as a result of changes in trade policies under the new US administration led by Donald Trump, Tonkens said it remains to be seen if the President’s “big words” are actually translated into policies, and showed confidence that US corporates will “make noise” for that not to happen.

“We know that in 2018 and 2019, a lot of [PE] capacity is coming on stream. We believe when this [Borealis’ PE] plant would come on stream that part of the oversupply will have been absorbed and the market conditions should not be too bad – it will be a combination of local sales as well as exports,” said Tonkens.

“We are not saying that [oversupply will end by 2021] – it’s difficult [to] predict. But we think the oversupply will start to reduce then. The US market is not doing too badly and demand is improving while companies which are bringing crackers on stream in 2018 and 2019 will find export outlets, so we don’t expect this balance to be too high at that moment.”

Tonkens said, however, that exports would be a key part of the market dynamics within the Gulf in coming years.

TRADE DISRUPTION RISK

Chemical analysts, however, have said the oversupply may be here to stay for a longer period than that predicted by Borealis’ CFO, while other analysts have predicted that more protectionist trade policies from Trump’s Administration could bring retaliation from other countries, ultimately hurting US petrochemical producers.

Potential trade disruptions on the back of higher protectionism were the major concern amid US producers during the American Fuels and Petrochemicals Manufacturers annual meeting, held in Texas in March.

Companies like Borealis, which invest in the US and make feasible Trump’s campaign mantra of bringing back industrial jobs in the country, would not be in a bad position in a potential protectionist US, said Tonkens.

“He [Trump] uses a lot of big words, but if you go too aggressive, you create so much unbalance that there will be sufficient companies and businesses in the US making noise [for that] not to happen. We have to watch it carefully. He wants to ‘make America great again’ [so] if you invest in the US and contribute to that, you are in a fairly good position,” he said. “With Trump, from that perspective and with this specific investment we see more upside than downside. In his [Trump’s] overall position, I will not comment.”

Abundant feedstock in the US on the back of the shale gas boom, which will feed the ethane crackers in the US Gulf, was another reason for Borealis to think about this PE plant, for which the CFO declined to disclose potential capital expenditure (CAPEX) figures.

imageBROKER/REX/Shutterstock
Tonkens sees US shale gas feedstock advantage continuing

Borealis, which is owned privately by Abu Dhabi’s Mubadala Investment Company (with a 64% stake) and the Austrian energy major OMV (36%), will build the PE plant together with its sister company NOVA Chemicals – owned 100% by Mubadala – and France’s energy major Total, which will also build a 1m tonne/year ethane cracker at the same facility.

The joint venture’s ownership structure will be divided among Total (50%) and Borealis and NOVA with a 25% stake each. Total did disclose at the time of the announcement its capex forecast for the cracker’s construction, which would stand at $1.7bn.

SOME EXPORTS TO EUROPE

Looking at export opportunities and taking into account the 
almost certain oversupply in the US, Tonkens said the Gulf Coast would be well placed to export excess material to Latin America and Asia, but “in some levels” to Europe.

“[Other reasons to build the plant were] the nature of the cracker being brownfield and the PE assets of Total as well as the opportunity for us to bring Borstar (Borealis’ PE technology) into the US,” said Tonkens.

“The main thing for us was to look at where we can still see an advantage feedstock position. In the Middle East, availability of ethane is starting to be limited, as well as in Russia or other countries, while the US is still good to produce. It is a cyclical market with supply/demand imbalances and we are aware of that – we’ll need to go with that.”

The final decision on the 
investment will be taken by the end of 2017, the three companies said, but a retreat is unlikely 
because the three partners are committed to the project.

“You can never be sure [of anything], but there is a very positive atmosphere and belief among the three parties that this will go ahead. [There could be] unforeseen circumstances but this is not a MoU [memorandum of understanding] to make noise – this is a very serious step,” concluded Tonkens.