OUTLOOK '18: Poland’s Orlen move for Unipetrol takeover may herald lively year for CEE petchems

28 December 2017 12:05 Source:ICIS News

LONDON (ICIS)--A busy start to 2018 is promised for the Central and Eastern European (CEE) petrochemical industry as all eyes turn to the success or otherwise of PKN Orlen’s near-billion-euro attempt to take sole ownership of its Czech subsidiary Unipetrol.

Polish state-controlled Orlen, which acquired 63% of Unipetrol in a privatisation tender back in 2005, says it will delist the company should it move up to at least 90%-control.

Unipetrol is a polyolefins producer buoyed by the unexpectedly strong economic growth posted by the region in the past year.

Orlen sees the move as offering good potential for better Orlen Group petrochemical integration and further petrochemical investments.

The cost of achieving full ownership of Unipetrol would be “small beer” to a company of Orlen’s size, according to Jonathan Lamb, an analyst at Prague-based WOOD & Company investment bank.

“In our view, Unipetrol's business has been deprived of the necessary level of investment in recent years and we believe that the business could perform much more successfully in the long term if more were invested in plant and equipment,” said the analyst.

“As a wholly-owned subsidiary of PKN Orlen, we believe that this is much more likely to happen,” he added.

It will be interesting to see if the new Czech prime minister Andrej Babis has any comments to make on the Orlen move going forward.

Billionaire-turned-populist-politician Babis is the owner of the Agrofert agrochemicals and foodstuffs major.

Over several years, it fought bruising arbitration battles with Orlen over whether the latter had reneged on promises to sell on certain of Unipetrol’s assets post-privatisation.

Unipetrol, meanwhile, should be behind the biggest CEE launch of 2018 at its Litvinov production complex near the northern Czech/German border.

Polyethylene 3 (PE3) – costing towards €400m, the largest ever Czech petrochemical investment – should come online in the second half.

So encouraged is Unipetrol by the markets, that it is has reversed a plan to decommission its 120,000-tonne/year PE1 installation in tandem with the PE3 production start.

On paper, that will give Unipetrol a total PE capacity of 590,000 tonnes/year, although cracker constraints will limit PE1 use.

Minority shareholders in Unipetrol may welcome the opportunity to sell their holdings in the company – provided they like the price – given that for years they have complained about no, or meagre, dividends from what is a debt-free enterprise.

Their ire was last June increased by what they saw as the “senseless” reacquisition of lossmaking polyvinyl chloride (PVC) producer Spolana from Orlen’s Polish unit Anwil.

With the long-awaited closure of the subsidiary’s  amalgam electrolysis chlorine facility in December – the last such plant in the Czech Republic given synthetic resin producer Spolchemie’s scrapping of its mercury-based installation six months earlier  – some semblance of a plan to reconfigure Spolana is at least now emerging.

However, Unipetrol’s intentions for the company will only become clear in coming months.

In Poland, never a year goes by without a top politician pushing the idea of merging Orlen with second largest Polish refiner Grupa Lotos.

With the hands-on control of state companies favoured by the country’s ensconced right-wing Law and Justice (Pis) government, analysts believe the idea should not be dismissed.

Ministers in the largest east European economy, however, seem much more preoccupied with managing the fate of largest Polish chemical producer and second largest European fertilizer maker Grupa Azoty.

The prime minister turned up in September as Azoty launched its new 80,000 tonne/year nylon 6 (polyamide, or PA6) plant and the company will this year push on with plans to entirely move out of the caprolactam (capro) supplies market in favour of using its capro as feedstock in advanced plastics and foil compounds production.

While firming efforts to counter a Russian fertilizer invasion, Azoty must also strive to make solid progress in realising its planned €983.8m ($1.16bn) propane dehydrogenation (PDH) and polypropylene (PP) project at subsidiary Zaklady Chemiczne Police (ZChP), but no construction work is expected until late 2019.

Also notable is that on the acquisitions front Azoty has not in the past two years made any real progress in spending part of the €1.8bn war chest it has to invest in building up the group at home and abroad.

All major refining, chemical and fertilizer companies also remain under government pressure to help Poland diversify as much as possible away from overreliance on Russian gas and oil supplies.

Warsaw is exerting intense pressure on Brussels to regulate out of existence Russia’s plans for a Nord Stream 2 undersea gas pipeline connection to Germany that would link to the CEE pipeline network.

But Tamas Pletser, an oil and gas analyst at Erste Investment, does not rate the Poles’ chances.

“Here I do not see that the EU could make a legal obstacle, and the project is supported by the Germans. If Germany wants something, they will achieve it, so I expect Nord Stream 2 to be built in time,” said Pletser.

Outside the state-controlled Polish companies, Ciech will hope there will be no intensifying of US sanctions against Tehran that preclude it from continuing with is new deal to distribute Iranian polyolefins.

And the company will brace itself against the prospect of cheap trona-based soda ash arriving in Europe from huge new production plants in Turkey.

Over at synthetic rubber producer Synthos, management, like their counterparts at Unipetrol, are preparing for the controlling shareholder to assume sole control of the company.

Ex-racing driver and investor Michal Solowow on 22 December said he was paying just shy of $600m to expand his Synthos stake from 62.5% to 93.9%. He now plans a squeeze-out of remaining minority shareholders which will open the way to delisting the enterprise from the Warsaw Stock Exchange.

In Hungary, MOL remains busy with its year-old strategic regearing towards petrochemicals and chemicals that involves investing around $1.5bn every five years until 2030.

The group, which is also steadily investing in the petrochemical units of Slovak subsidiary Slovnaft, lately won European Commission clearance on €131m of state aid for its €874m polyether polyols and propylene glycols project and can now make progress backed by propylene oxide (PO) production licensing obtained from Evonik and thyssenkrupp.

“The project got a big boost from the licensing deals and it’s likely to become the sole CEE polyol producer by 2021-2022,” said Erste’s analyst Pletser.

Hungarian isocyanates producer BorsodChem, owned by China’s Wanhua Industrial Group, continues to win handsome backing from Chinese banks in investment financing.

In 2018, it plans to double the capacity at its toluene di-isocyanate (TDI) crystallisation unit in response to growth in global demand for T65 and T100.

In Romania, all eyes will be on chloralkali producer Chimcomplex Borzesti and its ambition to create a new Romanian chemical flagship.

It has won the right to acquire most of the core assets of insolvent fellow Romanian chemical company Oltchim, including part of its PVC and vinyl chloride monomer (VCM) capacities and oxo-alcohol, PO and polyol operations.

Any investor who makes a success out of Oltchim, a company that has been on the ropes for a decade or more, really will have a claim to a prize for the turnaround of the year.

By Will Conroy