OUTLOOK ’19: CEE petchems abuzz with ambitious investment activity

LONDON (ICIS)–Large investments are expected in 2019 from central and eastern Europe’s (CEE’s) major petrochemical players, with Poland’s PKN Orlen and Grupa Azoty, Hungary’s MOL and Austria’s OMV, among others, all stepping up their plans.

A pressing concern is an expected inundation of cheaper ethane- and propane-based polypropylene (PP) and polyethylene (PE) from the US, according to Tamas Pletser, oil and gas analyst for Europe, Middle East and Africa (EMEA) at investment bank Erste Investment.

That threatening horizon is pushing CEE petrochemical companies to increasingly pursue investments in higher value-added petrochemicals, he added.

“I expect the petrochemical margin level to come off gradually in the coming years due to the flood of cheaper US PP and PE.”

CEE petrochemical market consumption is rising, thus the big regional suppliers all stand a fighting chance of driving up their revenues, said Pletser.

“I think the real fight is rather between naphtha-based producers and ethane- and propane-based guys from the US and the Middle East,” said the analyst.

“Also, there is a risk that the EU gets more serious with plastic waste – like in the UK, where when plastic shopping bags became paid-for, consumption fell 90%.”

State-owned largest Polish refiner Orlen will in 2019 press on with its plan to merge with the country’s second largest refiner Grupa Lotos.

Will Brussels competition regulators get in the way? Erste’s Pletser believed they might, demanding the sale of a lot of assets to allow the deal to go through.

However, other analysts think divesting some fuel retail assets might suffice to satisfy the European Commission, the EU’s executive body, according to Oleg Galbur, analyst at Raiffeisen Centrobank (RCB).

However, once the merger is through, the analysts think Orlen will be launching a renewed push for petrochemicals production.

In the Czech Republic, after having bought out all minority shareholders in the country’s sole refiner and major petrochemical producer Unipetrol, taking the firm private, Orlen gave in December 2018 foretaste of what may be to come by approving a substantial fertilizer expansion at its Anwil unit.

It also said it may green-light raising polyvinyl chloride (PVC) capacity at the subsidiary.

Prior to this affirmative action, Orlen had spent several years pondering over whether it was even going to stay the owner of Anwil.

Unipetrol, meanwhile, is gearing up for the early 2019 launch of its 270,000 tonne/year PE3 installation which, at a cost of around $400m, is the largest ever Czech petrochemical investment.

The Czech Republic is also eagerly awaiting a decision from the European Commission as to whether major agrochemicals and foodstuffs conglomerate Agrofert can continue to draw EU subsidies given that its founder, current Prime Minister Andrej Babis, may have a conflict of interest in EU funding decisions.

Babis has said he is no longer a beneficial owner of Agrofert, but lawyers at the European Commission may beg to differ.

Back in Poland, at Polish state corporation Grupa Azoty, a multi-faceted investment story is opening up.

At the end of November 2018, the major fertilizers producer unsettled markets after closing the acquisition of German specialty fertilizers producer Compo Expert Group without disclosing how much debt was taken on as part of the deal – Azoty’s stock suffered as a result.

“In order to fully evaluate the impact of Compo it may take years, as this is a strategic move towards more value-added products and there is still work ahead of the management to integrate all these assets into the already complex group structure,” said RCB analyst Dominik Niszcz.

In the far northwest of Poland, Azoty’s Zaklady Chemiczne Police (ZChP) subsidiary is due in the first half of 2019 to select a general contractor for its planned world-scale, billion-euro propane dehydrogenation (PDH) and PP project.

In the south, investors are expecting an update from Azoty’s Zaklady Azotowe Kedzierzyn (ZAK) unit on how and when it will start rolling out its long mooted coal-to chemicals (CTC) project.

The plan is to produce synthesis gas from the gasification of coal for use as feedstock in the production of hydrogen, ammonia and methanol, but RCB’s Niszcz was among those suggesting there may be delays in the gasification investment.

“As there was the large acquisition of Compo, and EBITDA [earnings before interest, taxes, depreciation and amortisation] has been under pressure due to growing natural gas prices, Azoty may be more flexible regarding the timing of that project, in my view,” noted the analyst.

Another Polish company looking to build on an acquisition is second largest European soda ash maker Ciech, after acquiring Spain’s plant protection products manufacturer Proplan for €45m.

The acquisition came prior to the company’s unveiling of a new 2019-2021 strategy, with a substantial emphasis on business diversification into agrochemicals.

In Austria, OMV should in the coming 12 months be revealing more as to what exactly €1bn set aside for refining and petrochemical investments under a growth strategy to 2025 will be ploughed into.

In Hungary, MOL will remain busy constructing its $1.4bn polyol production complex in the pursuit of higher add-value products.

Further south in Romania, all eyes will be on Chimcomplex Borzesti’s challenge in deploying the acquired core assets of chemical maker Oltchim to create a new Romanian chemical industry champion.

Chimcomplex’s completion of the assets purchase in mid-December brought an end to a saga going back more than a decade and involving several collapsed Oltchim privatisations.

In one abandoned sell-off, a media entrepreneur who had won an auction to acquire control of Oltchim farcically could not come up with the money for the deal; in another attempt, not a single bid was submitted.

Croatia will also make an attempt at reviving a domestic champion in 2019, after the government gave national oil and gas company INA and gas supplier Prvo Plinarsko Drustvo (PPD) the go-ahead to recapitalise and take majority control of mineral fertilizer producer Petrokemija.

Attempts to find a viable privatisation path for the company, struggling with heavy debts and costly gas supplies, went on for several years.

Finally, the development of Turkey’s petrochemical industry is moving into a phase where Turkish product could soon be knocking at the European market’s door much more vigorously.

Petkim, for instance, now has in place the adjacent STAR refinery that can provide the feedstock for ambitious petrochemical expansions fuelled by capital from parent company SOCAR, the national oil company of hydrocarbon-rich Azerbaijan, plus a modern container port for processing exports.

As things stand, however, Petkim is “aiming primarily at the Turkish market to substitute imports, so it is not a risk for CEE”, according to Erste’s Pletser.

Analysts have also highlighted the massive enlargement in Turkey’s soda ash capacity that has come to fruition in the past year has not led to much market incursion in Europe, as output has been targeted at markets opened up by lower Chinese exports.

CEE players would nevertheless be wise to take heed of potentially relentless growth in the size of Turkey’s petrochemical industry.

Hardly a month goes by without a significant announcement in that respect. By the end of December, for instance, UK’s major BP and Azerbaijan’s SOCAR announced they were mulling the construction of a large-scale joint venture in Turkey for production of purified terephthalic acid (PTA), with potential production capacity of 1.25m tonnes/year.

The venture would also produce paraxylene (PX) and benzene

In November, Turkish conglomerate Ronesans Holding and Algeria’s state-owned energy and chemicals group Sonatrach announced the formation of a joint venture to construct a 450,000 tonne/year PP facility in the newly declared Ceyhan Mega Petrochemical Industrial Zone, near Adana.

Ronesans and industrial zone operator Port of Rotterdam will in 2019 be accelerating efforts to attract new investors to the location.

Focus article by Will Conroy