The first six months of 2022 have been a roller coaster of events, according to Borealis CEO Thomas Gangl, ranging from the launch of a new sustainability strategy and the disinvestment of the fertiliser business to in June the staging of the Borouge IPO on the Abu Dhabi Securities Exchange (ADX): a ‘once in a lifetime experience'.
As the largest listing to date in Abu Dhabi’s history, the IPO, raised gross proceeds of more than USD2.0 billion for the offering of 10% of the Company’s total issued share capital and was almost 42 times oversubscribed.
This, combined with the substantial increase in the European indicator margins for olefins, yielded a new record profit in the first half of 2022. Borealis achieved a second-quarter profit of €571m and reached a new high of €1.10bn for the period from January through June, up almost 15% compared to the same period in 2021.
“It’s a fantastic achievement, resulting from strong demand on the one hand and on the other hand, problems with cracker supply shortages and logistical constraints, and at the end of the day even offsetting the increase in naphtha prices,” said Gangl.
On the polyolefin side, the situation is ‘normalising’ from last year’s high Q1 and Q2 levels, due to increasing feedstock prices, combined with softening demand and the rising volume of imports from the US and the Middle East.
“In the past, we had huge logistic issues where imports were all but impossible, but that situation is recovering now,” said Gangl.
He added that sales volumes in Europe have decreased compared to last year – most strongly in the case of PP, where high inflation rates and high energy prices have caused demand to slacken in the consumer product and infrastructure sectors on the order of 11%.
“We need to keep in mind, however, that Borealis is a company with a very strong focus on specialty products. Over 40% of our total polyolefins sales are in this segment where we have much more stable and higher margins - and those prices are not directly linked to the market indicators,” emphasised Gangl.
July saw the start-up of commercial operations of Bayport Polymers LLC – ‘Baystar’ -, a joint venture project with TotalEnergies built on the site of the TotalEnergies Refinery in Port Arthur, Texas involving the construction of a new ethane cracker with an annual production capacity of one million tons of ethylene. The ethylene produced by the cracker will be used as feedstock to supply Baystar’s existing polyethylene (PE) units, as well as a new Borstar technology polyethylene unit currently under construction in Bayport, Texas.
And in that same month, the Belgian authorities opened an investigation into the work conditions at the site of the Borealis PDH project in Kallo (Belgium) following allegations of worker abuse by one of the contractors on the project. In response, Borealis declared a three-day stand-still of all working activities at the site and suspended the contract with the contractor responsible for the piping-mechanical works for the construction of the new PDH project, with immediate effect and until further notice.
On a lighter note, said Gangl, the sale of the nitrogen business is progressing well. Having declined the original €455m offer from Russia-based EuroChem, Borealis then restarted the competitive bidding process and has now entered into a deal with Czech food and agricultural conglomerate Agrofert for €810m. The jump in enterprise value is due to the soaring price of fertilizer caused by the sanctions on Russia and the fact that Ukranian grain cannot be exported because of the war.
“Ukraine is responsible for 12% of the global wheat sales,” explained Gangl. If the volumes of Ukrainian wheat cannot leave Ukraine, farmers elsewhere are using more fertiliser to increase the production yield. With demand rising and prices shooting up by four to four-and-a-half times, the margins went up significantly. This is why a new valuation was necessary.”
Meanwhile, Borealis has not only negotiated a better price, the company also continues to earn money on the fertilizer business until the deal closes.
“And we're creating a big player in central Europe - Austria, the Czech Republic – which is a good situation for the customers that we have for the future.”
In terms of sustainability, there has been a concerted effort to ‘bring the new strategy to life’; a strategy with sustainability at its core and which is driving the company’s transformation across all applications and areas, including its geographical growth.
“In Finland, we're leading a research programme called SPIRIT - Sustainable Plastic Industry Transformation for which we received public funding of 20 million; and we’ve set up a joint venture with the waste management experts, Reclay Group, where we are working on redesigning the critical steps in plastic sorting and recycling systems, focusing on consumer lightweight packaging to really speed up the circularity and to meet the market demands. This will also help us grow the volumes we need to fulfil our pledge to increase the 100,000 tons of sustainable products that we are producing today to 600,000 tonnes in 2025,” said Gangl.
He also mentioned the Borvida product portfolio for sustainable chemicals introduced in June. That portfolio, he said, will initially comprise Borvida B, from non-food waste biomass, and Borvida C, from chemically recycled waste. “In the future, we will also have Borvida A, based on carbon captured from the atmosphere, so we will end up with Borvida A, B and C.”
Clouds are gathering
Looking ahead, Gangl noted that we would not see a repeat performance of the record profits of the first six months. The environment is changing, he said, with demand clearly already being impacted by inflation as people become more careful about their spending.
“The story of the second half [of the year] will be inflation, falling sales volumes and prices and the war in Ukraine. And unfortunately, I don't see a quick end to that, which means we need to prepare for it - there's no other option that I would see here,” he added.
It is important to keep in mind that things are not ‘bad’ as such, but that the margins and productivity levels of the past year had simply been extraordinarily high and were always going to drop at some point in time.
“So, an impact is inevitable. But it should not prevent us from continuing our transformation journey. That is as important as it is necessary, and I hope therefore that there are not too many negative effects in that area. From our side, we're continuing those activities full speed ahead, with clearly no intention of slowing down anything there at all.”