Weak polyolefin margins will not improve this year, says Borealis CEO

The past half year had been an ‘eventful’ one said Alfred Stern, CEO of OMV on presenting the financial results for the first six months of 2023 on 28 July due to political and economic impacts. Especially challenging were the developments in the Chemicals & Materials business, comprised largely of Borealis and the two joint ventures, Borouge and Baystar - a statement that was immediately endorsed by Thomas Gangl, CEO of Borealis and Daniel Turnheim, CFO, during a brief interview 31 July.

Gangl recalled that the performance in Q4 of 2022 had already clearly indicated that the market was deteriorating, although at that time, the hope was that it would pick up over the course of 2023. Not only has that not happened, there are no signs that it will as the second half of the year progresses.

He pointed to a lethal combination of high volatility and weak prices - and the failure of China to recover following the end of the zero-Covid policy. Asked about the most important factor that had led to the present results, he said it was probably inflation together with the cost-of-living crisis, which ‘is really impacting the entire industry’.

“OPEC attempted to boost prices via supply management and today’s oil price is back at January’s $85. But in the intervening months it plummeted, reflecting the overall economic situation. The entire chemical industry is heavily impacted by this,” said Gangl. In addition, the pressure from imports was significant - and the spring increase in demand failed to materialise. “The summer trough began earlier, as converters are looking for lower prices in the near future. Sales volumes were down by 5%,” he noted. “Lastly, fertiliser sales were also dramatically lower, while melamine sales were half what they were last year. Although, happily, this is the last time we will report on the nitrogen business, as the sale to Agrofert which valued the business on an enterprise value basis at €810 million, was completed on 5 July - which means that Q3 2023 will look better.”

In the first half year of 2023, Borealis delivered an operating profit of EUR 84 million, versus EUR 936 million in the same period last year.  The contribution of the Borealis JVs and associated companies  - i.e. companies that Borealis holds a minority share in - during the same period came to €60 million, versus € 256m million between January and June in 2022,  following a lower contribution from Borouge and the negative contribution from Baystar.

Daniel Turnheim, who was appointed CFO just two months ago, added that the operating profit, excluding the discontinued nitrogen business, was down to €95 million for the first six months of 2023, compared to last year’s €665 -  ‘a massive drop’.

The main cause was due to so-called inventory effects. “In a rising price environment, products stocked in lower price environments can be sold with an additional margin; in a falling price environment, you have the opposite effect,” Turnheim explained. “Around €350 million of this €550 million drop can be attributed to such inventory effects.”

He added that, while realised margins for standard products had declined substantially, the margins on the specialty products had held up well, which underpins the strategy to ‘through innovation, increase the share in the future’.

Also, he said that measures taken within the Strong Foundation Performance Excellence programme implemented last year were helping - “We expect an overall plus €100 million result impact already this year,” he said.

In terms of projects, the news was more optimistic. The Baystar joint venture, consisting of a new cracker that is already in operation, and a new polyethylene plant, is finally completed. Construction of the PE plant has now been finalised, and the next step will be to integrate the cracker with the new plant, which is based on Borstar technology, ‘so this is now finally also starting up’, said Gangl.

Another positive development in the past half year was the acquisition of Rialti, an Italian polypropylene compounder and recycler.

“Obviously, the closing of this transaction is still pending as the customary regulatory approvals need to be run through, but it is a huge step,” said Gangl. “ As I have said in the past, we cannot just grow organically, and this acquisition adds 50,000 tonnes of recycled compounding capacity to Borealis’ circular portfolio for PP.”

The company is continuing to grow its circular economy volumes, he added. “In total, we achieved circular economy solutions volumes last year in the magnitude of 160,000 tonnes, which includes the biobased materials.” Borealis’ mechanical recycling capacity, at its mtm and Ecoplast mechanical recycling plants, is in the ballpark of 100,000 tonnes, he added.
The company also recently launched Stelora, a new class of engineering polymer produced from renewable feedstock. The first commercial application is within a high-heat-resistant capacitor film.

Gangl said that customers seeking more sustainable materials need different solutions for different applications. “Sometimes it makes more sense to go to biobased feedstock material, others are more focused on recycling volumes. And this is why we have brought these sales volumes together in one bucket, so to speak, without differentiating between them.

Continuing its sustainability journey on other levels as well, Borealis said an added plus of the sale of the nitrogen business was that this enabled to company to reduce its carbon footprint by around 50%. The company is also further expanding its use of green energy.

But, said Gangl, the present price and margin environment makes it ‘really challenging for our customers to shift more to circular volumes’.

“That's my worry. I see affordability is in these circumstances as being more challenging than the cost pressure, and the focus on overall profitability. It's more survival mode for many of our customers in some industry segments.”

The focus on sustainability ‘is not the same’, he added. “So, this is something to watch out for. And we will continue to provide those solutions. But at the moment, we see that in some areas, it's extremely difficult.”