Petrotahlil --Borealis is tightening its focus on base chemicals and polymers as it prepares to divest the bulk of its fertilizers business after shareholder OMV doubled down on its position in the Austria-headquartered petrochemicals producer.

DIVESTMENT AND REALIGNMENT
After several years of peaks and troughs for its fertilizers operations, Borealis announced last week that it is preparing to put the business in play.

With no set timeline to divest, the sale of the nitrogen and melamine operations will represent a total break from the fertilizer sector for the company, with the exception of a Benelux player with two production plants it continues to hold a stake in.

Fertilizers has been one of the three pillars of Borealis’ operations, alongside commodity chemicals and polyolefins, but it is the smallest of those core divisions, according to CFO Mark Tonkens.

“I would not say a sale would make us much smaller, ferts is 10-15% of our top-line [sales], but from a magnitude perspective it doesn't make such a big impact, especially if you look in parallel with our growth projects,” he said.

The European fertilizers sector has long been due for consolidation, according to comments from various members of the Borealis management team to ICIS over the last few years, but the decision was reached to get out of the market rather than invest further in the sector, Tonkens said.

“We have always said for many years that consolidation needs to happen in the Europe fertilizers industry, and at the same time we also believe that we are more focused as a dedicated polyolefins/chemicals company than a fertilizer company, so that made us believe that we would now start a process for divestment and get it executed,” he said.

OMV FOCUS
The shifting focus of the company comes at a time when stakeholder OMV has significantly ramped up its investment in the company, investing $4.68bn in an additional 39% stake in October 2020 despite the focus on cost-cutting among oil players during the pandemic.

OMV’s stake now stands at 75%, with Abu Dhabi's investment fund Mubadala holding the remaining equity.

News of plans to sell the nitrogen and melamine operations came a day ahead of the announcement that Alfred Stern is to step down in April from the CEO position, to be replaced by Thomas Gangl, an OMV executive board member with responsibility for the oil and gas firm’s refining and petrochemicals activities.

Stern will move to OMV’s executive board with a focus on chemicals and materials.

In a statement, Borealis described Stern’s key contribution in his three years as chief executive as his stewardship in handling the company’s shift in focus towards sustainability and the circular economy.

Oil and gas firms, particularly in Europe, have been focused in recent years on the routes that will allow them to diversify their core businesses and diversify portfolios.

Chemicals, sustainability, renewables and bio-refining have emerged as some of the key avenues for oil majors to attempt to reinvent themselves as the likely downslope from a ‘peak oil’ era draws closer, and how heavily to commit to each diversification option.

While some firms have elected against the chemicals route to increasing operating margins, with BP selling off the bulk of its operations in the space to INEOS last year, OMV is betting on industry trends towards sustainability as a significant growth space, according to Tonkens.

“OMV now consolidates Borealis fully, they like Borealis as part of the family to move more toward chemicals,” Tonkens said.

“OMV is very active on chemical recycling, we are bringing those mechanical and chemical recycling initiatives together, and we can make the flywheel go much faster,” he added.

PDH LANDSCAPE
Borealis is also one of three European players that have been developing large-scale propane dehydrogenation (PDH) capacity in the region, alongside INEOS and Grupa Azoty.

When all three projects were initially announced, speculation was rife in the market as to whether one of those projects would end up delayed or mothballed.

INEOS was the first to blink, announcing in January that it was delaying construction of its Antwerp, Belgium, unit to focus on work on the cracker part of the complex, citing market appetite for ethylene as the reason for the rephrasing of the project work.

No timeline has been disclosed for completion to work on the PDH unit.

Borealis expects to complete its PDH unit by the end of 2022 and, while market dynamics already made the case for the project, a reduction in new supplies is likely to result in a tight market for propylene, according to Tonkens.

“When we made that investment decision regarding PDH we, of course, looked at the landscape and at time also INEOS was already contemplating building a PDH unit, so in our supply/demand balance, we have taken that into account,” he said.

“The fact that they  have now decided to postpone it without saying a date improves our position and gives us an even stronger belief that this is an excellent investment, a market which will really be in need of propylene, but also lower activity on the refinery and cracker side, so it is a good development,” he added.

The pandemic has disrupted the timelines for numerous petrochemical projects, due to tighter controls on spending or logistical difficulties pushing timelines beyond projected start dates.

A result of this is that 2021 may have been a bear market for many commodity chemicals due to ample supply and weakened demand, but the low cycle is yet to materialise, according to Tonkens.

“The market is really tight, and if you asked us a year ago, we would have said that in 2021-2022 a lot of capacity will be coming on which will lead to a low market, which we don't see now,” he said.

The company had struggled for seven months with the outage of its Stenungsund, Sweden, cracker, which came back online in January after a fire broke out at the site in May 2020.

While market supply at the period was fairly ample, conditions have changed markedly, with little spot material around.

“We are happy we don’t have a cracker breakdown at this moment because it would be almost impossible to get your hands on ethylene,” Tonkens said.

This may shift in the coming months as more base chemicals and polymers capacity comes online, he added, but momentum in the fourth quarter of 2020 is holding for the time being.

“We do anticipate also the first part of the year to be solid, so we expect a continuation of Q4,” he said.

“There is still capacity coming onstream, so at the moment that should have some impact, but at the same time I would say that demand is better than expected.”