INSIGHT: Low virgin chemicals pricing intensifies sustainable transition challenge – Borealis CEO

LONDON (ICIS)–Lower pricing for virgin petrochemicals in Europe on the back of a prolonged demand trough is exacerbating the challenge of building out sustainable products portfolios into a core spine of a chemicals business, according to the CEO of Borealis.

The Austria-based petrochemicals producer is in the process of substantially increasing its sustainable and circular products offerings, completing its acquisition of Italy-based recycled polypropylene specialist Rialti in November.

The company also agreed to acquire Integra Plastics, a Bulgaria-based producer of recycled polyethylene and polypropylene, that month.

VIRGIN VS RECYCLED
The push to develop circular products as a core plank of Borealis’ operations have become more difficult amid strained profitability and low pricing for conventional plastics, according to CEO Thomas Gangl.

“What we want to do is focus on establishing circularity as a viable business,” he said. “This is tricky in general, and even more tricky in times of low prices for virgin material. On the other hand, I truly believe that this is not an optional topic, and is the way forward and we see for Borealis.”

“The current environment, with lower demand for products, lower prices and margins, has of course been a difficult situation for us as well. Even more difficult in this environment, is making the mid- and long-term structural changes that we need,” he added.

Lower pricing for virgin material has been a challenge for the mechanical  recycling sector, with production units tending to be smaller-scale than gigantic fossil-based petrochemicals production plant, and utilising newer technology.

Those market characteristics can make for higher costs, and periods of cheap and plentiful fossil-based materials regularly challenge the pace of recycled product market adoption.

“We need to go to a more circular product portfolio. During times when the material is so cheap, it is very difficult to afford for customers to buy something with a premium.  That is a challenging situation for the transformation,” he said.

PERFORMANCE
The company reported 2023 operating profit of €18m for its European asset base, excluding its nitrogen fertilizers business, which it sold to AGROFERT in July last year.

The long-anticipated divestment has also allowed the company to simplify its approach to moving into a more circular business model, according to Gangl.

“The proceeds that we have received from the sale were very good, and it is also about focus in difficult times. With the transformation towards circularity, we need to focus on the polyolefin business, and the nitrogen business was a big distraction from a management point of view,” he said.

The 2023 figure is a huge decline from the €703m generated -also excluding fertilizers – the previous year, amid high inflation and weaker margins and negative inventory effects.

“The European asset base that Borealis is operating, excluding the big joint ventures such a Borouge, recorded €18m operating profit in 2023, a small profit compared to the record year 2022, but 2023 was a tough year for our industry, especially so for European based part of our industry, with high energy prices, inflation, a lot of imports,” said CFO Daniel Turnheim.

“Don’t get me wrong, we are anything but happy with that sum, but it’s still in a solid positive territory,” he added.

Slow ramp-ups and production issues for some new assets at Baystar, the company’s Texas joint venture with Total, also limited profitability last year. This is due in part to the 625,000 tonne/year scale of the polyethylene unit, which can present unique challenges when ramping up output

“With this as the biggest machine ever built, you would expect to see some ramp-up curve… but we are convinced that this year this ramp-up curve will be continued and hopefully at the end of the year we will see a very stable operation,” Turnheim said.

NO BIG SHIFTS IN 2024
No strong improvements are expected this year compared to last, with OMV projecting that operating margins for its European olefins and polyolefins assets will slip further in 2024, despite polymer sales and cracker operating rates projected to increase.

OMV holds a 75% stake in the business, with Borealis standing as the Austria-based oil and gas major’s key foothold in downstream petrochemicals.

OMV is in talks with Abu Dhabi sovereign oil major ADNOC on potential closer cooperation on petrochemicals, including the combination of subsidiaries of Borealis and Borouge as equal partners. Gangl declined to comment on the talks.

Europe indicator operating margins

(/tonne)	2024 (projected)	2023
Ethylene	490	507
Propylene	370	389
Polyethylene	320	322
Polypropylene	320	355

“I think what we really will see in 2024 is that the situation is not substantially different to 2023,” said Gangl. “It will be another challenging year. And so everyone has, therefore, focus on topics where there is the highest value to be delivered.”

Like most European players, an ever-intensifying focus on costs and efficiencies is the order of the day, Gangl said, with further consolidation in producers’ European asset base a strong possibility.

!We’ve done a lot in working on margins, pricing, variable costs, fixed costs. This is the name of the game for European players, and therefore we need to continue this journey,” he said.

“We have seen some first closures of assets last year and also here I expect that the one or the other will be added in the next years,” he added.

LEGISLATIVE REFORM
With the institution of a new European Parliament later this year as part of a wave of general elections that will see changes in national leadership for nearly half the population of the globe, sustainability legislation is likely to see some shake-ups.

Marco Mensink, director general of European chemicals trade body Cefic, has predicted that Commission support on sustainability investment will be focused on the first movers and the highest spenders as industrial strategy rises up the agenda.

With the sustainability transition comprised of the reinvention of numerous value chains and those shifts needing to happen in parallel to create a circular economy, what is lacking beyond investment is clarity, according to Gangl.

“We are not happy with the timing of what is required from legislation and what we need to do now. We are taking steps without knowing exactly what the legislation will look like, and this is of course creating some issues,” he said.

The US Inflation Reduction Act includes scope to cover operational expenses for new production units in value chains that may not yet be profitable, and an issue in Europe remains an obstacle to maturity of cleaner feedstock product markets, Gangl added.

“We can for example, produce more products derived from bio-based feedstocks but as long as this is not supported by legislation, customers will not pay the extra costs for that. And this is where we then need a lot of smaller investments as well,” he said.

“So it’s not only one big investment, it’s many smaller investments, and these will be delayed if there is no change in the approach by regulators,” he added.

Insight by Tom Brown

Thumbnail photo: Borealis’ office in Taylorsville, US. Source: Borealis

Clarification: recasts seventh paragraph