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INTERVIEW: Borealis polyolefins margins hit record highs during Q2 -- CEO

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Platts Market Data – Electric Power

INTERVIEW: Borealis polyolefins margins hit record highs during Q2 -- CEO

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Polyolefins margins double during quarter

Automotive rebound, hygiene driving demand

High shipping costs boost European market

Borealis' polyolefins margins expanded to record highs during the second quarter off strong demand and ongoing logistical challenges, CEO Thomas Gangl said in an interview with S&P Global Platts July 28.

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The company's polyethylene indicator margins during Q2 more than doubled to Eur803/mt from Eur391/mt in Q2 2020, with polypropylene margins nearly doubling to Eur898/mt from Eur453/mt the previous year, according to parent OMV's quarterly results.

"[Polyolefins margins] rallied to a historic high. If you compare year on year, they doubled," Gangl said.

"Q2 is by far the highest margins we have ever seen, not by a bit, but by far," CFO Mark Tonkens said at the interview.

Demand drives margins

"There is very strong demand, a recovering automotive industry, hygiene products are a really big development, we saw a demand increase across all segments," Gangl said. "On the supply side, there was intensive maintenance activity in Q2 and exceptional high shipping costs between Asia and Europe due to a shortage of containers. These missing import volumes have a big impact."

Gangl said the US polyolefins market also saw a similar trajectory for prices and margins as seen in Europe. However, he added that the US market was less dependent on imports, and so not as "affected as Europe by the disturbances on maritime trade."

European polyethylene prices hit all-time highs during Q2, according to S&P Global Platts data, a result of supply constraints brought about by domestic and US supply issues, healthy demand, and logistical constraints arising from shipping disruption and container tightness.

However, European PE has since softened as supply has improved, although it remains above levels seen during 2020. The widening gap between weakening PE prices and consecutive contract price increases in the upstream ethylene market since December 2020 has seen some ethylene market participants expressing concern that affordability in derivative markets for ethylene price hikes could be waning.

"[If] ethylene and propylene continue to go up then on the [polyolefins] side you will see a bit of normalization of supply and demand, there will be some pressure on the margins of PE and PP. But that pressure is quite comfortable from the level we've come from," Tonkens said.

"[We] will see a bit of tapering but the question will be: at what speed it will go? We're still really positive on Q3, and on also Q4 we're not negative at all. If you look at it in the context of Q2, then of course, it will be lower, but Q2 was amazingly good," the CFO added.

Logistical constraints to continue

Both Gangl and Tonkens said they expected logistical constraints, a significant driver behind European price developments, to remain an issue going into 2022.

"I think no one can really predict that exactly but all the indications I get is that this is something that will remain this year ... Q4 should also clearly indicate that logistics are not back to normal," Gangl said.

"On the logistics it's multiple factors -- it's the difficulty at various harbors to get product through quickly, COVID-19 is a part of that ... That combination, with the overall shortage of containers -- and they are not building new containers very fast -- gives us and shipping companies the prediction that it will go into 2022 before you can see proper relief. Maybe we'll see some relief, but ... the shipping price for a container was seven times compared to the same period last year and that gives you protection in Europe from imports," Tonkens added.

Limited renewable feedstock

Gangl said Borealis was seeing interest in its recently launched renewable polyolefins range as customers looked to reduce their CO2 footprint, though the significantly greater availability of recycled feedstock would mean the sector had a greater volume potential than renewable material.

In early 2020, Borealis began producing ISCC-certified PP produced from renewably sourced feedstocks, and is the owner of recyclers MTM Plastics and Ecoplast. It recently acquired a 10% stake in Belgium-based recycler Renasci.

"There is a much bigger potential in terms of volumes [for recycled material] because all the waste streams have to find a good way into a recycling stream. Therefore, volume wise, recycled material will play a bigger role moving forward as the availability of the feedstock is quite a challenge on the renewable side," Gangl said.

Gangl said it was important to continue to develop its renewable material offering, as well as to provide a variety of pricing for consumers.

"It will depend on one hand on the price level for the different solutions. There will be applications where people go for renewables because they have a certain claim they want to bring with the product, and others will be happy with the recycled material."

OMV is now the 75% owner of Austria-based Borealis following an additional 39% stake acquisition in October 2020. The remaining 25% stake in Borealis is held by Abu Dhabi's sovereign wealth fund Mubadala.

OMV's Chemical and Refining unit recorded an operating result of Eur678 million during Q2, up from Eur96 million in Q2 2020. Half-year results January-June rose to Eur1,143 million in from Eur229 million in 2020.

Borealis recorded a significant increase in profit on the year, rising Eur406 million on the year to Eur430 million during Q2. For January-June, profit rose Eur622 million to Eur701 million.