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OMV cuts full-year polyolefin margins outlook amid headwinds for Borealis

July 30, 2023
Energy & Chemical Value Chain

OMV AG (Vienna) has lowered its expectations for European polyolefin and propylene margins in 2023 but has maintained its guidance for polyolefin sales volumes despite headwinds for its Borealis AG (Vienna) joint venture (JV), which incurred a second-quarter loss of €58 million on lower margins, volumes and inventory write-downs.

OMV is now forecasting its internal polyethylene (PE) indicator margin for Europe will average about €300 per metric ton this year, down from a previous projection of €350 per metric ton, and a polypropylene (PP) indicator average margin of about €350 per metric ton, lowered from €400 per metric ton previously. In 2022, the company’s European PE and PP indicator margins were €390 and €486 per metric ton, while in the first half of 2023 they averaged €334 and €383 per metric ton, respectively, it said.

The company has also downgraded its expectations for European propylene margins this year, with its internal propylene indicator average margin now projected to be about €400 per metric ton, €80 per metric ton lower than its previous guidance and down from the 2022 average of €534 per metric ton. The average ethylene indicator margin in Europe is still expected to be stable at around €530 per metric ton, €30 per metric ton lower than the 2022 average. In the first six months of this year the European propylene and ethylene indicator margins averaged €419 and €524 per metric ton, respectively, it said.

Annual PE and PP sales volumes this year, excluding JVs, are projected to be around 1.8 million metric tons (MMt) and 2 MMt, respectively, in line with its previous guidance, OMV said. In 2022, sales volumes of PE and PP were 1.69 MMt and 1.84 MMt, respectively.

OMV has also lowered its forecast 2023 average utilization rate for its steam crackers in Europe, with the rate reduced to 85% from its previous projection of around 90%. The forecast rate would, however, be substantially higher than the utilization rate in 2022 of 74%. A scheduled six-week maintenance turnaround is planned to start mid-August at the company’s cracker at Porvoo, Finland, it said.

Weak polyolefins demand
Polyolefins demand “remains weak, as the ongoing cost of living crisis is impacting consumer spending and industrial activity,” said Alfred Stern, chairman and CEO of OMV. The company’s forecast average ethylene indicator margin in Europe this year of €530 per metric ton is expected to continue to be supported by lower feedstock naphtha prices, while the reduced forecast of about €400 per metric ton for the average European internal propylene indicator margin in 2023 is due to high supply availability, he said.

Stern added that its new 625,000 metric tons per year PE plant operated by Baystar, the 50/50 Borealis JV with TotalEnergies at Bayport, Texas, is “mechanically completed and is expected to start-up in the next weeks.”

Organic capital expenditure (capex) in OMV’s chemicals and materials business, which includes Borealis, is projected to be around €1.2 billion in 2023, down from €1.4 billion the previous year.

Stern also referenced OMV’s recently announced entry into negotiations with state-owned Abu Dhabi National Oil Co. (Adnoc) over a potential merger of the companies’ current Borealis and Borouge PLC petrochemical JVs. “The transaction would create a global polyolefin company with a material presence in key markets and potential for growth. We are aiming for equal terms under a jointly controlled, listed platform…and doing that together with an established successful partnership with Adnoc opens up opportunities, in my opinion, that by us alone we couldn’t pursue,” he said in the company’s second-quarter results briefing with analysts.

Borealis is owned 75% by OMV, with Adnoc holding the remaining 25%, and Borouge is owned 54% by Adnoc, with Borealis holding 36% and the remaining shares listed on the Abu Dhabi stock exchange. OMV is majority owned by the Austrian government with Adnoc holding 24.9%.

In the second quarter, OMV’s chemical and materials business posted clean operating profit of €7 million, plunging from €602 million a year earlier and also down sequentially from €94 million. The earnings decline was due to the slowdown in the chemicals sector, resulting in substantial negative inventory valuation effects as well as weaker olefin and polyolefin indicator margins, lower sales volumes in Europe, a negative contribution from the nitrogen business and materially lower contributions from Borealis JVs, it said. Overall polyolefin sales volumes at OMV, including Borealis, declined 7% year over year to 1.36 MMt in the quarter and were also lower than the first quarter’s 1.41 MMt.

“In chemicals, end market demand remained under pressure with slower-than-expected recovery in China and weak industrial activity in Europe, while supply increased with new capacity additions in Asia,” said Stern. “Olefin margins in Europe increased, supported by lower naphtha prices, while polyolefin margins continued to decline. Weaker consumer activity, a squeeze on affordability and continued destocking combined with pressure from imports have kept order levels depressed.”

OMV’s base chemicals business weakened year over year, due primarily to lower European olefin indicator margins in the quarter. The ethylene indicator average margin fell 14% compared to the prior-year period to €567 per metric ton and the propylene indicator margin decreased 32% to €459 per metric ton. “Both indicator margins felt the impact of weaker demand and import pressure, while easing naphtha prices provided some support,” it said.

The utilization rate of steam crackers in Europe operated by OMV and Borealis rose in the quarter to 83% from 56% a year earlier, when the rate was substantially impacted by a planned turnaround at the Stenungsund cracker in Sweden and an unplanned reduced cracker utilization rate at Schwechat, Austria. This year’s quarterly rate was impacted by a planned turnaround at the Schwechat petrochemical plants, it said.

Q2 loss at Borealis
The second-quarter loss of €58 million at Borealis, excluding its Borouge and Baystar JVs, swung from earnings of €412 million a year earlier. The decline was due mainly to negative inventory valuation effects, weaker olefin and polyolefin indicator margins, a negative contribution from the nitrogen business that was about €150 million lower than in the prior-year period, and lower European sales volumes, it said. Inventory valuation effects, excluding the nitrogen business, were around €200 million lower than the previous year.

The contribution from base chemicals at Borealis fell as weaker olefin indicator margins in Europe and lower inventory valuation effects “could not be fully compensated for by the higher utilization rate of the Stenungsund steam cracker and a more positive light feedstock advantage.”

The second-quarter contribution from the polyolefins business at Borealis also dropped significantly, it said, again due to substantially lower inventory valuation effects, the strong decline in European polyolefin indicator margins, and lower sales volumes in Europe. The JV’s average European PE internal indicator margin fell 28% year over year to €320 per metric ton and the PP indicator margin decreased by 32% to €372 per metric ton.

Polyolefin margins in the quarter “continued to suffer from weaker demand following inflationary pressure on customers and the global economic slowdown. The improved availability of imported volumes amplified these effects. As a consequence, realized margins for standard products declined substantially,” it said. However, realized margins for specialty products were stable and provided a resilient earnings contribution, it noted.

Borealis PE sales volumes excluding JVs fell 9% year over year in the quarter to 410,000 metric tons, while PP sales volumes excluding JVs declined by 4% to 450,000 metric tons, due primarily to lower demand “as a cautious European buying sentiment prevailed.” The sluggish demand environment reflected “depressed demand in consumer products and a decline in energy, infrastructure and healthcare applications,” said Stern. Mobility volumes increased, returning to pre-Covid levels due to the need to catch-up on long-placed vehicle orders and better supply of semiconductors, he said.

Borealis’s nitrogen business posted a loss of €35 million in the second quarter, reversing from profit of about €115 million a year earlier, due to lower margins in a weak market environment and negative inventory valuation effects, it said.

OMV said the combined quarterly contribution of Borealis JVs Borouge and Baystar decreased substantially year over year to €29 million from €159 million a year earlier due to a lower contribution from Borouge and a negative contribution from Baystar. JV sales volumes of PE slipped 2% compared to the prior-year quarter to 310,000 metric tons, while PP sales volumes fell 15% to 180,000 metric tons.

Borouge was impacted by a weaker market environment in Asia, with OMV’s reduced share in the JV following the listing of 10% of the JV’s total issued share capital on June 3 also reducing its financial contribution compared to last year, it said. Pricing in Asia weakened year over year as an anticipated recovery in Asian demand failed to materialize and new polyolefin production capacities came online, OMV said. Sales volumes at Borouge declined year over year, again due mainly to OMV’s reduced share in the JV and slow demand. This was partially offset by Borouge’s fifth PP unit, the new PP5 plant at Ruwais, Abu Dhabi, which was ramping up in the prior-year quarter, Stern said.

At Baystar in Texas, Stern said “operational challenges” meant the JV’s steam cracker recorded a low utilization rate in the second quarter. “The weak market environment combined with increased costs due to the planned depreciation of the cracker and higher interest expenses resulted in a negative result contribution from Baystar,” he said.

Capex in OMV’s chemicals and materials business rose in the second quarter to €322 million from €262 million a year earlier, predominantly related to the planned turnaround at Schwechat, ongoing construction of Borealis’ new 740,000 metric tons per year propane dehydrogenation (PDH) plant in Belgium, and construction of the ReOil® plant in Austria, according to the company.

OMV posted second-quarter group clean operating earnings on a current cost of supply (CCS) basis of €1.18 billion, down 60% year over year due to lower contributions from all divisions, with clean CCS net income of €472 million falling 67%. Sales totaled €8.9 billion, down 39% year over year.

by Mark Thomas


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