New plastics plants to support Borealis

Global economy not expected to pick up until second half of 2010, says chief executive.

New plastics plants in Abu Dhabi will support the balance sheet of Borealis, the Austrian petrochemical company owned by the Government, as global market conditions remain depressed over the next 18 months, the company's chief said. As output increases more than seven-fold over the next five years at Borouge, the company's joint venture with the Abu Dhabi National Oil Company (ADNOC), the main challenge will be finding new markets, said Mark Garrett, Borealis's chief executive.

Borouge will be selling its new supply of polyolefins, a raw material in plastics, into a market with an immediate glut of product as a result of other plants starting up in the Middle East, Mr Garrett said. "We don't expect the economy to pick up until the second half of next year, and in that sense, polyolefins producers are a little worse off ? They're going to have to deal with this new supply coming on. So that's going to be an interesting time over the next 18 months," he said.

Borealis, in which the Abu Dhabi Government's International Petroleum Investment Company (IPIC) has a 64 per cent stake and which produces about 4 million tonnes of chemicals annually at plants in Europe, saw revenues decline in the past two quarters. The firm lost ?122 million (Dh634m) in the fourth quarter of last year, and ?56m at the beginning of this year. Mr Garrett said the company hoped to return to profitability this quarter, and had managed to hold its debt level low, with gearing - the ratio of debt to equity - of 47 per cent.

"We went into the recession with a 27 per cent gearing, and some of our competitors ended up after the first months with gearings higher than 1,000 per cent," he said. "We have the benefit of having very long-term-orientated shareholders so they invest with us through the cycles." Since coming under IPIC's majority ownership in 2005, Borealis has steadily become more important to the Abu Dhabi economy.

The firm is helping IPIC to develop the first stage of the massive Chemicals Industrial City in Taweelah, and earlier this year it agreed with ADNOC to proceed with a third-stage expansion of Borouge to more than double capacity from 2 million to 4.5 million tonnes a year between 2010 and 2014. A second-stage expansion, known as Borouge 2, is scheduled to be finished by the end of next year. After the third-stage expansion is completed, production in Abu Dhabi will make up a majority of Borealis's output.

"For the next decade, Borouge has become the most important investment that Borealis has in plant and equipment," Mr Garrett said. Much of the new production will be sold to China and the rest of Asia, where Borouge's marketing arm has developed a strong presence, but Mr Garrett indicated IPIC may capitalise on its recent acquisition of Nova Chemicals, a Canadian firm, to open up markets in North America.

Over the long term, the low costs of Borouge's production, which is fed by cheap ethane derived from natural gas, would offer stability in an otherwise volatile market, he said. "You don't build a Borouge 2 for the next two years - the thing's going to be there for the next 30 years. So the site will experience a lot of cycles in its existence." [e-mail]