Borealis CEO Thomas Gangl: in our previous interview in 2022, you anticipated a worsening general market environment in 2023. Now that this has come to pass, how has Borealis responded?
TG The past year has indeed been a perfect storm of volatility and uncertainty: a deteriorating macro-economic environment, sluggish demand, growing geopolitical strife, rising energy costs, and in many countries, high inflation. Separately, these factors would be enormously challenging. But taken together, they complicate industry-wide efforts to transform and decarbonize.
Yet our long-term approach to managing these challenges has already been charted in our Borealis Strategy 2030. It serves as our guide as we maintain strategic focus on expanding our geographic footprint to better serve growth markets, and transforming ourselves to become a truly customer-centric provider of advanced and circular material solutions. As long as Borealis remains dedicated to our purpose of re-inventing essentials for sustainable living, we will overcome any obstacles the market puts in our way.
However, there is room for improvement in safety performance. Our Total Recordable Injuries (TRI) rate per million of 4.0 in 2023 is a deterioration versus 2022. Despite intensive efforts to prevent all such incidents, a large number of low-impact TRIs occurred, both actual and potential. In response, we have launched an expanded safety training program to improve performance. This and other efforts, including our established B-Safe program, show our steadfast commitment to “Zero Harm.”
Daniel Turnheim: you were appointed Borealis CFO in June of this turbulent year. From your perspective, how can Borealis best manage this “perfect storm” of market challenges?
DT For the petrochemicals industry, the macro challenges posed by the economic slowdown in China, inflation and rising interest rates are compounded by weak margins and increased competition from lower-cost producers outside of Europe.
Our financial results in 2023 reflect these challenges, with our net profit dropping to EUR 168 million from the record EUR 2,111 million reported in 2022, whereby one-off effects from the Borouge IPO in June 2022 contributed significantly to last year’s result. However, the “Strong Foundation – Performance Excellence” (SFPE) program introduced in mid-2022 was designed to mitigate the negative effects of the industry downturn by delivering long-term profit improvements across the entire Group, and to use these profits to support the ongoing implementation of our Borealis Strategy 2030. We focused on measures to improve profits in practices related to pricing, procurement, logistics, energy efficiency and the integrated value chain, among others. As the industry downturn became more entrenched, we launched an additional fixed-cost program in August this year which targets structural and more or less permanent changes that reduce our fixed-cost base. We intend to achieve fixed-cost savings of EUR 100 million by the end of 2025, working from a 2022 baseline.
TG Implementing SFPE would not be possible without the time and effort invested by our people in first identifying, then managing, the many ways to do more with less. Given their support, we are confident that Borealis can remain competitive in this difficult market environment while at the same time achieving our crucial, long-term strategic goals like geographic expansion.
Growth projects such as the joint venture Borouge, whose spectacular IPO in Abu Dhabi made headlines in 2022, have long been a driver of geographic expansion for Borealis. Where do things currently stand?
DT Like last year, Borouge continued to be a growth driver for Borealis, but driven by the market, its net profit contribution was lower than in 2022, which was a record year in terms of profits. We are pleased to report that good progress has been made on the Borouge 4 expansion project. Once operational, Borouge 4 will help meet robust polymers demand in the Middle East and Asia, and supply feedstock to the adjacent TA’ZIZ Chemical Zone in Ruwais, Abu Dhabi.
How are Borealis’ other major growth projects advancing?
TG In October, we celebrated the start-up of Bay 3, our new Borstar® polyethylene (PE) plant in Texas. It is a huge milestone for the Baystar™ joint venture with our partner TotalEnergies, because we have brought our most advanced Third Generation Borstar (3G) Technology to the US for the first time. The Baystar venture is now a fully integrated PE business. We are gradually ramping up production at this 625,000 metric-ton-per-year facility, doubling the site’s total capacity.
DT Our third major growth project is the new, world-scale propane dehydrogenation (PDH) plant at our existing production site in Kallo, Belgium. This massive undertaking had been temporarily suspended after misconduct on the part of the former contractor IREM was uncovered in 2022. After completing the re-tendering process for construction works in April 2023, construction activity got back on track as of this summer. In line with our unwavering commitment to corporate ethics and compliance, Borealis has stepped up its oversight of the Kallo project.
New builds are only one path to growth; mergers and acquisitions are another. What were your activities in this arena in 2023?
DT Our 2023 acquisitions are helping Borealis grow while consolidating our circular economy leadership. In October, we completed the acquisition of Rialti S.p.A., a leading European producer of high-quality, mechanically recycled polypropylene (PP) compounds for extrusion and injection molding applications in mobility and other higher-margin sectors. In November, we increased our share in Renasci N.V. from just over 50% to 98.56%. We also agreed to acquire Integra Plastics AD, an advanced mechanical recycler based in Bulgaria. Pending foreign direct investment and regulatory approvals, we anticipate closing this second deal by end of Q1 2024.
TG These acquisitions are especially exciting because they move us closer to our goal of 1.8 million metric tons of global production capacity for circular products and solutions by 2030. We are also proud to have now obtained ISCC PLUS (International Sustainability and Carbon Certification) accreditation for all of our European polyolefin and polyolefin compounding sites, as well as our recycling facilities with Renasci N.V. in Belgium, mtm plastics in Germany and Ecoplast in Austria. This is an important milepost in traceability for renewable-based materials such as our Bornewables™, and the recyclate-based products in our Borcycle™ M and Borcycle™ C portfolios.
While Borealis has acquired new shares in some companies, it has shed them in others. Please update us on the divestment of the Borealis nitrogen business unit.
TG The long and laborious divestment of this unit, which included fertilizers, technical nitrogen and melamine products, started in February 2021.It concluded in the first week of July 2023 as Borealis divested its shares to Czech-based AGROFERT. While the business was valued on an enterprise basis at EUR 810 million, the parties continue the process of customary closing accounts adjustments. As a leading player on the European fertilizer market, AGROFERT is committed to guaranteeing supply security and building out its production facilities. In January, Borealis also divested all its shares in Rosier after finalizing an agreement with the YILDIRIM Group.
In addition to spearheading the circular economy transition, Borealis is also becoming more sustainable in its own production operations. How did 2023 shape up in this regard?
TG Borealis had originally set 2025 as the target year by which we would power 40% of our Polyolefins and Base Chemicals operations in Europe with 100% renewable electricity. We are very proud to have already reached this goal in 2023. The power purchase agreement (PPA) that put us over the 40% mark was signed with a new partner in Finland, Alpiq. This PPA, along with another signed in April with an existing partner, Axpo, will ensure clean electricity supply to our production facilities in Porvoo, Finland. Thanks to these and the eight other PPAs finalized since 2021, we are well on our way to achieving our 2030 target of using 100% renewable electricity to power our European operations. This also means that we are on track to lower our Scope 1 and Scope 2 emissions to 2 million metric tons per year, from a 2019 baseline of 5.1 million.
DT Investing in our existing assets is another way in which we are improving the sustainability of operations. In 2023, we completed a major upgrade of our cracker furnace in Stenungsund, Sweden to further improve its energy efficiency and process safety standards. It is also a benchmark in Health, Safety, Security and the Environment (HSSE): there were no major accidents or process safety incidents throughout the entire seven-year project duration.
Market volatility and industry pressures are likely to continue into 2024 and beyond. Daniel Turnheim, from a CFO’s point of view, how can Borealis counter what industry experts ICIS have called “an unprecedented level of uncertainty within the industry”?
DT Ensuring operational reliability at our Baystar joint venture is crucial, because access to cost-advantaged ethane is key to remaining competitive on a global scale. Cracker reliability must be improved, and the new Bay 3 successfully ramped up.
However, our short-term financial performance will be impacted by factors outside our direct control, such as depressed demand in the face of overcapacity. We will continue to feel the impact of a weaker price environment in our core business areas. In addition to high energy costs, stubbornly high inflation in Europe exerts additional cost pressure and is thus a major concern. The dire predictions of a prolonged and deepening industry downturn cannot be discounted, but the petrochemical industry has always been one with pronounced booms and busts.
We are meeting industry challenges head on through our SFPE program, which is enabling us to better manage our variable costs, optimize margins and realize fixed-cost savings. As long as we stay on track with our SFPE program, we will have sufficient room to maneuver in the future. Our strong balance sheet and cash flow enable us to pursue our long-term goals of strategic growth and transformation.
The closing words go to you, Thomas Gangl. As CEO, which focus areas will occupy you most in the coming year?
TG Safety, in all aspects of our operations. The outstanding process safety results achieved in 2023 along with the excellent occupational safety performance at numerous sites show that we can deliver safety excellence as long as we maintain the necessary vigilance. To ensure that Borealis becomes an industry leader in HSSE by the end of the decade, we have developed and rolled out our new “2030 HSSE” strategy.
However, we must also stay focused on accelerating the speed of transformation. It remains to be seen whether the recent COP28 agreement will be the long sought-after breakthrough in global decarbonization efforts, but it is clear that we are at a tipping point. Much progress has been made. But we need globally coordinated, downstream efforts to incentivize the massive investments required to reach net zero and accomplish the circular economy transition. These actions include expanding our clean electricity infrastructure, establishing economically viable waste recovery and recycling capacities, and exploiting the potential of new technologies and processes available to us – whether chemical recycling, green hydrogen or carbon-dioxide removal, to name a few. To this end, policymakers at all levels of government should promote investment and innovation that drive decarbonization and circularity.
Borealis is playing a vital role in advancing plastics circularity by way of our technological prowess and constructive partnerships along the value chain. We are making good on our commitment to lowering our own emissions. Thanks to the solid foundation of our people – who are unflagging in their dedication to innovation and progress, even when the going gets tough – Borealis is well positioned to stay the course in uncertain times.
