Saudi Basic Industries (Sabic) has sold its petrochemical plants in Europe and its thermoplastics business in Europe and the Americas to private equity firms.
German equity investor Mutares has agreed to buy the thermoplastics business for an implied value of $450 million (£330 million), including plants that produce polycarbonate, polybutylene terephthalate and acrylonitrile butadiene styrene in Canada, the US, Mexico, Brazil, Spain and the Netherlands. Aequita (also based in Germany) will buy the European petrochemicals business for $500 million, including facilities producing ethylene, propylene, polyethylene and polypropylene in Teesside, UK; the Netherlands, Germany and Belgium.
Sabic described the sale as ‘portfolio optimisation’ that would allow it to focus on high margin markets and products. The petrochemical giant had previously announced that it would permanently close its offline olefins cracker in Teesside.
The old age of European plants, legislation-driven costs and uncertain outlook make Europe unattractive, says Matthew Thoelke, analyst at Dow Jones Company. ‘The higher operational costs in an extremely deep and prolonged industry downturn is driving companies to consider closure,’ he explains. ‘Companies are preferring to absorb the cost of exit rather than the cost to remain in the market.’
These new investors believe that they can operate these assets better than anybody else
Other firms have also sold off European facilities. Last June, Aequita agreed to buy LyondellBasell’s olefin and polyolefin assets in Europe. ‘Producers are increasingly concentrating capital on assets with clear cost or integration advantages, while exiting higher-cost European operations,’ says Thoelke. ‘The focus has shifted from growth to balance-sheet protection and cash generation.’
Several other firms are planning to sell or close steam crackers, including ENI, Total Energies, ExxonMobil, Shell and BP. ‘Buyers like Aequita are often acquiring businesses at discounted valuations with a clear restructuring or carve-out thesis, rather than paying strategic premiums,’ says Jannen Vamadeva, an analysts at Dow Jones Company. Both Sabic deals are structured to include little or no upfront cost for the buyers, with Sabic instead receiving a share of future earnings.
This is something new in the sector, according to Mark Porter, chair of global chemicals at management consultancy Bain. ‘Many industry players and traditional buyers of such assets looked at them and passed.’ His colleague Piet de Paepe, global head of chemicals, adds: ‘These new investors believe that they can operate these assets better than anybody else.’ This remains to be seen.
China has been manufacturing many bulk chemicals and selling at costs that have raised dumping concerns in Europe. ‘Margins are now so low in China [even negative] that it is attractive for them to export,’ says Porter. ‘That’s putting pressure on the market, especially in Europe.’ The US is somewhat more insulated because fracking generates shale gas, rich in ethane, as a low cost feedstock. Meanwhile, the Middle East also increased its capacity in recent years.
For a cracker to break even, it should run at at least 85% capacity, and above 90% for attractive returns on investment, Porter says. ‘We’re currently at 75% [in Europe].’ European facilities will remain under pressure, although many operators are somewhat hedged against challenges in Europe, since they operate in other regions, and there are potential long-term advantages to retaining some plants in Europe, he explains.
There are three possible release valves. More facilities could close, reducing supply. Porter reckons around 2 million tonnes/year, or 10% of capacity, needs to come offline in Europe for the sector to resuscitate. Supply and demand shifts can quickly flip petrochemical facilities from loss-making to profitable, and vice versa. But shutting a facility down benefits the margins of competitors who continue production. ‘People are waiting to see who blinks first,’ says Porter.
Another escape hatch is regulatory action from the European Commission in the form of quotas, tariffs or direct state support. There is a lot of pressure on the EU to take action. Porter says the EU’s directorate-general of trade is ‘completely overwhelmed with industrial concerns that are looking for help and protection’.
A third solution is for the global economy to expand more quickly. ‘Even a [small amount] more GDP growth in Europe would create huge demand for more chemicals,’ says de Paepe. Nevertheless, the overall picture is clouded by potential trade upheavals, economic growth uncertainty and potential changes to import tariffs, such as for US polyethylene into Europe.
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