Poland Petrochemicals Report Q3 2009

The effects of the economic slowdown on the Polish petrochemicals sector are being further compounded by the depreciation of the zloty, which has raised the debt-to-earnings ratio of the country's leading petrochemical producer PKN Orlen and led BMI to raise concerns over the impact on investment in the industry.

PKN Orlen has been struggling with debt and by early 2009 its foreign-currency-denominated debt rose above the net debt-to-earnings ratios defined in credit agreements owing in large part to the depreciation of the zloty. Agreements signed in April 2009 between PKN Orlen and its creditors allowed it to temporarily breach debt covenants after its ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) surpassed an agreed level of 3.5. As part of the deal, it has also agreed not to exceed budgeted capital expenditures (capex) in 2009. Meanwhile, initial reports suggest that PKN Orlen suffered a decline in earnings in Q109, owing to a fall in the value of oil inventories and narrower petrochemicals margins. A fall in oil prices cut inventories by PLN300mn (US$88mn). Profit from production of polyolefins and olefins declined, and volumes of petrochemical product sales dropped 2% to 1.26mn tonnes. Falling earnings and rising debt will restrict PKN Orlen's ability to invest in expansion and improve efficiency. This could prompt it to sell off Anwil, its PVC and fertiliser subsidiary at a lower price than it hoped. The company says it intends to proceed with spending projects that have already been launched in a bid to improve its operational efficiency. Those projects include the construction of a purified terephthalic acid (PTA) plant, completion of which is expected in H210.

Anwil may be acquired by the Polish Chemical Consortium (PCC), which was set up by chemical firm Ciech and fertiliser producers ZA Tarnow and ZA Kedzierzyn in October 2008, and which is seeking outside investment to expand its operations. PCC has stated that if it did not acquire Anwil, it may bid for fertiliser firm Police. The current economic crisis may prompt the Polish government to reconsider a tieup between PKN Orlen and Grupa Lotos, although we remain wary of any rumours given the hard stance that the government previously took against such a merger.

Petrochemical prices are expected to remain under pressure at least until the end of 2009, while refining margins are likely to remain weak until 2011. Furthermore, additional capacity is expected to hit the market at a time when demand is slackening. Demand is expected to eventually recover, but a longer-term problem facing the Polish industry is its dependence on foreign feedstock supplies. At present PKN Orlen derives most of its profits from refining oil imported from Russia into diesel, gasoline and petrochemicals that are then sold in central Europe. The company has not made much headway in securing access to its own oil reserves and the seizure of the credit markets is likely to make funding for any acquisition in the near term difficult to come by.