The chief executive of Nova Chemicals has acknowledged that its Ineos Nova joint venture styrene operation is in a horrible business right now but it's worth hanging onto for the long run.
The 50:50 joint venture, formed in 2005 by Nova and European chemical producer Ineos was expanded last year, and is currently not adding shareholder value due to the current low prices for its products. Margins are expected to improve if market prices improve from 5 cents per pound to 17 cents per pound, the mid-point of the historial cyclical range. Continuous consolidation of the industry in due course will lead to significant value in the business. Nova and Ineos still have about 12 months left in a stand-still agreement they signed when they created the joint venture. At that time, a "shot-gun" provision will allow either company to force a sale of its half to the other partner.
Additional capacity due onstream next year in the Middle East and Asia will increase competition for Nova. However, delays are expected in bringing the new production capacity onstream, and even after that the operations are estimated to get hampered by a shortage of experienced, skilled labour. Nova will continue to benefit from the Alberta Advantage compared with its peers so long as the price of natural gas is low relative to crude oil prices. In 2007, Nova had a price advantage of 17 cents/pound produced and that advantage grew to 21 cents/pound in Q1-08. A proposed pipeline to bring natural gas from Alaska, south to Alberta, will benefit the operations in Joffre, Alta., because the North Slope gas is rich in ethane - a major ingredient in ethylene and polyethylene. Additionally, Nova, formerly based in Calgary, moved to Pittsburgh a few years ago to be closer to its major industrial customers.