Ineos Group - Cracking Capacity - Initiation
All,
Please find our initiation on the Ineos Group here.
INEOS Group has sufficient liquidity to operate through December 2027, even if volumes and pricing remain at FY25 lows. However, with yields at 12–14%, constructing a compelling long thesis is challenging, particularly in the context of broader chemical market pressures. Earnings are expected to benefit materially from the new Project One facility, but uncertainty remains around how the commissioning of the Antwerp site will affect both INEOS’ margins and profitability and the wider industry’s cost structure. We prefer to wait for a more attractive entry point.
Investment Discussion:
- We are not taking an active position in INEOS Group. We hold the view that it is too early to take a directional position in Ineos, considering the main driver, the wider macro picture, has not yet shown any signs of turning around. Ienos Group’s liquidity position and lack of near-term maturities would ordinarily support the attractiveness of 12-14% yields; however, subdued near-term fundamentals, muted Q4 guidance expectations, and heightened sensitivity to broader market sentiment leave the risk-reward skewed unfavourably at current levels.
- We will continue to monitor the situation and will re-evaluate our stance if yields widen to c.15%. The all-senior capital structure implies stronger recovery prospects, and under modest near-term growth assumptions, our model continues to indicate fundamental value in excess of 85%.
- Due to a lack of catalysts, we expect the bonds to trade within a relatively tight range in the near term, with limited upside or downside.
Recent Results:
- EBITDA is near historic lows, driven by pricing and margin compression rather than volumes, with pronounced and structural regional divergence, while demand weakness reflects uncertainty rather than an end-market collapse. Management views 2025 as the trough, 2026 as a transition year, and 2027 as a return toward mid-cycle earnings.
- Project One is fully funded and ring-fenced, and the medium-term recovery thesis depends on industry rationalisation and Project One materially reshaping the group’s earnings profile.
- Q3 headlines were dominated by a sharp year-on-year decline in EBITDA. Q3 EBITDA of €375m was materially lower than Q3 2024 (€603m), although it improved sequentially versus Q2 2025, suggesting some stabilisation at depressed levels. The year-on-year decline was driven by lower selling prices and margin compression, particularly in polymers, rather than volumes.
- INEOS continues to operate at the bottom of the chemical cycle, characterised by subdued global demand, significant oversupply in Asia (notably China), and persistent structural disadvantages in Europe stemming from high energy costs and carbon pricing.
- North America remains comparatively resilient due to advantaged feedstocks, while Europe is stable but weak, and Asia remains soft. Heightened geopolitical uncertainty, particularly around tariffs, has weighed on customer confidence, leading to hand-to-mouth purchasing behaviour and increased volume volatility.
- Management views 2025 as the trough, 2026 as a transition year, and expects a recovery toward mid-cycle conditions in 2027. This outlook is underpinned by anticipated industry rationalisation in Europe and parts of Asia, alongside easing inflation and interest rates.
Model:
- Ineos business is highly cyclical with significant operational leverage. Our base case assumes no recovery in FY26 and FY27, with the industry rebounding in FY28. This results in €300m & €700m of negative cash flow after interest in FY26 and FY27. Without refinancing, Ineos' cash balance reduces to c.€1bn in December 2027 with insufficient liquidity to trade through FY28.
- Project One is expected to deliver a step-change improvement in EBITDA from FY27; however, the magnitude is difficult to quantify. While INEOS estimates a €700m uplift, this assumption does not fully account for the knock-on impact on supply dynamics, which is likely to weigh on pricing and profitability across the remainder of the Group’s existing asset base.
Capital expenditure is assumed to reduce to approximately €900m per annum, with the interest burden of a similar magnitude. Under these assumptions, the business generates negative free cash flow after financing in FY27, before recovering in FY28 as EBITDA margins improve to around 12%.
- We exclude the impact of Project ONE from our model. While this may appear conservative, the interaction between Project ONE and the legacy asset base is difficult to forecast with confidence. Although the project should be earnings accretive, we remain sceptical that it will deliver the step-change implied by management projections; a 5–6 year payback period would instead underline the structural challenges facing the older European asset base.
Rationalisation in Europe?
- European ethylene capacity reductions are actively underway, with closures and announcements totalling hundreds of thousands of tonnes per year by 2027. Planned shutdowns, including crackers operated by Dow, Sabic, and TotalEnergies, are expected to reduce net European ethylene capacity by approximately 505,000 t/yr by 2027, even after accounting for new start-ups such as INEOS Project One.
- Broad industry analysis indicates that up to 40% of EU ethylene capacity is at high or medium risk of closure, with older, underutilised naphtha crackers unable to compete with lower-cost producers elsewhere. A March 2025 document issued by eight EU countries highlighted that up to 50,000 jobs could be at risk if further closures occur by 2035. EU plants, mostly small- to mid-sized, have historically operated at average utilisation rates below 80%, which is generally considered uneconomical.
- Project One alone, at approximately 1.45 Mt/y, is equivalent to 2–3 legacy crackers, which explains why multiple closures are structurally required elsewhere.
- Although several closures have been announced, overall European capacity is expected to remain broadly static in the 24–26 Mt/y range, due to Project One and other new projects, including PKN in Poland (0.5–1.0 Mt/y).
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk