New economic realities will inevitably affect the situation in the industrial production, and the plastics business is no exception. Without any doubt, the status quo will most painfully be disturbed by the devaluation of ruble. However, the effect of the currency blow as well as the implications of sanctions will vary for different market players. The tactical task for the Government is to prevent the market disbalance, while its strategic goal is to support further development of the industry, providing enterprises with financing sources for investment projects.
«Plastics of Russia 2014» Forum, organized by INVENTRA and CREON Group, was held in Moscow on November 25. The event was supported by the Ministry of Industry and Trade of the Russian Federation and the Analytical Centre under the Government of the Russian Federation. Centropolymer became the Gold sponsor of the Forum. The event was attended by more than 170 representatives of industry majors, government bodies, expert community, federal and trade media.
In his opening address, Fares Kilzie, Head of CREON Group, outlined three different views on current events in the economy shared by the plastics business. «One group considers the current sanctions situation to be a great opportunity to outperform the others, to start some new production. The second group is pessimistic. For instance, I expect hard times next year unless the ruling elite conducts fundamental reforms and changes the course. The third group is trying to benefit from the whole process by reshaping the market in their favor. Such an approach has the right to exist too, but it is destructive», – said Fares Kilzie.
The economists who analyze the markets would rather support the views of the second group and have no illusions at least for the nearest future. «Next year will be difficult», – is the forecast of Tatiana Gurova, Deputy Chief Editor of Expert Publishing House. Speaking at the Forum, she noted that the economy has not been in such a bad condition since 1997. Industrial production has been growing by double digits until recently, but stayed at zero growth levels for past several months. The reason for stagnation is in the lack of investment phase, modernization, which should have happened in 2012-2013, but never did.
Formerly, large companies had secure access to sources of finance for their projects, but adoption of sanctions has limited the credit resources not only for medium-sized businesses, but also for industrial majors. This is pretty much the main problem today for companies involved in petrochemicals, plastics production and plastics converting.
Representatives of plastic business community claim that local sources of finance should be opened up to support investment. Government development funds can be an option, but the main task is to create new financing instruments. Such an assertion was voiced in every speech by heads of polymer producers and plastics converting companies.
Tatiana Gurova suggested a specific solution. She is convinced that the situation requires a corporate bond market; it can help accumulate investment capital for development of operations. The problem however is that establishing the bonds market takes at least a year, while the money is needed now.
Despite external challenges, the projects in petrochemicals continue to be implemented, with some adjustments though. For example, Nizhnekamskneftekhim has adopted the decision to implement its over-million-capacity ethylene project in two phases. According to Marat Fatykhov, Deputy Commercial Director for Plastics Marketing of Nizhnekamskneftekhim, phase one will be construction of 600 ktpa capacity, with another 600 ktpa facility to follow afterwards. The Company is proud of its completed expansion projects. In 12 years, pyrolysis capacities were increased from 450 to 600 thousand tons, which is a significant and positive indicator.
Gazprom Neftekhim Salavat, Lukoil and companies in the Republic of Kazakhstan are also planning construction of new pyrolysis plants. This will inevitably increase PE and PP production volumes.
Sergey Zhidkih, Director of Basic Polymers Sales Department at Sibur, noted during the Forum that polyolefins production capacities will grow up to 3.5 million tons in the foreseeable future.
In global practice, affordable feedstock and large-sized markets are the main drivers for petrochemistry development. Currently we can see the combination of both these factors in the USA, where 71.7 billion dollars is expected to be invested in petrochemical projects during 10 years. According to Andrey Vorogushin, Vice-President for Strategy and Development of UPC, the annual revenues of new facilities will reach 66.8 billion dollars once they are commissioned.
Meanwhile companies in the Russian market have doubts that petrochemistry will continue to be profitable in Russia. «The main advantage in Russia has been the low cost of naphtha and LPG and high export duties on raw materials. This provided the stimulus for launching new petrochemical capacities. The ongoing tax maneuver is changing the situation, despite the planned compensation in the form of «negative excise», – stressed Vice-President of UPC.
Farid Minigulov, General Director of Kazanorgsintez, provided more strident estimates: «The situation with the tax maneuver will have a strong impact on the industry. By implementing the move, the Government is pushing petrochemical plants into closures that will happen maybe in 5-7 years». The reasons for such a scenario include lower margins, inability to modernize production, lack of finance to expand capacities or to launch new projects.
The economic situation left aside, the petrochemical industry is also influenced by other global factors. «The XXI century demands large-scale projects and new production sites. Even in the EU, small petrochemical industries are unprofitable, and they are being shut down. New standards imply new investments», – noted Igor Valushkov, Head of Department for Coordination of Gas and Energy Operations and Sales of Petrochemical and Gas Processing Products of Lukoil, during the discussion.
Today the fate of many projects in the industry is under question. But happy owners of own investment capital can achieve significant breakthroughs. Ruble’s devaluation that hits the importers can become a driver for local production capacities: they will benefit from the possibility to substitute the decreasing imported volumes.
The agriculture and probably some other import substitution areas will keep us away from stagnation, agreed Tatiana Gurova from Expert, who first suggested gloomy scenarios, but then noted that possible points of growth existed as well.
With respect to agriculture and food, plastics have bright prospects in the packaging industry, for example. Optimistic market players believe that the plastics industry can become one of the growth drivers for Russia. According to Andrey Lapin, General Director of Kronos Group, the plastics have influence over 10% of the economy. By supporting the plastics segment, the multiplier effect is being launched. Replacement of imported materials and products has a real potential, he believes. The volume of imported plastic feedstock and finished goods in Russia reached 16.3 billion dollars in 2013, and this equals to potential surplus of local production. Mr. Lapin believes that the most optimal scheme for organizing new production is development of industrial parks, where the full value chain is manufactured from feedstock to final product.
The most successful plastics converting companies are not going to slow down the pace of development, despite all the external challenges. According to Vasily Tkachev, Operations Director of «Polymeric Isolation» Business Unit at TechnoNicol, ruble’s devaluation strongly affects the cost of equipment purchased in Europe, it sharply reduces return on investment and increases the pay-back period. However, the company continues to implement all of its investment plans.
It is the demand for end-product that can trigger the whole chain from plastics converting, up to polymer feedstock production and to E&P of hydrocarbons, the latter being challenged today by lower export prices and instability of supply.
Sergey Zhidkih, Director of Basic Polymers Sales Department at Sibur, described the per capita plastics consumption gap that can illustrate the potential growth of demand for petrochemical products. According to him, Russia’s consumption of plastic insulation stands at 50 cubic metersper 1000 people, while the same figure in the US equals to 260 cubic meters, in Sweden to 360 cubic meters. Plastic pipes in Europe are occupying almost the half of the pipes market, while their share in Russia is 25%. About 200 kg of plastic materials are used per vehicle in modern automotive construction. Localization rate of the automotive industry in Russia has reached 70%, but many plastic parts are being imported. Above said, the growth of plastics consumption in Russia is possible. In order to succeed in this, systemic measures of demand stimulation are very important. Apart from this, the development of petrochemical industry needs higher levels of industrial engineering localization. This requires coordinated efforts by the Government, industrial consumers and equipment suppliers.
Frequent appeals to the Government voiced by very successful companies were not accidental at the Forum. The event has long established itself as the recognized GR tool and the platform where entrepreneurs can share their views and propose regulating measures to the ministries and institutions.
With this respect, Polyplastic Group, a major manufacturer of plastic pipes in Russia, put forward their proposals for development of plastics converting in the country. Miron Gorilovsky, Head of the Group, urged to cut the import duties on black PE pipe grades to zero, as the current shortage of the feedstock is offset by counterfeit substitutes. In turn, surrogates can cause accidents in gas and water pipelines, thus ultimately undermining the credibility of plastic pipes as a product.
The quality of materials is a topic of concern for converting companies as well as for plastics manufacturers and suppliers. There are PE grades in the market produced under Western license, but not accepted for pressure pipes applications by the State Standard (GOST). Ludmila Bakhar, General Director of Ormos-Polymer Company, suggested that certain state standards be revised, but Miron Gorilovsky disagreed, stressing once again the danger of possible implications over quality.
The Association of Manufacturers and Processors of Polyethylene Terephthalate (ARPET), representing the interests of producers and converters of PET, also drew attention to unfair regulatory restrictions regarding PET bottles. According to Viktor Kernitskiy, Honorary President of ARPET Association, the possible ban on plastic bottles larger than 0.5 liters will seriously reduce the demand for PET and harm companies that invested heavily in the development of this industry in Russia. The situation should be addressed to prevent the attack on this segment of plastics.
International market players contributed to the Forum, too. John van der Stoop, Managing Director of Sabic, presented the paper and confirmed the company’s plans to continue its activities in the Russian market, but avoided hypothetical suggestions to localize plastics production in Russia.
Uhde Inventa-Fischer Company, part of ThyssenKrupp Concern, in its turn, presented the technology of polylactic acid production from vegetable feedstock, which serves as an alternative to petrochemicals in plastics production. Biopolymers based on polylactide are a reality now. The market growth is about 19%, but on a global scale, biopolymers share is quite small, said Udo Mühlbauer, representative of the Company.
In conclusion, the plastics business community agreed that the industry requires Government support, that competitive advantages for plastics production should be sought in lower hydrocarbons cost and wider supply, and that consumption of plastic products should be stimulated. The instruments discussed included introduction of tax benefits, interest rate subsidies for petrochemical companies, protection of the local end-product market and subsidizing the exports.
«Large feedstock polymer producers will be able to protect their interests, and will even benefit from the crisis. But the companies in plastics converting will require government support and will not survive otherwise. The Ministry of Industry and Trade of the Russian Federation in the current situation must play the regulating role and develop specific mechanisms within the working group: to cut import duties on polymers to zero; to provide support to plastic products exports; to issue financial guarantees or directly subsidize new projects; to ease the administrative burden. In case these measures are not taken anytime soon, the Russian plastics converting as we know it now, will come to an end», – saidSandjar Turgunov, General Director of CREON Energy.
Summarizing Resolution of the Forum was submitted to the Ministry. The document contained concrete proposals aimed at improving the situation in the industry.
To support the image of the plastics converting industry and to highlight the success stories and the best players in the market, the Forum program featured the Plastics of Russia 2014 Award Ceremony. The winners of the Award included converting companies working in construction, automotive, packaging sectors, major feedstock producers, as well as companies operating in the field of agriculture, and also federal media popularizing plastics.