Russian polyurethane market is highly integrated into the world trade of PU feedstock, systems and final products. Therefore, it responds to every change in global and domestic factors. The importers of PU feedstock and components are witnessing the decrease of global prices and concurrent price rise in a devaluated ruble equivalent. As for localized PU systems producers, they are anxiously evaluating prospects of the domestic demand in Russia. Will it be possible to keep the current lower market volumes from further critical drops? The answer depends on a comprehensive risk analysis and coordinated efforts.
The Eight International «PU & TPU 2015» Conference, organized by INVENTRA, part of CREON group, was held in Moscow on February 24.
In his welcome address Sandjar Turgunov, General Director of CREON, noted that practically all the system houses have conferred together with the largest consumers, PU converters, suppliers, investors, and government structures. This indicates that the difficult situation in the industry has consolidated the largest players in the market in the search of optimal development patterns. At previous PU & TPU conferences, CREON Group repeatedly encouraged the largest companies to invest into PU feedstock projects in Russia. According to Mr. Turgunov, this year provides another, maybe the last, chance to start working in this direction. Prohibitive import prices, shortage of raw materials, currency instability – all this creates an ideal environment for the development of local production of feedstock components.
The overview of main trends in PU feedstock markets in Europe and Asia was presented by Aleksandra Kilyashova, Head of PU and TPU Division at ChemPartners Company. In 2014, the situation in the European isocyanate segment was comparatively stable with usual seasonal fluctuations in the first half of the year. In the 2H, the dominating trend was decline of prices, triggered by the fall of oil prices and to a lesser extent caused by commissioning of new capacities. Bayer launched a new TDI facility with 300 ktpa capacity in 2014, while BASF completed the same-capacity plant, the launch scheduled in the 1Q 2015. Thus, while total capacity of European TDI producers stood at 576 ktpa in 2014, it will grow to 886 ktpa by 2016.
By the end of the year, the comparable decrease in prices happened in the MDI segment. Ms. Kilyashova reported that no capacity increases for production of this feedstock were planned in Europe in the nearest future except for Bayer’s plans to revamp one facility from TDI to MDI.
Oil price did not have a key impact on the European market of polyols for flexible foams. Accident at the Shell propylene oxide plant had influenced it to a greater degree: the market saw shortage of feedstock supply for polyols production.
The speaker noted that weaker Euro against the US dollar (traded over 20% lower since summer 2014) had significantly improved the competitiveness of European raw materials compared to Asian.
In the Asian countries, the PU feedstock market was primarily under the influence of oil price. After a significant drop in the middle of 2013, TDI prices in Asia remained flat for the first three quarters of 2014, and fell further in the 4Q following the downward trend of oil and toluene. Dynamics of MDI prices was similar to that in Europe: the price floor was reached in February 2015.
The MDI production capacities significantly grew in China in 2014. Wanhua launched a plant with a capacity of 600 ktpa, while Bayer added another 150 ktpa. Overall capacity in Asia reached 3,510 ktpa, where 2,600 ktpa belongs to China. The Asian market of polyols and propylene oxide was meeting general expectations, and propylene oxide prices were the determining factor. The fall of oil prices impacted the polyols market only by late 2014 and early 2015.
According to Ms. Kilyashova, the main trend in the European and Asian PU markets in 2015 will continue to be a significant impact of oil prices. In the isocyanates segment, price fluctuations will be subject to seasonality, with the influence of oil price movements and planned outages. Polyols will continue to depend on the supply of propylene oxide, on fluctuations of oil prices and the level of demand in China, Middle East and Southeast Asia.
The 2014 imports to Russia amounted to 221.4 thousand tons of PU feedstock, which is 5% lower than in 2013. The most significant reduction of imports happened for polyols, almost by 10% to 66.2 thousand tons (the lowest volume since 2012). MDI imports stood at 113.3 thousand tons, TDI at 42 thousand tons, both figures decreased by about 4% compared to 2013.
Ms. Kilyashova listed the factors affecting PU feedstock prices and the choice of supplier in Russia as follows: price for oil and derivatives, ruble exchange rate, purchase prices for raw materials, and USD/EUR cross-rate.
The Russian PU market volume in 2014 was estimated at 270 thousand tons by Ivan Lobanov, Development Director of SBK Company, who had analyzed the customs statistics. Local production of polyols made 120 thousand tons, imported components volume (including multi-component systems) was 150 thousand tons. PU foams hold a market share of 84% (rigid PU foams have 38%, rigid PU foams hold 46%). Consumption structure is dominated by applications in furniture industry (34%), automotive (22%) and construction (22%).
Conference participants challenged the presented data. In particular, Aleksandra Kilyashova noted that a more realistic assessment of local polyols production would be 80 thousand tons, while imports of PU feedstock are closer to 220 thousand tons. According to the representatives of Elastokam Company, direct supplies of PU feedstock from Europe to Russian customers (not through local offices of system houses) could have been ignored by customs statistics. Therefore, in the course of the discussion the experts arrived to an adequate estimate of Russian PU market volume at the level of 250 thousand tons. Throughout previous years, the market volume remained at around 300 thousand tons, but the new economic reality has had its negative impact.
The devaluation of the ruble in late 2014 must have caused a significant reduction of PU feedstock imports. However, there is no dramatic drop to be seen up till now. Konstantin Belyaev, Senior Sales Manager for CIS countries at Wanhua-Borsodchem Group, a leading global manufacturer of MDI, said that the sales have grown in 2014, and good dynamics are visible in the beginning of 2015. Other key raw materials producers shared the view.
Julian Pshirkov, Head of Development Department at Bayer, supported the assessment of the Russian market volume at 250 thousand tons in 2014. In 2015, consumption is expected to decline in the thermal insulation segment, as well as in the pipe industry. PU application in the furniture industry will remain flat, while other sectors will continue to grow.
Meanwhile BASF assumes a decline of 20-25% in the flexible foams segment in the furniture industry in 2015. Svetlana Perova, Sales Manager, reminded of a similar situation during the crisis of 2008, with a rapid rebound that followed. In case the economic situation in Russia is stabilized and the consumer demand grows, the rebound in the furniture industry will also arrive very fast. However, such a scenario is unlikely for 2015.
With respect to the automotive industry, the decline in PU consumption began in 2010; a 10-15% annual decrease has been in place since then. Sergey Kolosov, General Director of Elastokam, compared the 2011 volumes of the company’s supplies to the automobile plants at 4 thousand tons to only 750 tons in 2014.
Elastokam produced 38 thousand tons of PU systems in 2014, where 20 thousand tons belonged to isocyanates. In 2015, the company will be producing only PU systems; output is expected at the level of 37 thousand tons. The company will no longer be engaged in feedstock agency business; this function has been transferred to BASF representative office in Moscow.
PU consumption in the automotive industry is a significant and rapidly developing segment of PU market. However, the general economic downturn affects this area of consumption. Forecasts concerning decline in the automotive industry in 2015 vary from the most positive being minus 10% to the pessimistic minus 40%, as commented by Denis Shelkov, Deputy General Director for Strategic Development at AvtoVAZagregat.
Despite the general stagnation in the automotive market, AvtoVAZ is able to maintain the level of sales, especially with such models as Kalina, Granta, Datsun. Ruble devaluation is pushing consumers to buy more affordable cars. Therefore Mr. Shelkov underlined that AvtoVAZ has a chance to increase its market share in 2015. The only barrier would be prioritizing production of more expensive cars at the plant under Renault and Nissan brands, where the level of production localization remains low.
Higher prices for imported PU feedstock stimulate Russian companies to consider launching local production of components. For instance, Promsintez Company together with Bashkir Soda Company (BSC) is keeping alive its plans to establish MDI production in Russia. According to Vladimir Morgutov, Adviser to GD of Promsintez, the project perfectly fits in the current import substitution trend. BSC plant in Sterlitamak is a potential basis for a new production site. The planned nameplate capacity will be 100 ktpa of MDI. The project is at the stage of feasibility study. The expert noted that the most vulnerable part is an outdated technology that does not meet modern requirements. Possible solution would be acquiring the license from one of the global leaders in the industry, or entering into partnership.
Commenting on the prospects of the project, Sergey Kolosov noted that the profitability of the plant generally begins at a capacity of 300 ktpa. However, Mr. Morgutov thinks that such volumes of the product will not find sufficient demand in the local market.
The foreign trade turnover in 2014 for PU (code 3909 50) in the territory of the Eurasian Economic Union (EEU) was 170.7 million USD, which is the highest result since 2012. The import was 164.1 million USD, export 6.6 million USD, said Aleksey Tikhonov, Deputy Director of Tariff and Non-Tariff Regulation Department of the Eurasian Economic Commission. 90.4% of the total trade belongs to Russia, 7.3% to Belarus, and 2.3% to Kazakhstan. The main suppliers of import to EEU are Germany and Italy.
Changing customs duties is the main instrument of customs tariff regulation, and it is actively being used in the polyurethane market of EEU. Eurasian Economic Commission (EEC) is a supranational body of Russia, Belarus, Kazakhstan and Armenia that implements functions of customs tariff regulation. ECE objectives also include ensuring compliance with Russia’s obligations adopted during the country’s accession to the WTO, as well as introduction of relevant changes to the Common Customs Tariff (CCT).
The speaker drew the attention of the audience to September 1, 2015 – the date of the next stage of duty reductions within the implementation period of WTO obligations fulfillment with respect to the majority of PU products. The import duty on PU will drop from 7.7% to 6.5% on that date. The current duty on polyols of 6% will decline to 4%. The obligations adopted for the moment of Russia’s accession to the WTO as for isocyanates stand at 6.5% (current duty is 0%). Lower duties for feedstock rather than for PU are reasonable and illustrate the so-called escalation concept of customs policy, when a higher import tariff is applied to the product with higher added value in order to stimulate processing within Russia.
Aleksandra Kilyashova asked whether the increase of the current 0% duty for MDI to 6.5% is possible. Such a move would leave the market without feedstock which is not produced in Russia at all. Aleksey Tikhonov eased the anxiety, having explained that 6.5% is the maximum applicable rate, but there are no plans to increase the duty, as the existing 0% rate is not challenged by proper inquiries from businesses in EEU countries. Any possible changes would first involve discussions with all the market stakeholders.
The devaluation of ruble has significantly improved the competitiveness of PU raw materials that are produced in Russia. Andrey Nikulin, Head of Rubbers and Petrochemicals Sales Department at Nizhnekamskneftekhim, said that the situation has changed dramatically compared to 2013. At that time, the competition with Asian, especially Chinese, suppliers depended on the rates of import duties for PU feedstock. At the same time, Chinese companies were openly engaged in underpricing, supported by their government. Currently, the currency difference overrides any effect of the customs tariff regulation. In other words, the cost of imported raw materials has increased so much that the demand for Nizhnekamskneftekhim products greatly exceeds production capacities. According to Mr. Nikulin, the Company receives requests from new customers every week. Operation rates at the plant are now at 100%. Nevertheless, the reduction of import duties for polyethers from 6% to 4% scheduled by EEC in September 2015 may have a negative impact on the production expansion projects that are now being considered by Russian manufacturers.
Mr. Nikulin also said that Nizhnekamskneftekhim is looking into options of polyether production expansion. The key point is the availability of feedstock after a new pyrolysis unit is launched.
Aleksey Tikhonov commented on Chinese dumping prices, having stressed that China’s support to the exporters may be a violation of WTO rules. He urged Russian consumers of PU feedstock to report such cases, because certain protection solutions are available through existing WTO mechanisms. Representatives of Wanhua denied that their prices were lower than the market in 2013.
Evgeniy Meshalkin, Vice President for Science at NPO Puls, presented a paper devoted to the fire safety regulations and compliance assessment for buildings with efficient insulation. The Company considers that it is necessary to define allowable values of fire risk in the Law (FZ №123) and in the construction rules, taking into account the classification of buildings and constructions by functional fire hazard. Fire risk should fully reflect the fire safety of hazard location (not only people safety, but also safety of property), including compliance with fire safety requirements established by normative documents, which must be applied on a voluntary and (or) on a mandatory basis. Further development and improvement of methods are needed to expand the list of indicators that provide an unbiased assessment of fire risks and confirm the effectiveness (or ineffectiveness) of various design and construction solutions.
NPO Puls urges the Ministry of Construction to initiate the implementation of the annual «road map» for creation of new and amending the existing regulations (including fire safety), as well as to provide financial support for the study. It is necessary to foster the required scientific and technical research and to reflect the results in construction rules and in the all-Union state standard. It is also important to create a pool of qualified experts who can actively influence the quality of regulations.
National Construction Union (Nostroy) has developed a catalogue of technical solutions and practical recommendations. The catalogue was presented by Elena Fadeeva, Presidential Adviser at National Construction Union. Its goal is assisting the design engineers and constructors in the development of «sustainable buildings». The catalogue is used for achieving the «sustainable building» criteria, as determined by all-Union state standard R 54954-2012 titled «Conformity Assessment. Environmental requirements for building construction». Criteria level may be designated by the customer on the pre-design stage. Technical and design solutions in the catalogue provide an opportunity to pre-identify the level of sustainability of the project according to the request.
The catalogue consists of three sections: solutions for site space planning; architectural, design and space-planning solutions; solutions for engineering systems, gas and heating systems inside buildings.
Nostroy also runs its own standardization system, where it develops standards for performance of works, requirements for operation results and control system. Nostroy is working on raising the status of the standards to the national or supranational level, including underground construction and engineering systems standards. For instance, the all-Union state standard R 54964–2012 «Environmental requirements for building construction» was adopted on the basis of Nostroy standard 2.35.4–2011 «Green construction. Residential and public buildings. Rating system for evaluation of sustainability». In accordance with the order by Rosstandart, a new Technical Committee on standardization was established on the Nostroy basis in order to manage standards with respect to performance of works and with an authority to act on the national, supranational and international levels.
The Expert Council under the Government of the Russian Federation is quite frequently mentioned when it comes to regulatory activities in building and construction. Sergey Dubyanskiy, Executive Secretary of the Working Group on Construction within the Expert Council, informed the audience on goals, objectives and current activities of the Council. The Working Group conducts comprehensive analysis of the influencing factors and elaborates recommendations on measures aimed at reduction of the negative impact and implementation of positive potential. In late 2014, the plan for Building Information Modeling (BIM) was adopted, as well as the plan for implementation of European construction standards (Eurocodes); the first pilot projects were identified. The Working Group also took active part in development of a «road map» for the Russian Ministry of Construction titled «Improvement of technical regulation, pricing, budget regulation, self-regulation in construction industry and development of the contract system».
In January 2015, the Expert Council held discussion on the development strategy for construction industry. The Council recommended transparent access to resources, consistent regulatory and technical standard basis and coherent arrangements for amendments in regulations in accordance with the interests of the industry as definite conditions for the normal functioning of the industry and for driving innovations.
Alexey Gorokhov, Executive Director of the National Association of PU Foam Panels Manufactures (NAPPan), presented the overview of sandwich panels and PUR, PIR heat-insulating boards market. The 2014 market volume of sandwich panels in Russia made 8.2 million sq.m, 15% more than in 2013. The 2015 forecast also implies growth, estimated at 5% and based mainly on the positive dynamics in the agricultural sector.
If certain changes in the technical regulation are adopted, the market growth in value terms will reach 17 billion rubles. As for the market structure in the sandwich panels by insulation type, rockwool (65%) is the leader in this segment, followed by polyurethane foams (27%) and EPS (8%).
According to the expert, there are two options for further developments in the market. The first option is positive: further investments to alter the technical regulation system in the Russian Federation, as well as investments in the construction of plants to produce feedstock. This would lead to a re-distribution of market shares compared to those in the Central Europe, where 63% belong to polyurethane foams, 10% to EPS and 27% to rockwool. The negative option would imply growth of competition and price dumping.
At present, the Association is involved in several projects aimed at amending technical regulation system. In particular, NAPPan develops rules and regulations titled «Thermal protection of buildings. International calculation methods and performance standards», as well as analytic papers for federal executive bodies devoted to necessary changes in the government policies promoting energy efficiency in the Russian Federation. In addition, the Association implements the «roadmap» on changing the fire safety regulations.
As for the thermoplastic polyurethanes in Russia, the market volume was approximately 3.2 thousand tons in 2014. Boris Kalashnikov, Manager of Plastic Raw Material Department at Telko Company, said that almost all the TPU products were imported (99%). Main countries importing TPU to Russia were Germany (48%) and Italy (44%). Small amount of TPU for in-plant consumption is produced in Russia at the obsolete production unit in Vladimir.
The main application area for TPU in Russia is the footwear industry (30% share), followed by pipes and hoses (25%), railway and public transport (15%), mining (10%), automotive industry (9%). Mr. Kalashnikov said that the crisis forces consumers to consider substitution of TPU by cheaper materials (even if it is connected with lower quality), which causes certain reduction of the market.
According to the speaker, TPU market growth is still possible, even in the current difficult situation. This may occur on the back of local machinery production growth and also if rubber, PVC, EVA and PU systems are replaced by TPU in various industrial sectors.
The data presented at the conference demonstrates that the devaluation of ruble has not yet led to a proportionate drop in imports. This is explained by impossibility to replace imported material with local supplies, as one of the components is not produced in Russia at all, and production capacities of the other component are operated in full. Consequently, the increase in the cost of production of PU systems and products has already happened. In 2015, the market capacity will be determined by the elasticity of domestic demand to higher prices.
In the worst scenario, the decrease in consumption will trigger further collapse of imports. For a better scenario to happen, and to ensure the domestic demand is fixed at current levels of 250 ktpa, not only supportive economic measures of the Government are needed, but also pro-active efforts of the business. In particular, there is considerable potential for joint lobbying attempts in the segment of sandwich panels, and the crisis dictates to act quickly. The organizers support the trade association’s initiatives and will submit materials of the conference to the Expert Council under the Government of the Russian Federation in hope the regulatory impact of standards for PU materials application in construction is reviewed.
Summarizing the conference Nikolay Asatiani, General Director of INVENTRA, noted that local projects related to start-up of the full range of PU components production plants are becoming the primary focus of business attention in Russia. The new economic background creates great opportunities for the Russian polyether manufacturers to compete both with the European and the Asian feedstock, and motivates them to expand capacities. A valiant investor who goes into production of isocyanates will win a considerable margin advantage, substantial support from the government and, without any doubts, a healthy demand from consumers seeking to replace imported stock. A full-scale technological cooperation with a major international system house would be only natural for such a successful project.