Downward revision of Russian ethylene and polymer capacity forecast

Owing to the effects of the financial crisis, much planned Russian capacity has been delayed or shelved, leading to a downward revision of Russian ethylene and polymer capacity forecast, as per a report by companies and markets. Problems of plummeting demand and weakening margins will be compounded by the increase of substantial new low-cost capacity which is due to come on stream in H209 and 2010. According to Rosstat, the Russian statistics agency, plastics production was down 10% y-o-y to 2mn tonnes in H109, while synthetic rubber output plunged 37.5% to 401,000 tonnes. In the first five months of 2009, synthetic rubber output dropped by 38.8% to 335,000 tons, according to Rosstat. Russia´s total PE production in the January-May period was up 0.6% y-o-y to 452,400 tons. PP output was up 6.7% to 229,500 tonnes, but PVC production was down nearly 10% to 208,600 tons and PS output was down 5% to 102,300 tons. Despite relatively strong performance in some segments, the report retains a pessimistic forecast, according to which petrochemicals output is expected to drop by around 15%, with the economy continuing to shrink in H209. A recovery is not expected until Q210 at the earliest, dependent on the federal government’s ability to stimulate the economy. The core scenario for Russia is decidedly bleak, with an economic contraction of -7.1% in 2009. On the upside, liquidity risk is low and debt should be manageable for most Russian petrochemicals producers. Naphtha prices have also fallen in line with oil prices, thereby narrowing the cost differential with ethane-based crackers in the Middle East, but this can only benefit Russian producers when it is accompanied by strong demand, which the report does not envisage occurring until H210. In response to the financial crisis and economic downturn, Sibur’s plans to build a cracker and PE units at Orenburg, Russia, have been cancelled. Sibur has also cancelled a cracker and PE complex in Astrakhan and is instead seeking project consolidation with other investors looking to establish similar complexes in the region. Meanwhile, Sibur has stated that a planned olefins and derivatives complex at Salayat would not come on stream until around 2015. Planned capacities are still not known. Meanwhile, Sibur announced in June 2009 that it intends to complete Tobolsk-Polymer’s proposed 500,000tpa PP plant by Q312, albeit two years behind the original schedule and with the assistance of a generous financing deal from the state-owned Vnesheconombank (VEB). However, Sibur has not completely escaped the effects of the economic downturn. Its planned 330,000tpa PVC plant at Kstovo, Nizhny Novgorod, has been delayed further and is now expected on stream in Q212; the delay is related to an expected late revival of the Russian construction sector. Russia is forecast to have total polymer production capacity of 5.22 mln tpa and ethylene capacity of 4.46 mln tpa, representing increases of 98% and 43%, respectively, over 2008 levels. However, project postponement and cancellation of projects means that we have taken off 770,00tpa from our 2013 ethylene capacity forecast. Investment in capacity expansion will enable Russian producers to enter the European market at a time when European plants are closing in the face of recession and a lack of competitively priced feedstock. Petrochemicals are particularly vulnerable owing to the prevalence of outdated manufacturing plants and technologies and uncompetitive products. The sector is also saddled with insufficient investment resources and unreliable feedstock supplies. At the same time, it faces sharply increased competition in domestic and export markets.
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