CEE chemicals projects boosted by EU integration

Integration spurs growth

29 October 2007 00:00  [Source: ICB]

The expansion of the EU is boosting Central and Eastern European economies - and leading to increased chemical consumption

Anna Jagger/London

ECONOMIC GROWTH in Central and Eastern Europe (CEE), helped by the expansion of the EU, is stimulating investment in much-needed chemicals production capacity in the region.

Domestic and export-driven demand for polyolefins is expected to grow quickly for the foreseeable future (see graph).

Accession to the EU has given CEE countries the opportunity to sell their products in Western Europe, and to benefit from the financial support of EU funds. It has also helped companies harmonize industrial policies to meet EU standards, says Andrew Sparshott, Russian and Central and Eastern Europe (CEE) petrochemical specialist at UK consultancy Cirec.

Romania and Bulgaria joined in the last EU expansion, at the beginning of this year, and 10 CEE states joined in 2004.

The latest expansion has boosted economic growth in new member states Romania and Bulgaria, according to Laszlo Piry, deputy CEO of Hungary's TVK, and CEO of Slovakia's Slovnaft Petrochemicals. "Further investments targeted at Romania and Bulgaria will increase polymer consumption," he says.

In Poland, the largest CEE market, consumption of chemical products has risen from $320 per capita (€226 per capita) in 2004, to a value of almost $400 in 2005, according to accountancy firm PricewaterhouseCoopers (PwC).

There is substantial room for growth, observes Rafal Janus, assistant manager at PwC's business development team for Poland and CEE. Per capita chemical consumption in Western Europe is worth $1,200, according to PwC.

Poland's per capita consumption of polyolefins is still half that of Western EU countries, and the market is still growing fast, says Tomasz Baranczyk, business and tax director for Poland and CEE at PwC's chemical division. The financial health of Polish chemical and agrochemical producers has improved every year following the country's accession to the EU in 2004, he says. EU structural funds have helped farmers purchase fertilizers, for example, supporting agrochemical producers, he adds.

Countries with smaller domestic markets, such as Hungary, the Czech Republic and Slovakia, are benefiting to a greater extent from access to EU markets than Poland, which, with a population of some 38m already, had access to a large internal market, notes Janus.

RED TAPE

But not all the effects have been positive. The accession countries now have more paperwork, arising, for example, from the administrative burden associated with the new EU Reach environmental legislation.

More importantly, the new EU member states have had to start competing against their bigger counterparts in Western Europe. And while CEE chemical companies can still benefit from lower production costs based on access to cheaper raw materials, energy and labor, Baranczyk notes that this situation is changing because of expected price increases for gas, energy and wages.

Investments in new capacity are necessary to enable the CEE chemical sector to catch up with the West, he says. And as the differences between Western and Eastern EU states diminish, CEE chemical companies must ensure technological development to diversify their portfolios and cut their energy appetite. With a chemical trade deficit of about $12bn, the CEE region needs to move away from producing high-volume, low-margin chemical products, he says. Imports, mainly of polymers and specialty chemicals, are estimated to be worth $17bn, while exports, mainly basic chemicals, are estimated at just $5bn.

DIVERSIFYING PORTFOLIOS

Although chemical producers in CEE countries focus mainly on basic chemicals, they are increasingly diversifying their product portfolios and investing in research and development (R&D). "Innovation becomes one of the key elements," says Baranczyk. "Increases in the prices of oil and gas reduce margins, and companies will soon have to look for new, cost-effective technologies."

Rising chemical demand in CEE countries is stimulating partnerships between producers in the region and companies in Western Europe and the US. A key development was the creation of a €500m ($709m) multi-platform joint venture (JV) between Basell and Poland's PKN Orlen in Plock, Poland. The plant started reaching its nameplate capacities of 320,000 tonnes/year of high density polyethylene (HDPE) and 400,000 tonnes/year of polypropylene (PP) in August.

Orlen has also extended its reach through the purchase of Czech company Unipetrol - a move that Sparshott describes as one of the most interesting recent developments in the region. "Orlen controls many of the strings in Poland and the Czech Republic," he remarks (see Unipetrol interview on page 18).

Following the acquisition, Orlen divested two Unipetrol subsidiaries: polyvinyl chloride (PVC) and caprolactam (capro) maker Spolana to Orlen-owned PVC producer Anwil, and styrenics maker Kaucuk to Polish synthetic rubber firm Dwory. The Kaucuk sale was conditional on Dwory agreeing to a Unipetrol-led JV to build a new butadiene plant in the Czech Republic.

A supply agreement between Romania's Rompetrol and Dow Chemical is also significant. Rompetrol supplies polyethylene (PE) to the US group and Dow will supply the ethylene feedstock until Rompetrol restarts its idled ethylene cracker at the site.

The Rompetrol/Dow agreement is a "win-win position for both companies" and will help kick-start Romania's chemical industry, observes Sparshott. Chemical plants have been closing over the past 15 years but now, helped by accession to the EU, domestic polyolefins consumption is rising, he adds.

The partnership enables Rompetrol and the Romanian chemical industry "to receive know-how and technology from one of the leaders in world markets," says Baranczyk. "This puts Rompetrol on the list of key chemical companies in the CEE region."

Plans to build new capacity are being considered across CEE. In Poland, Orlen awarded a contract to Japan's Mitsubishi Heavy Industries to build a purified terephthalic acid (PTA) plant in Wloclawek.

Ciech, a key Polish basic chemicals producer, is pursuing an aggressive growth strategy, including expanding its production of toluene di-isocyanate (TDI), polyurethane (PU) foams, soda and sodium silicate.

Polish melamine and capro producer Zaklady Azotowe Pulawy is planning a coal gasification project that it claims will rank among Poland's largest chemical investment ventures. ZA Pulawy is also planning a €50m polyamide 6 project in cooperation with Italy's Aquafil.

PCC Rokita, part of Germany-based PCC, is planning various projects in Brzeg Dolny, Poland, including a 60,000 tonne/year polyols plant, a 20,000-40,000 tonne/year ethoxylates plant and a 15,000 tonne/year polymeric polyols installation.

In the Czech Republic, Orlen subsidiary Unipetrol RPA (refineries, petrochemicals and agrochemicals) is expanding ethylene and PP production at its Litvinov site. Unipetrol RPA is responsible for Orlen's Czech petrochemical operations, which were previously known as Chemopetrol and Unipetrol Rafinerie.

Slovnaft Petrochemicals plans to build a 170,000 tonne/year low density polyethylene (LDPE) plant in Bratislava, Slovakia. The project, which is likely to cost around €200m, is expected to be approved by parent group MOL later this year and come onstream in 2011 or 2012, says Piry.

Hungarian oil and gas group MOL became a major chemical player in the region following the acquisition of Slovnaft and Hungary's TVK. But under its current strategy, MOL intends to focus on expansions in its refining and upstream operations.

A change in ownership at Hungarian producer BorsodChem has led to uncertainties about its expansion plans. BorsodChem announced a €500m isocyanates expansion in 2006 before it was acquired by private equity firm Permira at the end of the year.

The expansion plans included con-struction of a 160,000 tonne/year TDI plant and a 200,000 tonne/year methyl di-p-phenylene isocyanate (MDI) plant at BorsodChem's Kazincbarcika site, in Hungary, but it is not known if the new owner intends to proceed with the proposed investments. BorsodChem also has a production site in Blachownia, Poland, which it acquired from Ciech, and another in Ostrava, the Czech Republic.n

For a map of the EU, go to http://europa.eu/abc/maps/index_en.htm

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