05 June 2008 00:00 [Source: ICB]
EU membership, a highly educated workforce and fast-growing domestic economies make Central and Eastern Europe a place of real potential for the chemical industry
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Theo Simons and Marcus Huebel/Accenture
GLOBALIZATION, THE formative development of our age, continues to affect economic geographies in ways that we are only beginning to understand. The rise of this new world - what we at Accenture call the multipolar world - is constantly reshaping our perspective.
The multipolar world is characterized by increased economic interdependence of capital flows, talent pools, competition for resources, emergence of new consumer markets and new clusters of innovation.
We see all the dimensions of a multipolar world at play in Central and Eastern Europe (CEE), as the region continues to grow in importance in terms of opportunities for chemical-industry business investment and growth. Factors such as new EU membership have affected capital flows: the Czech Republic, Hungary, Poland and Slovakia have proved to be attractive locations for investment, particularly in the area of automotive production.
EDUCATION PAYS OFF
CEE countries are also playing a substantial role in shaping the new map of innovation. Poland, for example, won at least 25 major technology or research-driven investments in 2005, mainly as a result of the country's thriving universities, which are producing 55,000 graduates a year in mathematics, science, computing and engineering. Poland is also receiving a great deal of interest from multinationals in the high-tech and automotive sectors, with the likes of US communications groups Motorola and Delphi setting up research and development centers in Krakow.
The professional services sector has developed rapidly as well, for example in Prague, the Czech Republich, where French specialty group Rhodia was the first to locate its (outsourced) finance and accounting operations, followed by many others.
And the emergence of Russian multinational players, mainly from the natural resources sectors, such as LUKOIL, Gazprom, Sibur and Severstal, is noteworthy, and represents a challenge to traditional Western players.
CEE's chemical industry has experienced tremendous growth over the past several years. Industry sales climbed from $52bn (€33bn) in 2000 to $135bn in 2006, at a compound annual growth rate of 17%. Globally, the region raised market share of chemical production from 3% in 2000 to 4.7% in 2006. The chemical sector plays a predominant role in most of the CEE economies. In 2006, it was the largest industry sector in Hungary and Poland, and the second-largest sector in Slovakia.
Upon closer examination, however, it becomes apparent that the CEE region is highly heterogeneous and complex. In particular, the market situation of Central Europe on the one hand and Russia and the Commonwealth of Independent States (CIS) on the other requires these geographies and markets to be contemplated separately in terms of opportunities for chemical industry investment.
Central Europe: Benefiting from an Expanding EU
Poland, Hungary, Slovenia, Slovakia, Estonia, Lithuania, Latvia and the Czech Republic joined the EU in May 2004 Romania and Bulgaria followed in January 2007. Since the markets opened toward the West, economies such as the Czech Republic and Poland have attracted substantial foreign direct investment from chemical end-user industries.
The automotive industry, for instance, has driven opportunities for plastics and the plastics processing segment. The privatization of the Czech plastics industry drew great interest from foreign investors in companies such as Plastimat Liberec, Strojplast Tachov, Gumotex Breclav, and Silon Plana.
The Central European paints and coatings sector is also benefiting from the relocation of the automotive industry, as are the wooden furniture and electrical machinery industries.
Increasingly, polyurethane (PU) system houses from global players offer local PU processors, irrespective of size or specialization, many tailored solutions, technical advice, quality service and entire PU systems - from operations within the region.
Promising growth rates in the paints and coatings sector have attracted Western multinationals. Germany's BASF acquired automotive refinishes importer and distributor Webolit Polska, US-based DuPont took control over its Polish powder coatings distributor Polsver Lakiery Proszkowe, and SigmaKalon (now part of US-based PPG Industries) took a majority stake in Czech paint distributor Triga Color, after having already acquired the major Czech paint company Primalex.
Russia Dominated by Oil and GasBut Opportunities Emerging
Russia ranks No.1 in terms of natural gas reserves, holding 27% of global reserves, and in eighth place in crude oil. The sector is estimated to represent around 20% of the country's GDP, and it generates more than 60% of Russia's export revenues.
Given that oil and gas are of such strategic importance to Russia, the country's policy makers continue to exhibit an inclination to advance the state's influence in the energy sector and limit foreign investments. In May 2008, Russia adopted a law on foreign investment that restricts foreign control for 42 strategic sectors, including oil, gas and precious metals.
Entry barriers for Western players are hence relatively high - not only due to this new law, but also due to bureaucracy, cultural and language barriers, insufficient market understanding and remaining opaqueness in decision-making.
The situation is slightly different for specialty chemicals, such as the paints and coatings sector. Here, Western players have a significantly higher technological standard compared to local players. A lack of investment in modernized manufacturing capacity, for example in Russia and Ukraine, means the need for quality paint and raw materials has to be met by imports mainly from Germany, France, the Netherlands and Finland. In 2006, Russia imported 80% of its powder coatings demand.
WESETERN INVESTMENT ON THE RISE
In this context, we increasingly observe direct investment by Western multinationals. As many players in end-user industries have been investing in Russia, multinational paints and coatings companies are following, in order to provide the high standards demanded by clients in the automotive, domestic appliances and construction sectors.
Netherlands-based AkzoNobel has opened its first production facility in Orekhovo-Zuevo near Moscow. Germany's BASF Coatings has started up a paint plant in Pavlovski Posad, near Moscow, and US-based Rohm and Haas plans to build a production facility for polymer emulsion near Moscow, scheduled to be completed by the beginning of 2009.
Because of its heterogeneous and complex nature, the CEE region constitutes a challenging business environment that requires differentiated investment approaches.
In general, making acquisitions in the local chemical industry will not prove to be attractive due to a lack of scale or need for costly plant modernization to ensure state-of-the-art product conversion, energy efficiency and environmental standards. Most local manufacturers are small players possessing a broad portfolio, making them not very attractive acquisition targets.
Meeting the quality and technical requirements of end-users still remains a challenge for local players not only for finished products for export purposes, but also increasingly in their domestic markets where quality and consumer demands are rising. Hence, by realizing greenfield investments, Western companies can better ensure they are able to provide the technical and quality standards required by the end-user industries.
The Central European countries largely depend on oil and gas imports from Russia and display a controlled raw material supply for their downstream industries. Nevertheless, the Polish, Hungarian and Czech Republic markets will remain of interest for downstream chemical investment because of the end-user market size (38m, 9.9m, and 10m, respectively), increasing consumer wealth, and presence of manufacturing sector for domestic and growing export demand.
The trends and interdependence of the multipolar world will continue to unfold in Central and Eastern Europe, and present chemical companies with opportunities for profitable growth if selected investments are made.
In the near term, we expect Western independent investment to remain focused on high-margin segments in technologically advanced applications, as well as on supplying the growing automotive, furniture and electrical white goods industries.
While the CEE must compete with more advantaged feedstock areas and the Asian growth markets, the region offers a host of significant, attractive opportunities, fueled by fast-growing and innovative end markets.
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