INSIGHT: Despite tough times Hungary petchems attract investment

Chemicals contributed 0.6% (of gross value added), or forint (Ft) 135bn ($606m/€462m) to Hungary’s Ft26,748bn GDP in 2010 which was 2.7% of the country’s manufacturing industry output.

But the automotive industry dominates Hungary’s manufacturing sector, accounting for 14% of the sector’s output and a significant 3.1% of GDP.

Last year, 70.5% of manufacturing industry’s production was exported, those exports having increased by 8% year on year. One quarter of manufacturing industry’s exports was made up of computers, electronics and optical media, another quarter by cars.

Not surprising then that local petrochemical demand is heavily reliant on automobile production. World-renowned brands such as Opel (GM), Audi, Suzuki and Mercedes have plants in Hungary with part suppliers scattered around the country.

“Right now, as [far as] the Hungarian economy stands, the automotive industry is one of the only positive sectors in the country with all the foreign investments from Mercedes to Audi,” said Gabor Karsai, vice president of GKI, an economic research organisation.

Mercedes is on track to open a new 100,000 car/year plant in Kecskemet, southern Hungary. Suzuki already operates a 200,000 car/year plant in Esztergom, northern Hungary while Audi has invested €900m to expand its assembly line in Gyor, western Hungary, to increase output from the current 60,000 to 125,000 cars/year.

The Audi plant also produces two million engines each year. Opel produces 460,000 engines a year in Szentgotthard, western Hungary.

“I think these plants are here to stay and if the chemical sector supplies them, their future is pretty certain as well,” Karsai added.

During the boom years of the last decade, the Hungarian economy was more diverse, but demand from the construction industry collapsed in 2008 and, amid the eurozone and the foreign currency loans crises, is unlikely to recover any time soon.

The construction sector’s contribution to GDP was 4.4% in 2010. And the latest data show that the sector’s output shrank by 7.8% in 2011.

Hungary’s disputes with the European Union (EU) and International Monetary Fund (IMF) over the terms of another bailout package have drawn a lot of unwanted attention. The government has sought to negotiate softer terms for another loan, while the IMF and the EU have pushed for stricter terms.

The IMF wanted Hungary to scrap new bank taxes and banking regulations and the subsequent wrangling weakened the forint and hit Hungarian bank and other corporate shares.

With a ‘junk’ credit rating from the major ratings agencies – based on the negative economic outlook and unconventional tax policies – many investors no longer see Hungary as a safe place to put their money.

“Any new investment in the near future is questionable, because of the current macroeconomic climate and also because of Hungary’s dire situation, but what is here already is unlikely to leave any time soon,” said Karsai.

In the tyre sector, however, Michelin, of France, has shelved an expansion project in the northeast of Hungary. It was planning to increase annual tyre production capacity from 2m to 8m-10m but says legal and financial difficulties have delayed the project.

Apollo Tyres, an Indian manufacturer, cancelled a €200m project back in 2008 because of strong local opposition and administrative problems.

This is bad news for Hungarian petrochemical producers that supply most of these downstream sectors with raw materials.