INSIGHT: Despite tough times Hungary petchems attract investment

15 February 2012 16:22  [Source: ICIS news]

By Janos Gal

Automotive sector demand underpins HungaryLONDON (ICIS)--Hungary’s petrochemical producers will be hard hit if there is another Europe-wide economic downturn because of their reliance upon exports and also on demand from the construction sector and the domestic downstream automotive industry.

The latest data from the national statistics office, KSHshow that in November last year exports increased by 7.9% while industrial output rose by 3.5% (2.2% in December) compared with 2010, mainly driven by the automotive sector.

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.

International manufacturers such as Germany’s Continental Tyres in Budapest, Korea’s Hankook Tyres in Dunaujvaros, Japan’s Toyo Seat in Nyergesujfalu, America’s GM Powertrain in Szentgotthard and ZF, a steering component producer in Eger, are also represented in Hungary. These firms supply the European market with tyres, car seats, engines, car parts, flat glass, fabrics, aluminium components and a long list of other things.

Their strong presence should be reassuring, but also worrying because all the country’s ‘eggs’ – at least as far as industrial chemicals are concerned – are effectively in one basket.

“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.

Yet all is not doom and gloom. Two major Hungarian players, oil and gas major MOL and BorsodChem have decided to expand plant capacity and modernise production. Isocyanates and resins producer BorsodChem is owned by China-based Wanhua Industrial Group.

“Whatever fuel drives a car, be it gasoline or electricity, it will always need four tyres and a replacement tyre in the boot, so butadiene will always be needed,” said Zsolt Petho, CEO of MOL's olefins and polyolefins producer TVK. MOL is to construct a new, 130,000 tonnes/year butadiene (BD) plant at an undisclosed location for €100m.

MOL is also reconstructing a 210,000 tonnes/year steam cracker operated by its Slovakian subsidiary, Slovnaft  in Bratislava, Slovakia. The reconstruction work will start this year, and the cracker is expected to open in 2015 with unchanged nameplate capacity.

The company is also replacing three of its old, 180,000 tonnes/year low density polyethylene (LDPE) plants with one 220,000 tonnes/year LDPE plant in Bratislava.

The cracker reconstruction and the new LDPE plant will cost about €300m and is the largest investment in the chemical industry in central Europe.

“We thought if we reconstruct the steam cracker, we should do something with the LDPE plants as well. The question was what to do with the ethylene. In the end, we decided to go with a new, expanded-capacity LDPE plant,” said Petho.

BorsodChem raised its annual methyl di-p-phenylene isocyanate (MDI) output from 150,000 tonnes/year to 240,000 tonnes/year last year. The company also invested €200m in the construction of a toluene diisocyanate (TDI) facility.

The new TDI-2 line has an initial capacity of 160,000 tonnes/year and BorsodChem has the option to increase it to 200,000 tonnes/year if demand requires. As a result of the expansion works, BorsodChem’s total TDI and MDI capacities are 250,000 tonnes/year and 300,000 tonnes/year, respectively.

“The new lines are running well, and our teams and sales managers are more optimistic,” said BorsodChem CEO Jiansheng Ding. “We now feel we are going the right direction.”

As demand for most of BorsodChem’s products is in construction, the collapse of the sector in Hungary puts it under a great deal of pressure. The new leadership, however, is confident that it will pull through.

“They [staff at BorsodChem] now see the light at the end of the tunnel and work together to recover and pass through a difficult time,” said Ding.

($1 = Ft222.95/ €0.76)
(€1 = Ft291.99)

By: Janos Gal
+44 208 652 3214

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