Market outlook: Russia's SIBUR plans a polypropylene revolution

05 April 2013 16:38  [Source: ICB]

The polypropylene (PP) market is braced for change, and Russian major SIBUR is looking to capitalise

While the shale gas phenomenon and prospect of low cost, advantaged feedstock drives investment and optimism in the US, the effects are already being felt across global petrochemical markets.

With consumption in Europe on the rise, the Tobolsk-Polymer project in Russia is poised to fill the demand gap for PP

Copyright: SIBUR

With the world set to be flooded with ethane-based ethylene capacity by the end of the decade, the relative value of propylene is set to remain high and rise.

Alternative routes are therefore being sought to source the olefin - a key building block for polypropylene (PP).

Delegates who attended the recent ICIS PP seminar, which was held in association with SIBUR, heard that a Russian major has both the ambition and capability to seize this opportunity.

In the long term, PP consumption in western Europe is expected to outpace domestic supply, and eastern Europe is increasingly relying on imports.

SIBUR believes its new 500,000 tonne/year Tobolsk-Polymer PP project in Western Siberia will help to meet the shortfall.

 
STRUCTURALLY SHORT
The propylene market has been dominated by supply pressures, faltering demand and pricing volatility since the onset of the economic financial crisis in 2008. Many believe that this scenario is unlikely to change in the years ahead.

With the shift to ethane cracking in the US, traditional sources of supply for heavier co-products are becoming increasingly limited.

Consequently, with the world awash with ethylene, propylene availability looks set to remain limited and pricing will continue to be volatile.

Just Jansz, director of global technology management consultancy EBB, suggested that global ethylene production is expected to rise by 52m tonnes/year - or 40% - from 2011-2020. Conversely, according to ICIS, propylene supply sourced from steam cracking will drop to as low as 50% of the total global production from 70% in 2000 as other routes and technologies gain market share.

With propylene demand continuing to grow at a steady rate of around 4%/year, the supply/demand situation is set to become increasingly difficult, according to Mike Perkins, vice president EMEA (Europe, Middle East and Africa) at ICIS Consulting. Refineries and steam crackers are unlikely to offer much support either, particularly with the rationalisation of capacity throughout Europe and the US in recent years.

This scenario is already steering many to establish "on-purpose production" and alternative routes for the beleaguered olefin. All regions have invested in alternative sourcing during 2000-2010, including metathesis (albeit expensive and reliant on the availability of C4s); methanol to olefins technology (MTO) - which is predominantly planned in China; and the preferred propane dehydrogenation (PDH) projects. The latter is probably the most cost-effective route and looks likely to see the most significant growth, said Perkins.

There are at least 13 large-scale PP projects planned through to 2017, most of which are located in the Commonwealth of Independent States and Asia. At 500,000 tonnes/year, SIBUR's Tobolsk-Polymer plant is the largest expected to come on stream this year.

UNDER PRESSURE
Propylene is the key building block used to produce polypropylene (PP), the dominant polymer in applications as varied as packaging, fibres, construction, the automotive sector and many others. PP production currently accounts for about 60% of global propylene demand, according to ICIS.

For the PP sector, the implications are clear. As propylene is getting shorter compared with ethylene, PP could easily become more costly compared with polyethylene (PE) and other ethylene-based polymers.

Fabrizio Galie, consultant at ICIS Consulting, noted that PP capacity has been rising consistently year on year despite lacklustre consumption. The average annual growth rate (AAGR) for PP production globally was around 6%/year during 2000-2007 but started to struggle from 2008 because of the economic downturn and faltering demand in several key markets. A slight resurgence from 2010 saw this recover to about 3.5%. Demand in western Europe has fallen by about 1m tonnes/year since 2007 and is now estimated at around 7.5m tonnes/year. A similar trend was recorded in other mature markets including North America and Japan.

"The main effect of this slowdown has been a sudden decline in plant operating rates; the utilisation rate was hovering around 92% through to 2007, before dropping suddenly when the global downturn started in 2008," said Galie. "With new capacity being added, producers have been unable to claw back rates, with the average now reported at around 85-86%. The knock-on effect has been the rationalisation of existing capacity, particularly in Europe where the PP market has been struggling." Increased pricing volatility because of the faltering demand and the fluctuating cost of propylene feedstock has also affected profitability, said Galie. "We notice that negative margins have been recorded in some areas like North America in early 2011, and western Europe in late 2011[to] early 2012," he said.

POSITIVE OUTLOOK FOR PP
The pressure on producers may be increasing, but the outlook is far more positive in the long term. Domestic PP capacities in western Europe are unlikely to meet growing consumption, and eastern Europe markets - although smaller and far less mature, such as the Czech Republic, Poland, Hungary and Slovak Republic - are all witnessing demand growth.

Certainly, Turkey is a market that is full of optimism too. It was the biggest single market in Europe in 2012 with PP consumption totalling some 1.8m tonnes and an annual growth rate of about 12%, said Galie. With only one small plant operated by Petkim, Turkey relies on PP imports. This currently consists of around 1.2m tonnes/year of homopolymers - largely from Saudi Arabia - and about 400,000-500,000 of copolymers mainly sourced from western Europe.

The scenario poses plenty of opportunities for advantaged producers, such as SIBUR. With the ripple effect of shale gas discoveries on propylene output, and repercussions further downstream on PP, Russia is widely expected to become an exporter of significant volumes of the polymer. Looking ahead, SIBUR and its Tobolsk-Polymer project are well positioned to benefit.


 

 Sergey Komyshan, SIBUR managing director, Basic Polymers Division

SIBUR'S TOBOLSK-POLYMER PROJECT SOON TO COME ON STREAM
Within a matter of months, SIBUR's new 500,000 tonne/year polypropylene (PP) plant is due to come on stream, doubling the Russian producer's basic polymers production capacity. The new site will produce homopolymer PP for injection moulding, raffia, fibres, film and sheet grades.

This project is among a series of new domestic capacities coming on stream that are expected to make the country capable of substituting PP imports and becoming an exporter of PP. Western Europe is expected to move from a state of oversupply for PP in 2012 (384,000 tonnes/year) to a deficit of 1.7m tonnes/year by the end of the decade.

"How should this shortage be met? By propylene or polypropylene?" asked Sergey Komyshan, management board member and managing director of the firm's Basic Polymers Division. "In Russia, for example, the advantaged feedstock is very remotely located from the areas where the demand is. There is no other way than to convert it into polymers because given the distance your propylene becomes even more expensive than that produced from naphtha in Europe," he said. "Therefore I have a strong belief that this will be met not by propylene coming into Europe but by its derivative - which will be easier and more economical to transport."

In the face of escalating naphtha prices and the influx of ethane, SIBUR is an advantaged player - a market leader in Russia with its ambition backed by huge investment, said Komyshan. SIBUR's Feedstock & Energy segment includes seven of the nine existing gas processing plants in Western Siberia, five compressor stations, and three gas fractionation units.

Russia itself has plenty of potential, with key bulk commodities tipped for strong growth in the coming years. The region is becoming a significant exporter of PP and with the completion of Tobolsk-Polymer, it is expected that the oversupplied Commonwealth of Independent States will have even more product available. "This was a signal for us when we embarked on the growth strategy; this was a market we could tap into. We just needed new capacities," he said.

"On the other hand, since the market is rather small compared with more developed markets, we realised that by building worldscale capacities we would need to go outside of the domestic region. Our strategy is to focus on local, fast growth as well as opportunities outside of the country."

Transportation costs are expected to be comparable to those from Middle East, US and Asian producers, with a replenishment lead time of around three to four weeks. Some 70 grades are expected to be available in 2013.The Tobolsk-Polymer facility, which started construction in the fourth quarter of 2009, is now almost mechanically complete. The new PP plant will be the company's largest in Russia and consist of two 250,000 tonne/year lines using INEOS technology, with commercial volumes expected around mid-2013.

"This has been very challenging but we are very excited that this year we will be able to have new product coming from this plant," said Komyshan. "It's an integrated plant and onsite we have propane, which at the moment is either sent to our crackers in Russia or sold as a fuel. We're planning to take this to a PDH [propane dehydrogenation] unit which is the first part of the project, and is based on the UOP technology that is already used in the Middle East and Asia.

"I think we made a very wise choice using the INEOS technology; it's easy to operate, which is important in Western Siberia, and it behaves extremely well in terms of timing for grade switches. We have a strong belief that the unit should remain flexible, regardless of the size."

Currently in the commissioning process, the utilities and infrastructure units are already running. The onsite PDH unit will produce 510,000 tonnes/year of propylene, which will be converted into 500,000 tonnes/year of PP.

For more about SIBUR and its polypropylene business, visit http://sibur.com/


By: Andy Brice
+44 20 8652 3214



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