26 July 2013 08:51 [Source: ICB]
Challenging market conditions have done little to dampen SIBUR's optimism as its robust business model and increased investment provides a solid base for growth
SIBUR's new CFO is bullish about the future. Despite difficult trading conditions, lacklustre demand and weak pricing for many of its petrochemical products over the past year, Pavel Malyi says the effects have been largely offset by increased production and several strategic acquisitions by the company.
The company reported a 9.1% increase in revenues in 2012 to rouble (Rb) 271.3bn ($8.63bn, €6.66bn), fuelled by energy products and higher production and sales volumes for most products.
Sales volumes for petrochemical products increased by 4.9% in 2012, compared with 2011, to 2.27m tonnes.
Plastics and organic synthesis production increased by 39.1% during the year to 844,836 tonnes, while basic polymers production climbed by 3.4% year on year to 385,794 tonnes.
Synthetic rubbers production was most affected by the challenging market environment, stagnant demand and weak pricing trends - resulting in a slight decline of 0.7% year on year to 423,348 tonnes.
Although the results suffered slightly following a strong 2011, Malyi says the performance demonstrates the resilience of SIBUR's model, with the company's increased investment offering good growth prospects for the future.
"We have certainly had areas where business has been more difficult than overall - but we are very satisfied with our results," says Malyi.
"Despite the challenging global environment, everything we're doing is in line with, or better, than most of our petrochemical peers. We continue to show a strong profitability trend at well above 30% and remain one of the top international petrochemical companies by EBITDA margin, which shows the strength of our model.
"Importantly, we are satisfied with our progress in delivering on our key objectives: continuing to grow our strategic investment plans and the security of our main feedstock streams, associated petroleum gas (APG) and natural gas liquids (NGLs)."
Earlier this year, SIBUR's debut Eurobond raised $1bn. The issue was 5.5 times oversubscribed with orders received from 280 international accounts.
"This debut means that SIBUR has now established secure access to yet another pool of funding, which will help us with negotiations and creates a healthier situation going forward," says Malyi. "What we have achieved through this issue is that SIBUR is now, for all intents and purposes, a public company. We have $1bn of securities outstanding in the market and predominantly international institutional investors, and they expect us to behave as a public company.
"SIBUR now has fully transparent records in terms of accounting, and we have an international-style prospectus. We have committed to continuous improvement in the frequency of our disclosures so from this year we are switching to quarterly reporting."
Almost Rb200bn have been invested over the past four years across the feedstocks & energy and petrochemicals divisions, with the capital expenditures (capex) plan already approved at board level for the next four years.
Malyi notes that the main changes this year will come from organic development, notably the flagship polymer project in Tobolsk. The full impact of its financial performance will be seen in next year's results, he adds.
"SIBUR has a good pipeline of organic growth projects, and these will have the main effect on our business growth," he says.
Besides Tobolsk-Polymer, a new liquefied petroleum gases (LPG) and light oil products transhipment facility in the port of Ust-Luga is also scheduled for completion in 2013 and will support growth in LPG exports to the premium western European markets. It is expected to come on stream in the third quarter.
"This will also have significant potential for the shipment of naphtha and underpin further profitability of our feedstock export operation," he says.
Later this year, SIBUR hopes to make a decision on whether to proceed with an integrated polyethylene (PE) and polypropylene (PP) production complex in Tobolsk. The ZapSibNeftekhim project - known as ZapSib-2, is now at the front end engineering (FEED) phase, with works being carried out by engineering group Linde, TECHNIP and ThyssenKrupp Uhde.
The project would be the largest integrated facility for production of basic polymers in Russia and include a 1.5m tonne/year ethylene cracker, with 1.5m tonnes/year of downstream PE and 500,000 tonnes/year of PP. It will include an 800,000 tonne/year swing linear low density polyethylene (LLDPE) and high-density polyethylene (HDPE) plant, plus 700,000 tonnes/year of HDPE. Fed by ethane and LPG from its own gas processing plants, it is expected to be more competitive with feedstock prices than the US is with its shale-based ethane prices.
There are several other equally important but lower-profile developments such as improvements in the production of polyethylene terephthalate (PET) and new expandable polystyrene (EPS) capacity, he says.
"You can expect very bold strategic development plans from SIBUR. We are trying to use all available financial instruments, some of which may not have been used in Russia before," says Malyi.
Synthetic rubber business focused on higher margin products
Synthetic rubber is one of the most complex chemistries in SIBUR, says Mikhail Gordin, managing director, head of synthetic rubbers division. The large scale specialty rubbers are the company's most expensive products on a per tonne basis. In 2012, the business represented around 15% of SIBUR's revenue.
The synthetic rubber business has a significant market share in Russia, with 48% of basic rubbers and 65% in specialty rubbers in 2012, according to the Russian Rubbers Producers Association. The company is ranked in the top 10 in terms of global production, amounting to 423,348 tonnes last year. Sales are split roughly 41:59 between domestic and export markets.
"Part of our strategy is to have higher margin products to help protect us from any downturn," he says. "Higher margin products give us some price stability compared with more commoditised products. Clearly there is no point trying to expand volumetrically so we want to concentrate on improving margins."
SIBUR enjoyed high margins during a period of decent consumption in 2010-2011 but demand has since slowed. In Q1 2013, specialty and commodity rubbers remained depressed because of both lower sales volumes and a decrease in the effective average selling price, says Gordin.
"Russia is now becoming more focused in terms of development and is producing more sophisticated, high-end products. We're concentrating on efficiency and life-cycle assessment for our rubbers and have new styrene-butadiene-styrene (SBS) production that started in May for higher value products and extra margin. It's a very cyclical market; today we're at a low point in the cycle, but we're hoping prices will soon go up."
The facility in Voronezh is the only styrene-butadiene thermoplastic elastomers (TPE) producer in Russia. The innovative polymer will be used in road construction to improve crack, heat, shear, water and frost resistance and help to reduce maintenance costs.
SIBUR announced its decision to build 50,000 tonnes/year of SBS production in 2009 and construction started in July 2011. It is also expanding a butyl rubber facility in Togliatti by 5,000 tonnes/year to 53,000 tonnes/year. Moving forward, Gordin says that it is considering the expansion of the capacities of its solution styrene butadiene rubber (S-SBR) and neodymium based performance butadiene rubber (Nd-PBR), hi-tech grades for high speed tyre applications with lower rolling resistance. Demand is growing for these more sophisticated grades, he says, which have been far less impacted than other segments.
Domestic market key to plastics and organic synthesis division
FOR SIBUR's plastics and organic synthesis division, the key objectives are to maintain a leading market position, boost production and expand its portfolio, says managing director Sergey Merzlyakov.
"We've seen no real changes to our priorities since the start of the global crisis in 2008 but have perhaps just intensified our efforts," he says. "We've always treated cost-cutting initiatives, head count, optimisation issues and energy efficiency seriously."
Over the past year, the business has been particularly active in expanding its range of biaxially-oriented polypropylene (BOPP) films, acrylates and plastics, as well as introducing a new expandable polystyrene (EPS) grade and marketing its geosynthetic products - innovations that can, for example, help to improve the quality of roads and infrastructure.
"Besides BOPP, the main focus for our products is domestically. Our strategy is to produce polymers and organic synthesis products to meet domestic consumption through import substitution," he adds.
The business already holds a leading position in Russia and will continue to target local markets for its core products.
"BOPP is the only market where we're planning exports in 2014 because overproduction is expected. It is a much more profitable product and we have a strong competitive advantage that will help us grow our business."
BOPP demand growth stands at around 3-5%/year globally, although this is as high as 10% in Russia, says Merzlyakov.
Among its planned projects, SIBUR is increasing the capacity of its PET facility in Blagoveshchensk, Bashkortostan region, to 210,000 tonnes/year. This year, the division is also expecting to complete two restructuring projects in Tomsk of 38,000 tonnes/year and 30,500 tonnes/year in Novokuybyshevsk (Samara Region) for the conversion of polypropylene (PP) to BOPP film.
SIBUR also recently launched a new 100,000 tonne/year facility for a new grade of EPS based on Sunpor (Austria) technology.
With demand also growing for surfactants in the CIS at than 6%/year, a letter of intent has been signed with Solvay to establish a surfactants joint venture called RusPav, located in Dzerzhinsk. SIBUR will contribute its raw materials, production and logistics capabilities to the joint venture. RusPav will be located near SIBUR's petrochemicals operations, 400km east of Moscow, and is tentatively expected to be operational in 2016.
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