OUTLOOK '14: CEE petchems face anxious wait over cheap imports

03 January 2014 11:00 Source:ICIS News

By Will Conroy

LONDON (ICIS)--An air of anxiety hangs over the petrochemical industry of central and eastern Europe with 2014 likely to deliver further evidence of a real competitive threat from US and Middle East producers that benefit from cheap feedstock, analysts say.

“The overall outlook for the CEE petrochemical industry remains rather bleak,” said Dominik Niszcz, an analyst at Raiffeisen Centrobank.

“It is hard to see any specific trends for 2014, it is rather that the trends related to the higher capacities in low-cost regions like the Middle East and the US and closures in Europe may continue,” he added.

The litmus test of how hard the regional petrochemical industry is prepared to push back against the growing Middle Eastern and US rivalry may come with the scheduled decision on whether two state-controlled groups in Poland, Grupa Lotos and Grupa Azoty, go ahead with an envisioned €3bn ($4.1bn) petrochemical complex.

Analysts, including chemical industry observers at Prague-based investment bank WOOD & Company, have questioned the wisdom of going ahead with the 'mega-investment', to be rolled out either solely in Gdansk, northern Poland, or to be split between Gdansk and Azoty's main production base in Tarnow, southern Poland.

The bank has warned investors that they should probably steer clear of the stock of both Lotos and Azoty until more details about the project and its economics are visible.

With a preliminary decision to centre the petrochemical complex on an ethylene cracker rather than an aromatics extraction plant having been taken, Piotr Drozd, an analyst at WOOD said the rationale for the investment was “highly questionable” given the massive petrochemical investments set to take place in the US over the next five years on the back of cheap shale gas-derived feedstock.

However, Niszcz noted that CEE's petrochemical industry might anticipate attempting to protect its competitiveness by relying on forms of state backing for their strategic sector.

Polish ministers have thus far backed the Gdansk investment by citing Poland’s chemicals and primary plastics trade deficit, which officially stood at minus zloty (Zl) 16.7bn (€4.0bn) in 2012.

Despite state enthusiasm for the petrochemical complex - initial agreements for investment loans of up to Zl 750m for the project have been made with state-owned infrastructure financing vehicle Polish Investments for Development (PIR) - Erste Group Bank analyst Tamas Pletser said he saw several threats to it including “the risk that several US and Middle East players are now investing into NGL-based [natural gas liquid-based] petrochemicals, and they could dump the market with cheap polypropylene from 2016-2017”.

PKN Orlen, the existing major petrochemical player in Poland and, through subsidiary Unipetrol, the Czech Republic, in 2013 saw the profitability of its petrochemical business counterbalance the poor performance of its refining business, which suffered from low margins partly caused by European over-capacity in refining, Pletser said.

“But I see clouds now gathering for the petrochemical business as well with margins likely to be under pressure from the appearance of US and Middle East polymers on the market,” he said.

Analysts and CEE petrochemical companies will be keenly observing any regional market impact made by the early 2014 start-up of the first plants at the 2.5m tonne/year Borouge 3 installation in Abu Dhabi which is expected to raise Borouge's olefins and polyolefins capacity to around 4.5m tonnes/year.

Asia will continue to be the primary export target of Borouge, but the company is planning significant exports to Europe and Turkey.

Another event planned for early 2014 is the renewed attempt at privatising largest Romanian petrochemical producer Oltchim.

Having seen an attempt at selling off its controlling stake in the indebted company collapse at the end of 2012, and the company entered into insolvency by state officials in January last year, the Romanian economy ministry will in early February attempt to select a viable bidder for a debt-free version of the firm named Oltchim II.

The new year should also bring a solution to the ongoing spat between Hungary and Croatia over whether Hungarian oil, gas and petrochemical group MOL can find an acceptable way forward for Croatian state refiner INA, over which it retains full management rights.

MOL has filed it will sell all or part of its Anwil polyvinyl chloride (PVC) and nitrogen fertilizer subsidiary.

Sources at Azoty say the group may move to acquire the Anwil fertilizer division through a non-cash transaction that would simultaneously see Orlen take a stake in Azoty.

Azoty, having last year through acquisitions become Europe's second-largest fertilizer producer behind Norway's Yara International, said that in 2014 it would continue to invest in diversifying its fertilizer range and would find further savings in synergies offered by its acquired subsidiaries, such as fertilizer, melamine and caprolactam producer Zaklady Azotowe Pulawy (ZAP).

($1 = €0.73, €1 = Zl 4.17)

By Will Conroy