15 февраля 2011
2752

Faded polyethylene

To process polyethylene in Russia is not interesting today, because this branch of petrochemicals is ceasing to be the market and turns into a vertical of monopolies.

At 15 February 2011 Creon`s Conference "Polyethylene 2011" was traditionally held in Hotel Baltchug Kempinski Moscow. An event`s sponsorship was provided by "Tsentropolimer" (golden sponsor) and "Europlastic", with partner assistance of "Polyplastic" and "Cortes"`s support. A key question was the prospects of the investment development of the industry. Everyone would like to know whether the sector representatives expect an increasing of the supply of Russian polyethylene and lower prices. Representatives of four companies at once gave presentations of new investment projects. Interest in new investments is quite natural as the market continues to grow and consistent deficit remains.

Consumption of polyethylene in Russia has reached a record of 1 632 thousand tons in 2010, but the situation in various market segments differs. Post-crisis recovery of the market of traditional low-density polyethylene (LDPE) that is used in manufacturing of package is very slow and weak and now it`s consumption just 2% higher compared to 2006. Trade flows of LDPE are reduced to geographical balancing of demand. The grains are imported from Belarus to European part of Russia, and otherwise exported from Tomsk to China in large quantities. There is the trend of recovery and growing HDPE market after the crisis because of the launch of two new plants in Salavat (120 thousand tpa) and Nizhnekamsk (230 thousand tpa). Nevertheless, imports of this group of PE grades are also increasing and imports` market share is growing and has reached 30%. Meanwhile two-thirds of the HDPE imports to Russia are pipe brands, although their share in total demand for HDPE is less than 40%. If we look at imports in general, the share of feedstock for pipe industry accounts for about 40% of the imported polyethylene in Russia.

The market of a linear low density polyethylene is the most rapidly growing segment of the polyethylene market in Russia, which "drives" all of the industry. Its consumption in the country have tripled over the past five years, and this growth hadn`t been interrupted even by the crisis. Russia consumes more than 160 thousand tons of linear polyethylene now, which already makes more than 10% of the market. Despite the fact, that Nizhnekamskneftekhim is producing it in Russia, the share of imports on the market decreases very slowly, and is two-thirds of demand. The demand itself is generated by film producers for 90%.

Because of the fact that the market of polyethylene in Russia in 2010 has became deficient once again due to the predominance of consumption over production by 100 thousand tons, prices of HDPE were increased significantly and to the end of the year have reached the European level. On the LDPE market the prices has grown while remaining below the European and reached Asian market figures. Thus the economic crisis and subsequent demand recovery have led to significant changes in the PE market in Russia. There is a trend of slow demand restore for HDPE and capacity of its production is excessive for the domestic market. At the contrary demand for HDPE and LLDPE is growing and even new projects of domestic companies had not fundamentally changed the situation on these markets, which are still import dominated. The prices on polyethylene in Russia, which disturb processors, are at extremely high levels and are vaguely related with the balance of supply and demand at namely all grades of this polymer. Mikhail Turukalov, who is the chief editor of the department of prices and the regional markets of "Cortes" have told the audience about the situation on the polyethylene market in Russia. The main issue on the agenda was the willingness of Russian producers of polyethylene to meet the growing processors` demand for most popular grades of polyethylene. The answer appeared to be negative.

The Conference participants had large enough interest in a new polyethylene facility, which was expected to launch at Novy Urengoy`s gas-chemical complex in 2012. The factory`s Deputy Head of department of foreign economic relations and marketing Valery Vasilenko told that the planned production start now has been postponed until 2013. The production volume will be 400 000 tons of LDPE of grades familiar to Russian market (158, etc.). Today the equipment by BASF-provided technology, which was delivered in 1995, is in a process of installation, and the ethylene crackers by Linde-based technology (with more than 400 000 tons of production capacity) have been already mounted. The planned distribution of production of this facility near the Arctic Circle is follows: 100 thousand tons for Russian market, 150 for China and 150 for Europe. It`s possible that there would be a sole major distributor. The factory`s technological opportunities allow the manufacturing of vinylacetale-ethylene and butylacrylate-ethylene copolymers on one of the three production lines. The details of realization of the project of second phase of Novourengoy GCC with polypropylene, HDPE and linear polyethylene productions are under research today. The event`s participants got many questions about technological equipment`s age, date of production start, the demand for produced polyethylene grades and perspectives of its delivery to consumers. The participants didn`t understand why Russia needs one more large-scale LDPE plant, if there is low and conservative demand for it? Besides, the site has extremely difficult conditions of production and logistics and the technologies are obsolete. However, the disappointed market players have very little confidence, that this production will ever be launched.

Other large-scale production of polyethylene based on Budennovsk "Stavrolen" plant will soon appear in the South of Russia in Stavropol region. Head of department for coordination of gas and energy operations and sales of petrochemical products of LUKoil Alexander Rappoport shared plans of developing the production of polyethylene at the site. The total capacity of the plant for ethylene will be about 600 thousand tons, but the parameters of production capacity for PE separately are defining more exactly. The company accumulates orders from potential customers and is ready to sign long-term supply contracts, considering independent processing inappropriate. The launch of the new complex in Budennovsk is scheduled for 2015; however, this date may be adjusted. Mr Rappoport stressed that it is extremely difficult to develop the polymer business in Russia even for company with own feedstock. Bureaucratic problems, import duties on equipment, the export duty on polyethylene, high transport tariffs making export senseless are incomplete list of problems that were firstly and openly told in the report of top-manager of LUKoil. On all positions the domestic PE loses to Middle Eastern one not only in Europe but also in Russia (see below). If the company has not received tax preferences, it would not have to implement the project of the Caspian GCC because of unsatisfactory economic efficiency. And it`s not surprising that only those polymer projects, which are past the "return point", are promoting in Russia and new investment ideas don`t appear. But the market doesn`t stand still and the once popular grade of pipe`s PE-100 is no longer unique one. New segments of the consumption, for example EPE, create a certain potential demand, but general estimates have been adjusted downwards.

Igor Taratunin, Chief Technologist of polymer production of another major polyethylene market player "Gazprom Salavat Petrochemical", presented the recent launch of the new plant HDPE with capacity of 120 000 tons. The first product by LyondellBasell technology was manufactured last March, and in February 2011 the plant was working at full power. The company produces both monomodal and bimodal polyethylene (bimodal is more flexible and durable). Salavat is capable to produce up to 33 grades of HDPE, but company doesn`t produce the most needed pipe grades. "Salavat" plans to increase the capacity of production up to 200 000 tones, and to expand ethylene capacities up to 380 000 tons. The guests were interested if the company will ever produce LLDPE, but Mr. Taratunin said that "Salavat" doesn`t have such plans. Participants were very upset with the fact, that the most modern Russian factory won`t produce the most needed polymer`s grades. This information added more feeling of hopelessness of running the business in the industry.

Speaking at the conference, Artem Krupinov who is the head of marketing department of polymer products of "Sibur", informed that the company halts formula-pricing (pricing based on LDPE stock indicators in Europe and Asia) as the firm is not always satisfied by profit of working under the scheme. Processors and traders are invited to join "Sibur-Bonus" instead, which offers discounts and priority shipment depending on the volume of purchases and "fiscal discipline" of counterparts. This news became unpleasant for processors along with the uncertainty about plans of leading manufacturers. Earlier, the prices formula allowed refiners to plan the production and supply.

High, unpredictable prices and permanent deficit haunts also HDPE and LLDPE markets. It slows down the work of processors and, as a result, impedes the development of these markets in Russia, and moreover even stimulates the import of finished products instead of polymer processing within the country. Kirill Trusov, the Head of Polyplastic`s (which is the largest market of polyethylene pipes) department of supply and logistics told the participants about the situation on pipe`s grades market. The market last year was able to regain only half of the 2009 demand fall, however, this means nothing to price rise. In Russia polyethylene of pipe grades grew by 20% over the past year, and prices have reached values of European markets. In Russia there was no price reduction even for a single month, unlike Europe and Asia. The rise of import looks natural due to fact, that Kazan polyethylene in August was much more expensive than Asian one.

The market of PE pipes has revived only in July 2010 and it is still moved by federal "image projects" (Olympic Games, Universiade, APEC summit etc.). The lack of strict control of supplied pipes quality and rising prices for PE leads to the fact that processors use ersatz raw materials. According to estimates, about 12 % of PE pipes are made of polymer, which shouldn`t be used for pipes production by international standards. However, the government structures as the main customer of pipes for "disposable" objects do not have enough concerns about quality of pipes, their service life and the prices.
In contrast of the pipe market, where competition is not so strong, the situation on the film market is opposite. Rising prices for feedstock leads to deterioration of processor`s financial condition, which can not shift it to customers. The executive director of the National Confederation of Packagers Alexander Boyko said that not less than 30% of Russian polyethylene is consumed by the packaging market. Polymer package is more than a third of the package market, and during the crisis its share has increased even more. In the pre-crisis years Russian processors and customers bought a lot of high-performance extrusion systems and packaging machines in Europe, and these systems and machines require high quality raw materials. The polyethylene price rise is forcing refiners to look for cheaper raw materials, which leads to a packaging quality deterioration. All this leads to situation, in which for many large customer companies it becomes easier to buy plastic packaging in Poland, the Czech Republic and Turkey, not in Russia. Many Russian suppliers are going out of business, and slow recovery of the LDPE market in Russia may be due to this fact.
However, not all producers of films are ready to accept this situation. The producers of stretch films made of a linear polyethylene found a temporary solution in increase of imports. Dmitry Zharsky, who is Executive director of Lava, clarified in details why the market is "turning away" from new producers of LLDPE in Russia emotionally and frankly. Kazanorgsintez ceased production of LLDPE and Nizhnekamskneftekhim produces it from time to time despite the fact that capacities of stretch films producers have increased greatly in 2009-2010. "Lava" manufactures about 2-3 thousand tons of stretch films per month and needs a stable supply of linear polyethylene, but this stability is provided by importers only, SABIC in particular. According to Mr. Zharsky, NKNKh is not interested in working with customers and trying to develop their own processing on affiliated plants in Tatarstan and Moscow region for domination on stretch films market. Affiliated companies have the processing volume 3-4 times less than the leaders and get raw materials cheaper with a supply guarantee and deferred payment for a month. As a result of this NKNKh gave up two-thirds of contracts for linear PE supply from two leading producers of stretch films in favor of importers. And the company would lose them all, if there were no efforts of Kama-plastic and personally Alexei Zavialov. Kazanorgsintez used to follow the same strategy and had to stop LLDPE output a year ago.
Head of "Creon" Fares Kilzie was worried by atmosphere at the conference. It provided realistic but sad and hopeless picture of entire industry. There were no such moods even at a height of the crisis two years ago. The conference "Polyethylene 2011" became perhaps the most doom and pessimistic for all eight years of its running. Processors don`t understand how to go on the business in Russia, they don`t discuss new projects. Polymer suppliers` policy is leading to suppression of all competitive trends and entrepreneurs` initiatives and harvesting of others` yields as processors have been developing the market for all of these years with the hope that manufacturers sometime will finally run after them. Manufacturers actively are pushing non-affiliated processors out of the market and turning the market into oligopoly instead. Processors are unready to work together and struggle for their rights as they simply don`t believe in success and are trying to save weakening present positions. New investment projects with which processors related their future are mainly needed only by investor firms and no one other, nor domestic, nor international market.

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