Ukraine Petrochemicals Report Q2 2010

This latest Ukraine Petrochemicals Report envisages growth in plastics and chemicals output in 2010. However, the depth of the countrys economic crisis in 2009 and the slow pace of economic recovery will mean it could take until at least 2012 for the sector to return to 2008 levels of production.

The contraction in Ukraines petrochemicals industry in 2009 came in the context of a 15.3% fall in real GDP. Though the recession is broad-based, with trade, consumption and investment indicators all continuing to decline in year-on-year (y-o-y) terms, the ongoing collapse in gross fixed capital formation (GFCF) and household consumption were particularly pronounced. This impacted negatively on the key petrochemicals consuming industries, such as construction, consumer goods manufacturing and the automotive industry. Construction was the hardest hit sector, falling by around a half. Even the fertiliser segment, which is traditionally more stable than other major petrochemical consumers – such as the automotive and construction industries – reported a massive decline in production volumes, despite modest growth in agriculture.

In the period of January-November 2009, production of plastic in primary forms totalled 279,500 tonnes, down by 32.5% y-o-y. Monthly output reached a peak of 30,300 tonnes in October (up 15.2% y-o-y), while November production was 27,700 tonnes (up 8.6%). Although growth was largely the result of a low comparison base, it was favourable compared to overall industrial performance, which saw 6.2% y-oy decline in October. This indicated that the petrochemicals sector was entering into an earlier stage than the rest of Ukraines industrial sector, albeit due primarily to the restocking which had to occur following inventory depletion. Overall chemical and petrochemical production was down 23.2% y-o-y in 2009, with chemicals output down 22.8% and output rubber and plastic products down 24.3% While the Ukrainian petrochemicals industry is not expected to contract any further, due to the depth of the decline, it will take until at least 2012 before it reaches 2008 levels. We forecast plastics output of 365,000 tonnes in 2010, up by around 17.5% over 2009 levels. Although growth will be strong, it is largely due to base effects. Output will still be 16% down on 2008 levels, and the Ukrainian petrochemicals sector will be operating at around 70% capacity – which is well below the 80-85% level which we regard to be the break-even point for the industry. The economy will begin a modest recovery in 2010, with GDP real growth at just 1.9%, with higher rates of growth in subsequent years.

The petrochemicals industry should receive a boost in the 2010-12 period as a result of the construction and other activity related to the countrys joint hosting of the UEFA football championships.

A diversification in markets and feedstock sourcing to remove the industrys dependence on domestic and Russian demand would enhance Ukraines petrochemical prospects. However, the outlook for petrochemicals exports is bleak with the Russian, Turkish and EU markets also set to see sharp declines in demand. With the kind of economic growth rates seen in 2000-2007 unlikely to be repeated, the petrochemicals industry will be more heavily reliant on export markets. The depreciation of the Ukrainian hryvnia (UAH) may provide some slight relief in terms of competitiveness, but equally it raises the cost of feedstock; which has to be passed on to the consumer or simply absorbed by the industry – which is already financially precarious. If the demand does not exist, then depreciation is unlikely to make a significant difference. Russian economic growth is not likely to be remarkable over the forecast period, and the market is at risk of going into over-capacity – owing to additional planned capacity being due to come online. Consequently, Ukrainian producers will be more reliant on the eurozone for sales.