The Czech petrochemicals industry showed signs of a steady revival in fortunes in late 2009 following a disastrous performance in H109, but 2010 could prove more challenging with the likelihood of a downturn in demand from the automotive industry following the end of European car scrappage schemes in key markets, particularly Germany.

Data from the Czech Statistical Office showed a marked downturn in sales and production of chemicals and rubber and plastics from November 2008, but a return to year-on-year (y-o-y) growth in November 2009, albeit due to base effects. Part of the stimulus was from demand from the automotive sector with Czech carmakers Škoda Auto, Toyota Peugeot Citroën Automobile and Hyundai Nosovice selling a combined 1.1mn units in 2009, an 11.3% increase on 2008 sales volumes, due in large part to German demand and a robust Chinese market. At the same time, the koruna weakened against the euro, making exports from the Czech Republic more attractive to consumers. Household expenditure has held up well, in marked contrast to elsewhere in Central and Eastern Europe (CEE) where consumer spending has been hit hard by rising unemployment and falling incomes, while gross capital formation took a considerable hit. This meant that while domestic consumption of plastic packaging and other consumer-related petrochemicals products held up well, spending on construction-related materials such as PVC declined. With car scrappage schemes across Europe coming to a close at the end of 2009, we highlight that 2010 could yet prove to be a tough year for Czech auto companies. Domestic demand for engineering plastics is set to decline as a result of an expected decline in output in the Czech automotive industry. The domestic construction industry, a significant consumer of PVC, is also set to make a slow recovery, growing by just 1.82% in 2010 from a contraction of 0.95% in 2009, but should see stronger growth rates from 2011. However, with the Czech banking system well positioned to support local firms and external demand tentatively recovering, we expect industrial output to average 4.8% y-o-y growth next year. We maintain that Czech industrial production will show a more fundamental recovery, for three key reasons. First, we expect the German economy, which accounted for 30.7% of total Czech exports in 2008, to post real GDP growth of 1.0% in 2010 which should boost demand for Czech exports, pushing headline industrial production figures higher. Second, the Czech koruna has weakened somewhat since its 2009 high in September, which should provide a further boost to exports. Finally, we continue to highlight the relative stability of the countrys banking sector, which should serve to keep Czech firms well capitalised, boosting headline production figures. The countrys financial system remains remarkably healthy, with credit still available to households and businesses. This should provide some measure of comfort to petrochemicals supplies to the Czech construction industry, although the lack of domestic PVC manufacturing capacity will mean that foreign suppliers will benefit the most from any growth in construction-related demand.

In 2009 the Czech Republic had petrochemicals capacities of 545,000 tonnes per annum (tpa) ethylene, 90,000tpa butadiene, 335,000tpa benzene, 320,000tpa ethylbenzene, 20,000tpa toluene, 355,000tpa HDPE, 300,000tpa PP, 170,000tpa styrene monomer, 90,000tpa PS, 140,000tpa vinyl chloride monomer, 120,000tpa PVC and 360,000tpa ammonia. In the long-run, the Czech petrochemicals industry is likely to be heavily influenced by the fortunes of Poland's PKN Orlen. PKN Orlen has been struggling with debt and is under pressure to make cuts, with Unipetrol likely to suffer swingeing cuts in capital expenditure in 2009. This will put a freeze on Unipetrol's expansion, thereby limiting growth beyond 2009 when the sector is likely to experience a recovery. Nevertheless, the Litvinov cracker, which has capacity to produce 525,000tpa of ethylene, was scheduled to be expanded to 545,000tpa by end-2009 with a further expansion to 595,000tpa planned during a turnaround in 2011. A rise of 70,000tpa of ethylene capacity will provide additional feedstock for any potential downstream development.