Ukrainian petrochemicals output showed signs of slowdown in the first few months of 2011 and BMI’s latest Ukraine Petrochemicals Report expects low or stagnant growth over the rest of the year with a full recovery to pre-recession production rates not expected until 2015.
The petrochemicals sector in Ukraine made a rebound in 2010 in line with recovering exports, although it did not return to pre-recession operating rates. The index of chemical and petrochemicals production indicated that the sector grew 22.5% year-on-year (y-o-y) in 2010, helping to offset a 23.2% decline witnessed in the previous year. For the first time since 2007, the chemicals and petrochemicals industry performed better than industry overall. Chemicals output was up 26.6% while rubber and plastic production was up 10.1%. However, impressive double-digit growth has still not returned the industry to its full potential. Plastics output totalled 339,600 tonnes in 2010, 25,400 tonnes below BMI’s forecast. Growth in 2010 came in at just over 11% y-o-y, which meant that the industry was operating at below 70% capacity and 22.3% down in 2008 levels.
In Q111, chemical and petrochemical output grew 18.0% y-o-y with basic chemicals up 38.9%, rubber products up 1.8% and plastic products up 14.8%. Performance declined through the quarter, particularly in March, as base effects wore off. On a quarter-on-quarter (q-o-q) basis, primary plastics output in Q111 was down 8.1% to 109,700 tonnes, in line with a slowdown in the broader economy.
Both domestic and export markets are set to suffer in 2011. The export sector led growth in petrochemicals in 2010 due to the depreciation of the hryvnia, but we expect growth in exports to slow further as positive base effects from the massive 15.1% real contraction in GDP in 2009 recede and fiscal austerity measures in key export markets such as Russia – particularly concerning state infrastructure projects – crimp demand for Ukraine's main heavy industry exports, such as petrochemicals. Russia’s petrochemicals demand growth will be sluggish over 2011, according to BMI forecasts. In addition, we highlight that the relative competitiveness enjoyed by Ukrainian petrochemicals exporters will be eroded by rising domestic gas prices as government subsidies are withdrawn under Kiev's IMF Stand-By Arrangement (SBA) as well as the rise in oil prices, which will spur growth in naphtha feedstock. The Russian construction sector is showing only modest growth in activity following a contraction of 28.2% in 2009, with PVC continuing to languish as a result. The poor performance of the Russian PVC market has held back Ukrainian petrochemicals expansion with Karpatneftekhim’s continual delays in bringing its new PVC production plant online due to poor market conditions. The 300,000tpa suspension vinyl facility being constructed in Kalush was expected to be completed and operating some time during 2009. However, the slump in the PVC market casts doubt on the viability of the operation means it was delayed until Q410. By end-2010, the plant had yet to begin commercial operations, with Karpatneftekhim promising start-up in Q111 – a promise that looked like it had been broken as the quarter came and went without any announcement of completion.
Ukraine has risen one place to joint 8th place with Bulgaria in BMI’s Central and Eastern Europe Petrochemicals Business Environment matrix as a result of its score increasing 0.5 points to 40.0 points as a result of a rise in its country risk rating due to an improvement in its long-term external risk rating. This puts Ukraine 6.2 points behind Romania and Slovakia and 6.7 points ahead of Azerbaijan.
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