Strategic changes and new architecture of the field are necessary to solve the problems of Russia polymer industry. While not all players of industry are ready to it tactically.
On Monday, October 3 Creon`s Forum "Polymers of Russia 2011". was held at the Hotel Baltschug Kempinski Moscow. Sibur was the golden sponsor of the Event, and Europlastic, Eurostroy, Polyplastic and Tsentropolymer were the partners. The Forum was held in difficult for polymer industry time, during heavy conjecture crisis afterliving up to our expectations summer season and growing uncertainty about the future. However, falling prices and static demand became a result of deeper and fundamental problems of industry, which have been mentioned by Creon during a number of years.
Report about current state of affairs, problems of domestic polymer industry and ways of its solution were presented by Fares Kilzie, The Head of Creon. Some segments of Russian polymer market are in crisis. There are demand growth slowdown, prices decrease, investment activity decline. All of this may be related to conjectural changes; however, it`s rather exacerbation of long progressive disease of industry. There are several fundamental problems and every following problem is a result of non-solved preciding ones.
The first basic problem is that the industry belongs to those players, which are not ready to deal with it. The volume of Russian polymer market is not small and, according to the most conservative estimates, is 15 billion dollars. It`s quite a lot, but current volumes are reached because of not producers` efforts but processors` ones. No one company which has the level similar to SABIC, Ineos, Borealis, Basell exists in Russia, exception is Sibur, which is trying to reach their level. The major reason of it is excessive guardianship of polymer industry by oil-gas companies` managers. Such companies requires high margin from polymer business just like from oil production, they hardly understand it and rarely pay attention to it, as they face many other problems. As the consequence of this there are efforts to sell polymers like oil and petrochemicals and specialization in the most ordinary and mass products and also lack of investments to development.
As it was shown by Creon`s Conferences, devoted to associated petroleum gas, gasoline and diesel, Russian vertically integrated oil companies are not ready to invest enough money even in associated gas utilization and domestic oil refinery. Polymer business is totally alien to petrochemical companies. It doesn`t allow top-management to control business of those people, who deals with polymers effectively. Taking in account that the number of companies is not so large, the polymer market is managed by community, consisting from 5 to 7 people and administrative oligopoly arises. It`s a great temptation and threat to the industry.
The second fundamental problem is degradation of polymer processing. Price management is possible by constant limitation of supply that doesn`t promote neither investment, nor qualitative business development. The processors, who have 80 % of finished products cost as raw materials cost, reacts to it, by manufacturing surrogates. They make pressure pipes of film grades polyethylene, add chalk in the product, make PC sheets slimer and so on. Consumers differ in income level, but remain ignorant.
The third problem is slowdown of industry quality development. In a deplorable state of the market polymer raw materials producers start to orient on such kind of demand. To their point of view, market doesn`t need any complexity. That`s why, industry quality development stagnates. Those "dissidents", whom it doesn`t suit, work with import raw materials completely, but with current dutys rates of polymers import, it`s easier to import finished products, for example, films. That`s why Russian modern polymers processing dies, replaced by growing. Only since the beginning of the year import of multilayer films has grown at 20%, of PP - at 1,5%.
Total distrust of market participants to each other is consequence of all this. The major activity, which is carried out by the players on the market, is profit maximization at any cost at any time. The market is destabilized, that`s why any long-term contracts and planning, both production and financial doesn`t exist in Russian processing industry. It means that there are no "long-term" investments. No company will plan something for the year ahead, when it doesn`t know, whether the supplier of raw materials can do a bad turn the next week. The processors in their turn fail eventual customers of their production (pipes, films, sheets and other production, including plastic glasses). Not only glasses, but plastic windows, polycarbonate sheets, cable isolation become disposable production. Processors` confidence to producers decreases. It leads to decline of customers` trust to products, who prefers goods-substitutes.
The fifth and final fundamental problem is in efforts of producers and processors integration. It seems like escape in current situation. However, proximity to polymers producers doesn`t solve the processors problems as well as integration of petrochemical and polymer business doesn`t solve the polymer business` problems. The circle becomes exclusive.
All market participants understand that it`s not possible to live like this anymore, but it`s being reproduced every year. The situation becomes more complicated, as processors "overcome" the producers and have much more possibilities. Mr. Kilzie offers to discuss "road map" of polymer industry. Its first point is making the information not available to Government Departments but to oil companies` chiefs who make decisions. Creon is ready to assist them to take part in negotiations to discuss the future of polymer industry before the end of the year. The second point is composition of maximum transparent and open system trade of polymers system in Russia, transition to internal stock price indicators. The third is a struggle with surrogates, limitation of production and sales of products which doesn`t meet requirements of industry standards. It must be run by Industry Associations. The fourth is polymer producer`s transition to long-term contracts with hydrocarbons raw materials suppliers. However, the main condition is change of polymer industry architecture, exchange of assets and creation of core owners in the industry.
The participants of Forum in general agreed with Mr. Kilzie`s view in their reports. According to Andrey Frolov, Sales and Marketing Director of Basic Polymers Direction of Sibur, lack of polymer companies of world level in Russia is connected with the weak position of Government, absence of cheap raw materials and weak accent on innovative development in contrast of SABIC, for example. In addition to that, even the major facilities of Sibur are physically and morally obsolete capacities. Speaking about price situation, Mr. Frolov explained that import dictates prices not only in Russia but also in Europe. In latter case we are talking about import from the countries of the Persian Gulf. He noticed that generally those grades of polymers are, imported, which are not produced in country or produced in small volumes. To remedy the situation, Sibur works with consumers over NIOST, and actively develops new polyolefin`s grades, which will be manufactured by Tomskneftekhim. More of that, after launching of Tobolsk-Polymer which capacity is 500 thousand tones per year, according to Mr. Frolov, it will be surplus of new quality material on the market.
Ludmila Bahar, CEO of Ormos -Polymer, noticed that along with a narrow range of grades and non-stable quality of domestic products, customs and State policy, which provides simplified import of finished products to Russia. For struggle with import Mrs. Bahar offered suppliers to move to the forward contracts. Domestic polymer industry management quality is poor. Kirill Savitskiy, Deputy Head of Raw Materials Production Management of Komus - Packing, mentioned for comparison one of the leading occidental polymer companies, which managers have comprehensive knowledge of the market and pay attention to work with the final customers of polymer industry. Herewith, all quality characteristics and requirements are quantized and performed rigorously.
Miron Gorilovskiy, CEO of Polyplastic, noticed that domestic processors have been told about coming abundance of feedstock for 15 years, which has not come. It`s hard to hope on prices decrease in the market without making surplus of polymer raw materials, PE, as an example. According to him, if the prices are defined by export parity, but not import, that leads to PE of pipes brands falls in price at 10 rubles per kg in Russia and it is unprofitable to produce surrogates. In that case, producers and customers of pipes could send additional funds for new different kinds of market development. Speaking about current situation, the expectations of pipe companies were not lived up by neither the market, developing less than forecasts consider, nor pellet producers who have not stabilized the .production of modern PE of pipes grades yet. According to Mr. Gorilovskiy, in case of raw material deficiency and complicated state of processors, cancel of import duties is the most acceptable step to support market.
Eduard Vilkhovetskiy, The Head of Petrochemical and Gas Processing Products Supplies and Sales Department of LUKoil, told about key industry problems. In general he agreed with Mr. Gorilovskiy and equated also weak project base and deficit of competent specialists as the main difficulties of polymer business development . Necessity of wide grades assortment affects on quality of PP, produced on Stavrolene, and in turn it affects stability of product indicators from batch to batch and is inferior to foreign analogs although meets requirements of current Russian standards. To improve work with customers, LUKoil develops subsidiary network of polymer distribution.
The participants of the Event suggested a number of ways to struggle for the production quality increase and surrogates distribution, many people confirmed extreme severity of this problem. Andrey Evseev, CEO of Safplast told that European standard of polycarbonate sheet density is 0,9 kg per cubic meter, in Russia this one is 0,6 and some companies has density of 0,5. Herewith, to enter industry it`s necessary to have 200 thousands euros that leads to spread of "garage" productions. Industry Association activity has not led to change in the struggle for consumer`s confidence
Mikhail Shulyakov, CEO of Eurometfilms, noticed that quality level in the market of BOPP-films is significantly reduced, that led to sharp increase of imports from Egypt and China. Companies can survive in such conditions owing to premium niche product manufacturing. According to Iskander Galimullin, Economist of Polymers Sales Department of NKNH, occidental companies don`t sell modern technologies; that`s why quality lag of domestic plastic producers is inevitable. The advanced technologies of polymers production, which can satisfy processors requirements, are not available in Russia now.
Igor Esin, CEO of TIKO-Plastic recognized that even long-term contracts in Russian conditions don`t protect from financial risks and to do that, company has to enlarge storage spaces and to resort to spot transactions. Herewith, group`s large customers of films have been already formed in Russia. And to satisfy their demand, company has to work with import raw materials. However, meanwhile big consumers prefer working by long-term contracts, polymer feedstock suppliers either elude contacts with them or they are not ready to fix the prices for long period.
Anton Matvienko, CEO of Biaksplen, told the audience about difficulties of the struggle against inrush of cheap BOPP-films. According to him, Russia imports either low-quality films from developing countries, or films with applied prints. Nevertheless, Biaksplen considers the possibility of extension of both production and export of BOPP-films.
Alexey Chubykin, CEO Deputy of NTL-Packaging, named industry dissociation and lack of major players, able to achieve favorable working conditions with network retailers and raw materials suppliers major problem of Russian packaging industry. Herewith, "weak link" is printing companies, which puts logos and graphics on the film. However, Russian producers` positions decline not only in film with print market, but in blank film market and gives market to Turkish and even Ukrainian companies.
Forum participants offered several ways to solve problem of pricing in the industry. Aleksandr Kinev, The Head of Department of Cartel Control of Russian FAS, stressed that now Department pays much attention to chemicals and, particularly, polymers markets. In addition to filed suits, related to chlorine and caustic market, suites of polymer market adds soon. Herewith, to fact-finding of price collusion, FAS uses more often not only analytic methods, but investigatory ways. Artem Polycarpov, The Head of Goods Market of Moscow Stock Exchange, called industry players to develop stock polymers trade more actively to make pricing process more transparent. According to him, experience of mineral fertilizers trading turned out rather successful and now 30% of all consumed fertilizers in the country are in sale on the Stock.
Marat Baymukanov, Chairman of the Board of NP "Polymer piping systems", told about similar problems on the plastic pipes market of Russia, Belorussia and Kazakhstan. Due to usage of dyed PE, with carbon black concentrate injected during the extrusion instead of dyed PE of pipes grades, strength characteristics of pressure pipes are significantly deteriorated. It happens owing to their inner inhomogeneous structure due to inferior mixing of lightstabilizer. Herewith, Standard "Pressure Pipes, made of Polyethylene" requires using only PE of pipes grades. By virtue of duty-free PE import to Kazakhstan, many production facilities of such pipes were organized in this country. Although these products are recognizable easily by white marks on the cut, demand on such cheap products is stable. Here associations` efforts don`t show great results. To delete surrogate products from markets of the Common Customs Area Countries it`s offered to range plants by category. This situation, according to Partnership, allows customers to be guided among demand of different quality pipes. Now idea is discussed by producers, parameters of plants relation with a specific category are designed. It`s offered to make product certification free. Its project will be presented on the Conference "Polymer Pipes" on2012, April.
However, not all industry players recognize the existence of serious problems. Luchesa Nabatova, Quality Adviser of Head of Business center "Komus" named profitability decrease and product quality degradation natural response to the crisis and called to struggle with it including the way of costs optimization.
