‘Quite a good result’: experts evaluate Kazanorgsintez’s financial performance
Russia’s chemical industry (except for rubber and tyre producers) handled consequences of the pandemic much better than other industries during the first half of the year, the market’s experts think. Russian enterprises have almost doubled polyethylene production. So Kazanorgsintez has increased its production up to 271,100 tonnes. The difficult market situation due to lower demand and prices, the OPEC+ crisis and consequences of April restrictions, of course, influenced the financial performance of the company and other enterprises. Nevertheless, KOS has summed up the first six months of the year with 4,05bn rubles of profit and 31,3bn rubles of revenue, and analysts in general evaluate its prospects positively. Moreover, specialists make cautious forecasts for the sector’s recovery, as the situation in the market in began to improve in July.
“Plastic production was relatively good”
As a result of a fall in demand and low prices for products, the financial performance of companies in the oil, gas and chemical complex both in Russia and around the world worsened during the first half of the year. Tatarstan enterprises reduced their output by 6%. The biggest Russian ethylene polymer and copolymer producer Kazanorgsintez has summed up the financial performance during the first six months in 2020. Despite the fall in demand and prices, a general decrease in the world and Russian markets, factories that were seriously hit during the coronavirus pandemic and had forced shutdowns, KOS ended the first half of the year with 4,05bn rubles of profit. According to the accounting report, revenue was 31,3bn rubles. The enterprise’s fixed assets rose by 1,6%, to 50,6bn rubles, the amount of the working capital did by 48,7%, or 3,9bn rubles.
“Despite general positive results during the first half of the year, the difficult situation in the market influenced key indicators. So the enterprise demonstrated revenue that’s lower than last year’s numbers by 22,2%, while net profit is lower by 48,6%. The first half of the year turned out an uneasy period for all companies from related sectors. The year began with abnormally lower oil prices and price for feedstock products correlating with it. This inevitably brought to a fall in world prices and polymers. After the OPEC deal, feedstock prices skyrocketed. As a consequence, there was a catastrophic feedstock deficit for petrochemistry. This was especially plain to see in Russia,” Kazanorgsintez PJSC commented on the financial performance.
The company also included consequences of the coronavirus pandemic to negative factors that influenced the general decline in the market. Quarantine measures around the world limited polymer producers and refiners’ possibility of correlating prices in line with prices for oil, oil products and LHG. “In the end, the world plastic industry turned out in a situation of temporary reverse correlation with feedstock. In these conditions, most producers seriously decreased capacities. Kazanorgsintez managed to go through this period with the highest load of capacities without stopping and reducing the production,” KOS claimed.
However, positive dynamics appeared in July. Demand revived, world polymer rates began to rise with the cancellation of restrictions. The situation in the sector is normalising. The company is forecasting a calm stable activity till the end of the year in the case of absence of any new shocks in the market.
As of 30 June 2020, the enterprise’s assets increased by 6% compared to last year and by 4% compared to the first quarter of the year — to 74,9bn rubles. Other incomes rose from 376 million to 1,2 billion rubles (+67%).
“Kazanorgsintez’s production output rose by 1,7% during the first half of the year. It is quite a good result. Petrochemistry in Tatarstan in general reduced the production by 6%, mainly in synthetic rubbers. Plastic production was relatively good, which played into Kazanorgsintez’s hands,” thinks Director of ACRA corporate rating agency Vasily Tanurkov.
“The prime cost of sales insignificantly reduced, which means that Kazanorgsintez has unlikely reduced volumes. Revenue seemed to go down because the price decreased because thermoplastic price reduced by about 20% compared to the last year. Though profit went down, it is in a positive zone, and the market of thermoplastic anyway grows. I think no company will get close to last year’s indicators this year, but there won’t be a catastrophic fall,” said Aleksey Kalachev, expert and analyst from Finam JSC.
July’s positive dynamics
Russian chemical enterprises as well as Kazanorgsintez demonstrated an 84% rise in low-density polyethylene (LDPE) production to 892,800 tonnes. Only TAIF’s company produced a third of this amount — 271,100 tonnes of products. Moreover, average prices of Russian LDPE and HDPE reduced by 28,0% and 12,9% compared to the first half in 2019. So prices for LDPE reduced from 104,300 rubles per tonne to 75,000 rubles, prices for HDPE shrank from 93,600 rubles per tonne to 81,500 rubles per tonne.
“Conversion of domestic ruble prices into US dollars shows a bigger reduction — by 31,7% and 18,0% respectively because rubles prices for LDPE and HDPE reduced amid a weak ruble. A considerable share of LDPE and HDPE made in Russia is exported, this is why the prices mainly depend on the situation in world markets and the ruble rate’s dynamics. The current prices have hit a multi-year low. For instance, average annual prices of LDPE producers were higher in dollars than the current prices for 16 years (more than twice higher during some years): from 2004 to 2019,” noted Aleksandr Shurakov, director of NCR group of corporate ratings.
According to the expert, surplus demand puts pressure on prices, including because of the growth of production capacities around the world in general. Recovery of the global economic dynamics after the COVID-19 pandemic is the main condition of the growth of polymer prices. But even though most countries are getting out of quarantine, demand recovery will be slow enough and can take 1,5-2 years, Shurakov warns.
In any case, a recovery of prices in the world market began in July, and the ruble’s dynamics remain positive for petrochemistry as well, other specialists noted. This is why “we can expect better indicators during the second half of the year”:
“Everything will depend on the dynamics of prices and demand. The situation so far began to improve in July, dollar prices started to grow, demand grew. Prices in Russia now are lower than in China, for example, which is good in general because the Russian market was premium for long, and now there is an opportunity for profitable exports and a rise in export volumes. Russian petrochemistry remains extremely competitive, probably there won’t be any significant reconsideration of investment programmes in petrochemistry because of the current crisis. Moreover, we should take into account that the investment cycle in the sector is long enough, this is why the projects that began to be implemented before the crisis will be completed in any case,” Vasily Tanurkov is convinced.
“The current expectations are more optimistic than those in April”
Market experts are still making cautious forecasts for the sector’s recovery. However, they don’t expect a dramatic worsening in the world economy, also because of a possible second wave of the coronavirus, as the countries are gradually adapting to the pandemic’s conditions.
“By our estimates, the current expectations are more optimistic than those in April when some Russian petrochemical enterprises considered an option of a shorter working week. ‘Short-term manoeuvres’ during a crisis are rather an expansion of the nomenclature of products that allow using the existing capacities, looking for new outlets, providing customers with more favourable terms (for payment, shipping) compared to rivals and optimising the chain of pricing, including via digital business transformation,” thinks Aleksandr Shurakov.
Russia’s chemical sector in general handles the current crisis better than other sectors, specialists note. Rubber producers and the tyre industry are the only exception. As for polymer production, the country had significant growth in production of not only polyethylene but also polypropylene, by almost a third.
“It is clear that this was caused by the launch of Zapsibneftekhim’s factory in Tobolsk, and anyway all these products don’t simply go to warehouses. Though prices for some polymers did reduce, they are still in demand. For instance, demand from the food industry increased because more packaging was needed; and from the medical industry to provide the increased demand for means of protection: masks, gloves and so on,” noted expert and analyst of Finam JSC Aleksey Kochetkov.
The pandemic provided certain support to polymer markets, other specialists confirm as well: demand for single-use goods rose. Moreover, some countries postponed the imposition of bans or restrictions on the use of plastic single-use goods, which has a positive influence on demand.
Given all the factors, Russia’s chemical industry hasn’t shown the worst result in the first half of the year. Companies with a big tax burden that launched new projects with foreign equipment had a problem, the reevaluation of the ruble could be negative. “The market has a reduction in general, of course, but it is smaller than the one the petrochemists have. The chemical industry certainly doesn’t have catastrophic consequences of the pandemic during the first half of the year,” Kalachev added.
The competition in the world’s polymer market is still stiff enough. Oil and gas producing countries are actively developing production capacities, they are also trying to diversify the use of hydrocarbons. To withstand the competition, it isn’t enough for Russian companies to augment production, it is necessary to provide the effectiveness of the whole chain of the creation of the value of Russian polymers for the end consumer, experts say. What’s more, Russian petrochemists are waiting for support from the government to impose duties to protect the domestic market from the competition with foreign players, which would allow increasing consumption of Russian polymers in the domestic market.