Aleksey Kalachev: ‘Petrochemists should refocus on the countries of Southeast Asia’

Finam analyst warns that the world and Russia will face a structural deficit, rising prices and falling incomes if business relations are not resumed

Aleksey Kalachev: ‘Petrochemists should refocus on the countries of Southeast Asia’
Photo: Rinat Nazmetdinov

What awaits Russian petrochemists in the conditions of a logistical failure, forced decline in production, and the consequences of sanctions against our country? Although the external restrictions were not aimed directly against the petrochemical sector, they have had an impact on domestic companies, said Aleksey Kalachev, analyst at Finam. In the author's column for Realnoe Vremya, the expert writes about which shares of Russian manufacturers, the least exposed to sanctions risks, are now attracting investors. He also discusses who will have the hardest time — the world market without Russian raw materials or our producers in conditions of restrictions.

Risks of imposing sanctions against fertiliser producers are negligible

Restrictive measures have not yet been introduced directly against the petrochemical sector of Russia, but companies have already felt the indirect impact of sanctions. In particular, this was caused by logistical problems, the blacklisting of Russian banks, problems with settlements in foreign currency, and the introduction of personal sanctions against top managers.

However, there are industries that are less exposed to risks: for example, producers of nitrogen fertilisers. Since the fertiliser market is critically important for global agriculture (for example, the US Treasury has recently added fertilisers to the list of essential goods), the risks of introducing restrictive measures against Russian companies are negligible. Moreover, the industry will support the increased demand for fertilisers, as well as their high price against the background of rising gas and electricity prices.

Against this background, investors are considering the shares of the largest Russian fertiliser producers (in particular, PhosAgro, Acron and KuibyshevAzot) as the most reliable securities with the lowest level of sanctions risks. However, there are nuances here too — it should be borne in mind that our fertiliser producers cannot take full advantage of the favourable global market conditions.

“Commodity prices are not static, reducing the profitability of producers”

The indirect impact of sanctions against the financial sector and logistics problems can be quite long-lasting. For example, although there was no ban on the supply of Russian products from Western partners, in early March the Russian Ministry of Industry and Trade recommended manufacturers to suspend the export shipment of fertilisers. The thing is that a number of the largest container carriers (including Maersk, Mediterranean Shipping Company) officially announced their refusal to work with Russian cargo, which led to problems with logistics. It should be noted here that the share of Russian supplies in the European market ranged from 40% to 60% and, it would seem, dependence on them could play a role.

Under the conditions of sanctions pressure, the authorities are trying to protect the domestic market from the influence of external prices — in particular, attempts are being made to freeze or otherwise limit selling prices.

However, commodity prices are not static, reducing the profitability of producers. For example, SIBUR requested the government to limit the prices of raw materials after the freezing of product prices. SIBUR uses associated petroleum gas (APG), natural gas liquids (NGLs), liquefied petroleum gases (LPG) and naphtha as raw materials.

NOVATEK, one of the largest suppliers of raw hydrocarbons for petrochemistry, in turn, is asking the government to reduce the mineral extraction tax on oil and condensate as an anti-crisis measure that would help to keep commodity prices. At the same time, we all know with what reluctance the Ministry of Finance goes to any tax reduction if it does not see how they can replace the falling budget revenues.

Domestic market is not sufficiently capacious for petrochemical companies. Photo: Roman Khasaev

Сourse for the countries of Southeast Asia

In general, for petrochemists focused mainly on exports, its reduction, no matter from whose side it is initiated, means a decrease in sales and, probably, a reduction in production. The domestic market is not sufficiently capacious for petrochemical companies, therefore, as an alternative, they will have to reorient themselves to China, India, Vietnam and other Southeast Asian countries.

However, such task will be faced not only by petrochemists, but also by metallurgists, and the entire commodity sector, so competition for access to transport infrastructure that is not sufficiently developed in this direction will be high. Thus, transportation costs will increase, and buyers in Southeast Asia will demand discounts.

We will see how much the situation will affect the financial situation of companies in about six months, when they publish results for the second quarter and half a year. It may take about the same amount of time to make sure who will have a harder time — the world market without Russian raw materials or our producers under restrictions. The best option for everyone would be to eliminate the causes of the aggravation of relations before that time and return to resuming business relations. Otherwise, both Russia and the world will face a structural deficit, rising prices and falling incomes.

Aleksey Kalachev

The author's opinion may not coincide with the position of the editorial board of Realnoe Vremya.