Second wave and falling prices: how Kazanorgsintez coping with market conditions

The end of the year 2020 will be remembered for the “second wave” of the pandemic, which complicates the already difficult situation for most industries. Nevertheless, the consequences of the coronavirus are not so critical for the chemical industry — the demand for some plastics has increased, especially for the products of Russian factories. For example, Kazanorgsintez, the domestic manufacturer of ethylene polymers and copolymers, has increased the volume of sales of polycarbonates. Revenue from their sales has increased by 22,6% compared to the nine months of last year. However, the market conditions have still affected the performance of the company, which submitted a quarterly report.

The effects of the market on Kazanorgsintez performance

The current state of the polyethylene market is having the greatest impact on the work of Kazanorgsintez. HDPE is one of the main products that the company produces. Currently, the total capacity of Russian polyethylene producers is 1,9 million tonnes a year, with the level of HDPE consumption of 1,1 million tonnes. These capacities make it possible to cover the demand of the domestic polyethylene market and encourage enterprises to sell their products abroad.

At the same time, experts of Market Report analytical agency, predict that by 2030 new production facilities for the production of polyethylene will be launched and the domestic market will become even more surplus. The pandemic made its own adjustments to the plans for exporting products — Russian companies faced restrictive measures, which affected revenue. Prices for several types of goods fell at once: ethylene, ethane, propane-butan fractions, benzene, and ethylene oxide.

“At the peak of restrictions, manufacturers faced difficulties in shipments to foreign markets due to logistics problems: a shortage of containers, reduced availability of trucks, increased delivery time due to delays at borders and ports, interruptions or stoppages of domestic logistics in certain countries and regions. The cost of freight during the peak of the pandemic increased dramatically (in some areas, it doubled). This also had a negative impact on the companies' financial results in the first half of 2020," Anna Volkova, leading expert at the HSE Development Centre and author of a study on the large-capacity polymer market, told Realnoe Vremya.

Despite this, Kazanorgsintez managed to reach a net profit of 6,5 billion rubles in the first nine months of 2020. Net working capital amounted to 10,8 billion rubles — this indicator is considered one of the important indicators of financial stability, demonstrating how much working capital will remain at the disposal of the company after settlement of short-term obligations.

Kazanorgsintez has no overdue loans and credits. Also, one of the largest domestic producers of ethylene polymers and copolymers has no debts for wages or taxes. At the same time, the number of employees at Kazanorgsintez didn't decrease in the first nine months of the year.

The situation on the domestic market of polymers

While the volume of domestic polymers was declining due to difficult market conditions, Kazanorgsintez increased the sales of polycarbonates. They are used in mechanical engineering, radio, light, electrical engineering, construction, in the production of optical products and for the manufacture of products in contact with food and drinking water. The volume of revenue from their sale increased by 22,6% and reached 7,8 billion rubles.

In general, in the first 8 months of this year, the output of chemical products in Russia increased by more than 6% in comparison with 2019. According to Anna Volkova, leading expert at the HSE Development Centre, this is due to the growing demand for groups of disinfection products. Polymer production has also remained a key driver of growth.

“As restrictions were lifted in Russia and in the world, polymer production grew. In the first 9 months of 2020, the production of propylene polymers increased by 21% year-on-year, and ethylene polymers — by more than 50%. Maintaining high production rates in the polymer industry of Russia was due to that, unlike many foreign factories, Russian companies were not quarantined. More important, however, is the fact that, in contrast to a critical drop in demand for most product groups, the demand for polymers was supported by manufacturers of plastic packaging, medical devices, and nonwovens for personal protective equipment (PPE). Moreover, at the very beginning of the pandemic, there was a rush demand for polymers on the Russian market, caused by the fears of possible price increases due to the fall in the ruble exchange rate and forced self-isolation, the expert said.

Consequences of the pandemic

According to Anna Volkova, some segments of the polymer market have been severely affected by the restrictive measures introduced as part of the fight against the pandemic. Construction stops, critical situation in the automotive industry, and a drop in sales of consumer goods led to a sharp decline in demand for polymers. The market of PVC and ABS plastics suffered the most. In April, a drop in demand for other plastics became apparent, which was not compensated by the packaging and medical devices market.

This situation is partly due to the weakening of the effect of “panic purchases” of the beginning of the pandemic — due to uncertainty, both the population and processors sought to buy for the future. Then the rush subsided. As a result, the expert of the Higher School of Economics believes that there is a serious risk that after the restrictions are lifted, the market will recover at a very slow pace. To a large extent, the pace of recovery depends on state support and the number of consumers and processors from small and medium-sized businesses that have escaped bankruptcy.

“We can conclude that the market of large-capacity polymers in 2020 faced a full-scale crisis, as well as many other industries. At the same time, the impact of the pandemic on the polymer industry was less dramatic than in other sectors, as plastics are crucial to meet the needs for essential goods and medical supplies. However, at the same time, there are difficulties in the market that arose even before the COVID-19 crisis and are associated with an imbalance of supply and demand in the global market. The fall in oil prices changed the balance of power in the market, reducing the competitiveness of American products (“shale” raw materials) and Chinese products (coal). However, this effect can be considered as temporary, and it is offset by a global decline in demand. In the conditions of tough global competition, it is necessary to systematically develop demand in the domestic market and stimulate the qualitative growth of polymer production," says Anna Volkova, specialist at the HSE Development Centre.

By Alsu Gusmanova