Global industrial production: perfect storm in 2020 and cautious outlooks for 2021

Trade wars, fall in investments and risk of “overheated” market of large-tonnage petrochemistry

The second wave of the world crisis, moreover, precisely in 2020-2021, was foretold by experts for a long time. At a board meeting of Tatneftekhiminvest-holding in early 2019, its unchangeable head Rafinat Yarullin stressed it too.

He noted growing geopolitical tensions, a trade war between the USA and China, which continued gaining momentum, and higher competition in the world market of chemicals where one of the most promising outlets China is actively putting effort to switch to complete independence of exports of basic chemicals and polymers.

Other experts of different levels also noted alarming signs of a world crisis on its way. Besides the development of the already above-mentioned trade wars between the USA and China, foreign experts mentioned an expected slowdown in the growth pace of the world’s GDP as well as blowing financial bubbles at large stock exchanges as one of the most obvious features. American economist and investment banker James Rickards warned that the ongoing rapid rise in the US economy was fraught with an exchange collapse whose scale was comparable with the Great Depression in the 1930s, and mankind couldn’t escape a long recession then.

Ultimately, financial analysts indicated that the 12-year cycle since the last crisis (in 2008) expired precisely in 2020. “Any crisis has its own underlying logic of development. Causality in economics is surprisingly diverse and complex, while the outcome is, as a rule, unpredictable. At the same time, there are crucial indicators that were examined multiple times that are impossible to ignore. For instance, the profitability of short-term treasury bonds in the USA has exceeded the yield of long-term ones in the last months. This moment transpired several times in the 20^th and 21^st centuries and almost in all cases anticipated recession. GDP began to fall as few as six months and as many as 20 months after this herald,” Banki.24 cited Professor of the Plekhanov Russian University of Economics, ex-Minister of Economy of Russia Andrey Nechayev.

In expectation of a crisis, the world’s large investors preferred to accumulate capital without investing in new projects, which again didn’t positively impact large-scale plans for the development of industrial production around the world.

Nevertheless, a fall in demand and prices for energy resources in the Russian domestic market made big companies look for additional profitability in gas and petrochemistry.

The segment of polymers where polypropylene and polyethylene consumption alone in the total annual volume, which is estimated at around 210 million tonnes globally, rose by 4% (around 8 million tonnes) every year is the main driver of the petrochemical sector. Despite being provided with its own feedstock and workforce, Russia’s representation in the market is modest: just 2% of the world’s polypropylene production, about 1,5% of polypropylene.

Already implemented and ongoing large projects are designed to reinforce Russia’s positions thanks to import substitution in its own gas and petrochemical market and around the world: in late May 2019, SIBUR holding completed the construction of ZapSibNeftekhim facility. The installed capacity is approximately 500,000 tonnes of propylene and 1,5 million tonnes of polyethylene of different brands.

Amur Gas Chemical Complex is another project of the holding. When its construction is over (the launch is scheduled after 2024), the complex will provide the market with about 3 million tonnes of polyethylene. Gazprom is erecting its Novy Urengoy Gas Chemical Complex with a capacity of 400,000 tonnes of polypropylene.

In March 2019, Gazprom and Artyom Obolensky’s RusGazDobycha also announced the construction of a big gas chemical complex in Ust-Luga that plans to process up to 45 billion cubic metres of gas, produce 13 million tonnes of LNG, over 2,2 million tonnes of LPG and nearly 4 million tonnes of ethane. The feedstock is supposed to be sent to another project of RusGazDobycha — Baltic Chemical Complex with a total polymer capacity of 3 million tonnes.

Irkutsk Oil planned to launch a Ust-Kut gas processing plant with a polymer, primarily polyethylene, capacity of 650,000 tonnes in 2023. Another industrial mogul — LUKOIL — has recently claimed it is looking for opportunities to process high-quality feedstock into polymers. Particularly, it was said about the possible construction of a plant processing up to a million tonnes of polyethylene and 500,000 tonnes of polypropylene in the operating gas processing plant in Perm.

The Russian polyethylene market has been profitable for several years already — after the reconstruction of polyethylene capacities at Kazanorgsintez (in 2007) with a threefold expansion of capacities and the launch of polyethylene production at Nizhnekamskneftekhim. Most polyethylene produced in Russia was exported. As for imports, only special small-tonnage polyethylene brands were brought. At the same time, there were noted growing competition and falling prices.

In an interview with RBC+ in October 2019, head of RUPEC information and analytic centre Andrey Kostin noted some danger of such active development of the Russian gas and petrochemical sector in quite a narrow segment of products: “Since ZapSibneftekhim will meet the rest of domestic needs for basic polymers, all other projects in this sphere launched after 2021 will have to consider exports, at least unless domestic processing develops and demand inside Russia grows,” he stressed.

In combination with a slowdown in the world economy, a progressive decline in the car market, related industrial sectors and many others as well as tighter environmental norms and the trend for the so-called carbon footprint reduction, which is gaining speed, all this promised tough times to industrial production.

Global decrease in industrial production exceeded experts’ expectations

After a long recession of economies in the world’s countries with the biggest GDP, the crisis in 2020 indeed came. But not the enumerated factors but the outbreak of the novel coronavirus infection no expert expected and therefore considered turned out to be the black swan of the global economy. States closed borders and restricted traffic between cities and regions one by one, people self-isolated, production stalled.

At Coface Country Risk Conference 2020 conference, which took place in Paris in February, Coface experts predicted that 2020 would be especially tough for metallurgy, the automotive industry, textiles and the pulp and paper industry everywhere. However, considering how closely manufacturing sectors are linked with each other, it became clear that the crisis might be deeper than it had been expected.

Metallurgy turned out at the heart of the trade war between the USA and China. Difficulties in the world’s automotive engineering consecutively impacted both metallurgy and the chemical industry. The fewer cars are made and sold, the lower the demand for chemicals, plastics, synthetic rubbers is. And this happened amid a forced fall in prices for some gas and petrochemical products because of constantly growing competition, in particular for ethylene and its derivatives, which means profit dropped.

The Coface experts also forecasted a decrease in profit from oil production and the oil processing sector. Against this backdrop, the situation was predicted to worsen for transport too. Again, this promised other negativity to both the automotive industry and oil processing — demand for motor and jet fuel, fuel oil went down.

No critical collapse

However, it turned out, that experts were wrong about many issues, at times, they underestimated threats to industrial production whilst sometimes they, in contrast, exaggerated. So Interfax cited reports of 2019 according to International Accounting Standards and noted that companies of TAIF Group — Kazanorgsintez PJSC and Nizhnekamskneftekhim PJSC — acknowledging some negativity from lower demand and prices for oil, high competition in the polymer market where the launch of new capacities outstrip the growth of polymer processing plants as well as a fall in incomes because of the pandemic emphasise that a wide range of products popular among global and Russian markets, a flexible production scheme in both feedstock and assortment allow TAIF Group to feel quite confident in the current situation remaining one of the leaders in its segments, without refusing and slowing down the fulfilment of plans for further consolidation of positions adopted by a development strategy through 2030.

In May, head of the Russian Ministry of Economic Development Maxim Reshetnikov announced the country’s outlook for socio-economic development. He noted that not a sudden fall and the same sudden rebound from the bottom but rather a U-shaped recovery awaited Russia. “In the second quarter, the economy will have to experience the toughest times. It will reduce by 9,5% at once but then start to recover. The Ministry of Economic Development expects a clearer recovery in the 4^th quarter. Throughout 2020, the economy will decrease by 5%, but there will already be a rebound in 2021 and GDP will rise by 2,8%,” Maxim Reshetnikov claimed.

He also noted that the economy is expected to grow in 2022-2023 with an acceleration of up to 3% and 3,1% respectively. The outlook also stressed that Russia’s exports in 2020, the outlook reads, are meant to shrink by more than 1,5 times, from $419 billion to $268 billion. And this indicator shouldn’t be expected to recover at least to a pre-crisis level earlier than 2023.

In 2020, a consensus outlook of some of the world’s leading energy agencies, consultancies and investment banks promised a fall in the world’s liquid hydrocarbon consumption by 8-12%, a decrease in investments in the oil production sector by 30-35% and a decline in global GDP by 5-6%. Moreover, the processes will stretch into 2021 too where demand won’t run into numbers of the pre-crisis 2019 either.

According to the forecast, global motor fuel consumption is due to recover the fastest in the U-shaped curve. Slower processes and a U-shaped recovery awaited diesel fuel consumption. But this is related not only to crises but also to a gradual downward trend for lightweight diesel transport in European countries. Experts predicted long L-shaped recovery dynamics, which meets tendencies of early 2021, air travel is far from returning to previous intensity, for air travel and, consequently, jet fuel consumption.

Experts think that mazut consumed by the industry, power engineering and used by water transport will see processes that are similar with the diesel sector: a U-shaped trajectory of recovery will be seriously hampered, as IMO 2020 requirements forbidding the application of high-sulphur brands of this type of fuel for maritime transportation came into force.

The industry’s analysts consider that demand for petroleum products won’t catch up with supply. Moreover, it will be even below 1-2 million barrels per day in 2021 than in 2019. Growth of competition can provoke another fall in prices and a greater decrease in price spreads between the price of petroleum and petroleum products.

There is much more optimism in the recovery of demand for naphtha and LPG. The pandemic didn’t manage to severely damage petrochemistry using these petroleum products as feedstock. The reduction in oil price that made the price and its derivates decrease was a bit equalised by a rise in demand for feedstock to produce disposable packaging, dishware and protective equipment.

Precisely petrochemistry, which accounts today for 14% of the world’s oil production of which almost a third (250 million tonnes) is polymers, is given the role of the main driver in the consumption of petroleum and petroleum products globally in the long term. In 2020-2030, the sector promises an about 2% annual rise in demand. A global trend for a shift of focus of oil and gas companies to the petrochemical sector where some of them either already implement or plan large investment projects is linked with this too. This, in turn, poses some threat to the market, namely, excessive capacities. Analysts note that mid-term plans for new capacities significantly exceed the growth pace of demand for petrochemistry’s products, which can lead to a reduction of the average load of existing and launched capacities.

In an interview with Interfax, President of the Russian Chemists’ Union Viktor Ivanov made his forecast for petrochemical products during the pandemic and after it: “I will note logical growth of key monomers — ethylene and propylene. Demand for them will likely go up or remain at their previous level. We can observe relative stability in other basic petrochemicals too.”

Nonetheless, some Russian oil companies evaluated the seriousness of the economic situation and started to correct their investment programmes, including in petrochemistry, and put inessential projects on hold. Due to this, timely support for Russian petrochemistry was received from the state — in the form of reverse excises on ethane and LPG, which should become a powerful driver stimulating investment activity and development of the sector.

“It is necessary to constantly amend plans and monitor the situation,” head of the Russian Chemists’ Union Ivanov is convinced. “Also, optimisation is necessary at state level and in petrochemical enterprises by focusing on domestic consumption. Investment projects to strengthen the epidemiological and food security of Russia should become a good tone for petrochemical enterprises.”

The federal authorities agree with such an approach too. At the height of the coronacrisis in April, a Russian energy strategy through 2035 was approved and adopted by the Russian government’s decree No. 1523-r as of 9 June 2020. Not reconsidering key objectives of the sector that were made public as early as December 2019, the document envisages that the consumption of the share of imports of large-tonnage polymers will reduce by 20% by 2024 and by 15% by 2035 against 23% of total consumption as of 2018. And it is planned to increase the amount of feedstock (LPG, ethane, naphtha), which is processed into gas and petrochemicals, from 23,1% (in 2018) to 30% by 2024 and to 35% by 2035. The strategy implies that new capacities will be created and already existing plants in Russia will be modernised.

President of Russia Vladimir Putin said what should be paid attention in developing the sectors at a meeting on the strategic development of the gas and petrochemical sector in Tobolsk in December 2020. “It is necessary to promote Russian petrochemicals inside the country more actively, increase efficiency and production volumes. For this purpose, the sector must implement large-scale projects with a total amount of investments of 5 trillion rubles,” he stressed in his speech and reminded the audience that 14 large projects were already implemented or ready to be implemented in the country.

One of the major accents in the development of the sector should be put on the production of small- and medium-tonnage petrochemistry, Vladimir Putin noted: “It is necessary to prepare a set of measures to develop the production of small- and medium-tonnage chemicals in Russia until 2030. It is necessary to increase the production of such commodities by 70% compared to this year’s numbers.”

The president is sure that this area has a comprehensive influence on the development of commodity chains and has a wide multiplier effect. At the same time, Russia’s own production is not enough: “Of course, domestic demand considerably surpasses what we make now and is covered by imports. The dependence on foreign suppliers in some products reaches a hundred per cent. It is necessary to change such a situation,” the Russian president especially emphasised.

TAIF Group: Development Strategy’s implementation

“This isn’t our first crisis, we have always found solutions. The most important thing is to save the existing plants, staff, specialists and keep developing the investment projects of TAIF Group of Companies, which have a strategically important meaning not only for the economy of the Republic of Tatarstan but also for the Russian Federation,” Rustam Minnikhanov who participated in a board meeting of TAIF GC in July 2020 stressed.

Despite unfavourable economic conditions, a fall in the price for products and a temporary decrease in demand for it, TAIF Group held positions in key markets and actively joined the work designed to halt the spread of the novel coronavirus infection. A subsidiary of Nizhnekamskneftekhim PJSC — Polymatiz (one of Russia’s largest non-woven fabric producers) increased the output of fabric to make masks and protective suits for doctors many times. Feedstock for the production was supplied and is still supplied by Nizhnekamskneftekhim PJSC. With the help of Group’s management and the government of the Republic of Tatarstan, it became possible to purchase an automated line to manufacture medical masks and launch it in record time.

Nizhnekamskneftekhim itself developed an antiseptic and received state authorisation granting the right to use it as a disinfectant. Industrial production of another deficient commodity during the pandemic was set up. Capacities of the testing and industrial shop alone at Nizhnekamskneftekhim PJSC allow providing the production of 280 tonnes of the antiseptic a month.

Amid the economic decline, a sudden decrease of demand, a reduction of production volumes and shutdowns of tens of enterprises that consumers of gas and petrochemical products around the world, TAIF Group didn’t refuse to implement the projects included in the Development Strategy from 2015 to 2030, which are worth 2 trillion rubles.

The construction of a new EP-600 ethylene complex goes on according to schedule. It will process 1,8 million tonnes of straight-run petrol a year, besides 600,000 tonnes of ethylene, receive 273,000 tonnes of propylene, nearly 250,000 tonnes of benzene, 88,000 tonnes of butadiene, 64,000 tonnes of butylenes-isobutylene fraction, 65,000 tonnes of C5 fraction and 17,000 tonnes of C9 fraction, 93,000 tonnes of pyrolysis tar a year and more than 300,000 tonnes of methane-hydrogen fraction for its own needs as fuel gas. It is the biggest and yet the only complex in Russia’s contemporary history to process petroleum feedstock. With the launch of this facility, the total amount of processed petroleum products made from crude oil and that are high-quality feedstock for petrochemicals at Nizhnekamskneftekhim will be over 3,5 million tonnes a year.

Such grand facilities weren’t built even during the best years of the USSR’s active industrialisation. A considerable ramp-up of output and scheduled production of new commodities will help not only develop Nizhnekamskneftekhim PJSC and TAIF Group but also serve the city, the district, the republic and the country in general well. The olefin complex is a considerable rise in taxes and payments to all budget levels, the creation of more than 600 new jobs with a decent salary, creation of new infrastructure, including roads (highways, railways, bridges), a new impulse for housing development and creation of social infrastructural facilities. Also, it will become a driver of the appearance and development of numerous plants making end products in Tatarstan and Russia in general, which will use polymers manufactured in the new complex. This totally complies with the import substitution programme implemented at federal level.

“After the programme is implemented, Nizhnekamskneftekhim will become one of the largest petrochemical companies and one of the few, I think the only enterprise in the world, to make such an amount of polymers: around 3,5 million tonnes a year will be produced. And the peculiarity of the complex will be the fact that it will process high-quality feedstock made of crude oil,” TAIF JSC Board Chairman, Senior Adviser to TAIF Group’s director general Albert Shigabutdinov noted during his business trip to Nizhnekamsk in February 2021.

In late 2020, Nizhnekamskneftekhim PJSC started commissioning and start-up works in a fifth-generation (solution-polymerised styrene-butadiene rubber) divinyl styrene synthetic rubber (SBR) plant with a capacity of 60,000 tonnes a year. Special characteristics of the new product of Nizhnekamskneftekhim PJSC provide better road grip, thus enhancing the car’s safety. The tyres made of SBR are frost- and wear-resistant, allow saving fuel, as they have low rolling resistance, thanks to which petrol consumption decreases and the car’s eco-friendliness augments.

“A lot of tyre companies have already tested our rubber and gave it the highest evaluation. The market is waiting, and we will give the market this product,” Director General of Nizhnekamskneftekhim Ayrat Safin told Realnoe Vremya’s correspondent in an interview at Tatarstan Gas and Petrochemical Forum, which was in Kazan in September 2020.

To provide the projects that were already implemented, are implemented and scheduled to be implemented at Nizhnekamskneftekhim PJSC and TAIF-NK JSC with natural gas, stable and reliable operation of the Nizhnekamsk CHPP as well as projects of Tatneft PJSC at TANECO and Nizhnekamsk CHPP, growing needs of the Nizhnekamsk population, more gas is required.

During the solemn launching ceremony of a new high-pressure pipeline Gas Distribution Station No. 2 Yelabuga (Central) — Nizhnekamskneftekhim PJSC, which took place in September 2020 with Tatarstan President Rustam Minnikhanov and the management of TAIF Group, it was noted that if the gas pipeline weren’t built, the Nizhnekamsk Industrial Hub’s unmet demand for natural gas as fuel could be billions of cubic metres a year. It would jeopardise not only prospects of the region’s development but also the performance of all operating facilities. The administration of the Republic of Tatarstan together with Gazprom PJSC made the only correct decision to build gas distribution stations with the effort and money of TAIF Group.

Additionally, to provide new plants with the necessary amount of electrical energy and to reduce the environmental impact, a 495 MW gas turbine is built at Nizhnekamskneftekhim PJSC and a 284 MW turbine at Kazanorgsintez PJSC.

In 2020, Kazanorgsintez PJSC successfully finished construction and assembly works in the second stage of modernisation of the first and only polycarbonate plant in Russia, CIS and Eastern European countries. After the modernisation is totally over, the capacity of polycarbonate production will reach 100,000 tonnes a year, up from an installed capacity of 65,000 tonnes a year.

Kazanorgsintez is ready to increase the amount of ethane processing to 3 million tonnes a year. An agreement between the Tatarstan government, Gazprom, SIBUR and TAIF on a project of monetisation of wet gases was signed as early as 2016. The gas processing plant will process up to 28 billion cubic metres of natural gas a year and make 2,2 million tonnes of ethane and around a million tonnes of LPG. This quantity can completely cover the needs of the republic’s enterprises for gas feedstock.

Also, Kazanorgsintez continues implementing a project on the construction of a new high-density polyethylene plant with the possibility of making ethylene-vinyl acetate. The installed capacity of the new production is 100,000 tonnes a year. It is also planned to modernise the reactor of the operating low-density polyethylene plant by increasing the capacity by 175,000 tonnes a year.

Recovery promises to be long

According to the UN’s World Economic Situation and Prospects 2021 report whose presentation was in Moscow on 2 February, the general fall in the world economy in 2020 was 4,3%. It is noted to be the most sudden reduction in world production since the Great Depression in the 1930s. To compare, the financial crisis in 2009 led to a decrease in world GDP by just 1,7%. The economic crisis severely hit mostly states with a developed economy where GDP went down by 5,6% and even more. China is the only G20 country that managed to reach positive indicators (2,1%). But its growth turned out to be the lowest since the era of Mao Zedong.

Total losses of the global economy are measured in trillions of dollars, both direct losses and states’ costs to help the population and the most affected sectors.

By the UN’s estimates, prospects for 2021 are positive. The world economy is expected to grow by around 4,7% (experts of the International Monetary Fund think the world’s GDP can rise by 5,5%). However, this isn’t so encouraging. It is noted that such a rise hardly covers the losses in 2020. Moreover, a recovery of the world’s economies will be exceedingly uneven. Most states will smooth the consequences of the crisis both in 2022 and 2023. These processes in some of the countries will take much more time.

As for the Russian economy, its decline in 2020 turned out to be a bit less dramatic than the Russian Ministry of Economic Development had foreseen in May. It should be reminded that the head of the ministry assumed in May that the fall would total 5%, while in fact, according to the Russian Federal Statistics Service, the first decrease of the country’s industrial production amounted to 2,9% for the first time in 11 years. Nevertheless, amid the coronavirus pandemic, some Russian sectors demonstrated growth in 2020, particularly textiles (+8,9%), the chemical industry (+7,2%), the production of rubber and plastic goods (+ 3,2%).

In general the industrial production is expected to conserve the negative dynamics throughout the first quarter of 2021. The reasons are the persisting uncertainty about the COVID-19 pandemic’s further development, a fall in domestic demand and exports. Gradual growth is forecasted from the second quarter, and the Russian government thinks that 2021 will end with a 2,6% rise (the International Monetary Fund forecasts 3%), 2022 will show positive dynamics of 3,6%. Then the growth will slow down a bit and reach some 2,3% in 2023.

The black swan of the world economy has its drawbacks. Nonetheless, it played a positive role too to a certain degree by forcing Russia to have a different look at global industrial processes and evaluate its place and role in them and, consequently, to set priorities in a new way focusing on increasing its own industrial potential, applying as much effort and money as possible to implement new and develop current projects aimed to lay the foundation for the Russian economy’s growth for years to come.