Pavel Lyakhovich, SIBUR Management Board member: Russia has a great polymer processing potential

Pavel Lyakhovich
member of the Management Board and SIBUR's Executive Director

The energy crisis and competition from China’s new facilities has led to a decline in polymer production and processing at ageing petrochemical plants in Europe, with Russia having a great processing development potential amid growing domestic demand for polymers.

Pavel Lyakhovich, member of the Management Board and Managing Director of SIBUR told us about to-be implemented investment projects of Russia’s largest petrochemical holding company.

Is the global polymer consumption expanding? What is its growth potential?

The consumption is expanding, though not that fast as in the previous years. In 2020 and 2021, despite pandemic headwinds, we still saw growth – not 4% per year as previously, but still some growth. At the same time, 2020 and 2021 saw an increase in demand in certain segments, such as medicine and packaging, while consumption went down in construction and automotive sectors.

To the contrary, in 2022 and 2023 segments related to automotive industry started to pick up, while in medicine, the demand fell. In general, this results in a steady growth but not as much as it was in previous periods. I believe that in 2024, we will not see a turning point, but rather a slightly more positive consumption growth.

What about the global production and profitability of the industry?

Since 2017, new capacities have been actively entering the market, but production has been growing at a slower pace. Overall, about 80% of the world's polymer production capacity is utilised. The current global production capacity for high-density polyethylene (HDPE) is 65.2 mt with a consumption of 53.4 mt, for low-density polyethylene (LDPE) it is 24.4 mt with a consumption of 20.6 mt, and for polypropylene (PP) it is 108.3 mt with a consumption of 87 mt. Traditionally, the largest polymer consumers have been the film segment (over 40%), cast products (over 20%), and raffia and fibre segment (around 20%).

Demand is now also adversely affected by the general deterioration of the macro environment and inflation. Experts expect continued pressure on margins and capacity utilisation as capacity growth continues amid weak demand growth. At the same time, the balance will be regulated just by the utilisation rate and the revision and reduction of commissioning plans after 2025 and 2026.

We can already see that efficiency is the king – small, old projects, the ones we see in Europe, are doomed to die out, while large and brand new projects, especially energy-efficient ones, will flourish. Our projects like ZapSib, Amur GCC, and PDH 2 are all competitive projects, and we feel calm about them. We are at the leftmost part of the cost curve.

Mr Lyakhovich, in Europe, chemical industries are experiencing a downturn with declining output, plants shutting down, and employees laid off. What are the key reasons for that?

If we look at the available data, early this year petrochemical production in Europe declined by 10–15% year-on-year, according to various estimates. It is certainly a major drop for such a short period. Why? We look at this issue through the lens of our own supplies. We had planned to ramp up our exports to Europe in 2022; Europe, however, gradually banned the supply of polypropylene and then polyethylene, and we delivered only small volumes in the first half of 2022. But who replaced us? Nobody. They simply cut their polymer production and processing. Because there was a so-called energy crisis, and polymer processing and petrochemicals are quite energy-intensive.

Another factor is high inflation. Naturally, when there is high inflation, polymer-consuming industries such as construction with its long-term investments and interest-only mortgages immediately slow down.

One should also bear in mind that in addition to these internal European factors, there are global market factors like the introduction of new capacities, primarily in South East Asia. China has launched large capacities over the recent years. While China was dependent on polymer imports until recently, it will become export-oriented at the turn of 2024. This certainly affects the global market. Major facilities that are emerging are economically more efficient than their old European peers, which used to be the industry’s flagships. I believe that European petrochemicals, polymer production and processing will continue to shrink, as we cannot see any positive signals right now.

What is the progress of Amur GCC? Has the technology been reconfigured yet?

We will complete the pyrolysis system using the original technology, while polymer production facilities are now being redesigned. Now we are finalising the selection of licensors and engineering contractors. We are going to complete it this year, after which the new configuration will be fully clear. In 2026, we plan to complete the construction and be ready for commissioning, and in 2027, the facility is going to be launched. For obvious reasons, it is later than originally planned. The project will have the same planned capacity of 2.7 mt of polymers, but will produce slightly different polyethylene and polypropylene.

Are you already clear about the markets and supply contracts for the project's products?

The project as a whole was aimed at South East Asia – both geographically and in terms of demand. The Russian market is now consuming about 4 mtpa of polymers and by 2028, thanks to our efforts, it will add several hundred thousand tonnes. SIBUR alone produces 4.5 mtpa of polymers and there are some other producers in Russia. It is clear that the 2.7 mt that will appear in 2027 cannot be immediately absorbed by the Russian market, so their main consumers will be South East Asia and China. As for China, we have an agreement with Sinopec, our partner at Amur GCC. It may look like a reason to relax and think that Sinopec will sell everything in China. But that is a wrong idea. In addition to being the largest consumer of polymers, China also processes about 70 mt of polymers, about a third of the global market. Though the largest, it is the least premium market. We will rely on the Chinese base while looking at Vietnam, other South East Asian countries, India, and, if there is arbitrage, Latin America. A part of the output, of course, will remain in Russia, because there are grades that we do not produce now, but will produce at Amur GCC. This means that covering primarily the needs of the domestic market will remain a priority.

Will Chinese contractors contribute to the construction of Amur GCC?

There are many contractors involved in the construction, including Chinese ones, of course.

Do you pay for their work in yuan? Have you already secured the currency balance given that you supply a substantial volume of products to China?

If we talk about yuan, we tested payments in yuan even before 2021, because China has always been an important market for us. Now, of course, the share of sales in yuan has gone up, and the balance allows us to buy equipment and chemicals in China and pay subcontractors quite safely.

What do you think about the growth prospects for demand and supplies of your polymers to Asia and, in particular, Turkey?

Things have improved in Turkey after the elections and the earthquake, though inflation is still high there, plus 50% – practically prohibitive – lending rates. Given that, the main issue for Turkey is development prospects amid such rates. The existing companies are working and feeling quite well, but it is difficult to talk about development.

At the same time, South East Asia and China make noticeable progress. Previously, China relied on imports, but it is quite opposite now: Chinese polymer exports are already putting pressure on traditional supply channels, trying to find some new niches. We feel it ourselves, because in our traditional markets – in Vietnam, Turkey, and even in Russia – polymers from South East Asia and China are beginning to be offered.

Later, the demand growth will catch up with the increased supply, but now, the pressure of new export players on the global market is quite tangible. So, the prices will not be very high over the next two years, the margins will be generally normal for those who poured money into new capacities and invested a lot, but for old and small players, the market environment will be tough. As far as all our assets are concerned, we are perfectly OK.

In late August, SIBUR started the construction of a new polypropylene production facility (PDH 2) at Zapsibneftekhim. What markets do you have in mind?

The new facility will be able to produce approximately 100 grades of polypropylene. Some of those grades have not been produced domestically. This means that we will partially substitute polypropylene imports. We also plan to benefit economically from longer production cycles by making fewer transitions between grades at our two operations in Tobolsk. The rest will be exported to South East Asia, Africa, and, probably, Latin America.

What will be the percentage of domestic and export supplies?

As things stand, then mathematically these 570 kt should be exported, because even now the country produces more polypropylene than it consumes. However, over the last decade, polypropylene consumption in Russia has been growing at a rate of more than 100 ktpa. If the trend continues and the processing increases, most of those volumes may be used in Russia. And we are, as I was just telling you, working to increase the amount of polymer processing by domestic companies.