14 Dec 2023

SIBUR exec Pavel Lyakhovich: Small petrochemical projects will die, large ones will prosper

SIBUR exec Pavel Lyakhovich: Small petrochemical projects will die, large ones will prosper

Higher consumption of petrochemical products, which analysts promised would grow faster than global GDP, seems to be constrained by the global situation and inflation. SIBUR Managing Director Pavel Lyakhovich describes in an interview with Interfax how the largest Russian petrochemical company is faring in these conditions, how its work is being reformatted amid sanctions and what new projects the company might carry out.

Q.: First of all, please tell us how is the petrochemical industry getting on?

A.: Previous forums in Vladivostok brought it home to us that for a long time we had entirely the wrong approach to serving this region. And last year we changed our relationship with local entrepreneurs. As a result, the volume of supplies here has increased exponentially, squeezing out Asian polymer producers. And the interaction we have established with Far Eastern processing plants on a different qualitative level enables us to take polymer processing further. For example, the other day three agreements were signed as part of our investment overdrive program. We provide financial support to processors - they buy equipment for development, and we guarantee to supply polymers at prices that compete with Korean and Chinese. They are building new or expanding existing capacity for this purpose.

Q.: What are these three partners going to build?

A.: Factories to produce polymer pipes, as well as fishing nets and ropes.

Q.: Pipes for gasification or for what purposes?

A.: For housing and utility services, pipelines - water, sewerage, gas. The Far East has bigger development plans than many regions. Medium and small enterprises are being set up for infrastructure projects, they are ready to invest actively in new production. If there is guaranteed support from a strong player like SIBUR, then they are ready to boldly develop their business. So I expect that in a few years we will be able to help increase Far Eastern manufacturing from the current 35,000-40,000 tonnes of polymers to 100,000 tonnes per year.

Q.: How do you deal with mistrust? Some believe the big players will then take over their business.

A.: There is such a stereotype, but as regards SIBUR specifically, we always emphasize that we are in a completely different business, focusing on petrochemicals - this is our main business profile. To produce feedstock for end products - yes, to expand capacity - yes, but to go to further - no. And the company’s development path over the past 15 years is the best illustration of this. Now, our capacity is about 4.5 million tonnes of polyethylene and polypropylene with the joint venture. And we’ll have 10 million tonnes by 2028, when we launch the Amur Gas Chemical Complex and DGP-2 and our other projects start operating. We have no need to make pipes, ropes and nets, but we very much want to see their manufacturers grow and develop.

Q.: Is the market developing on its own or does it need support, new niches for the use of polymer products to open?

A.: It could do with some support. In the first half of 2023, 13% more polymers were sold in Russia than last year - this plus approximately 364,000 tonnes on the horizon this year. And you could be deceived into thinking the market is developing by itself. In fact, there is a whole array of support measures behind the scenes, including, on our part correct pricing, similar items, recipes and overdrive programs... We see quite a lot of potential for increasing domestic demand - hundreds of thousands of tonnes annually. But our efforts alone will not enable us to develop processing. We need cooperation between participants along the whole chain from feedstock to end products, with the state and development institutions playing an active role.

Q.: Let's take a closer look at the Amur Gas Chemical Complex. A new deadline was unveiled in March: mechanical completion in 2026. What are the current estimates for the start of production?

A.: The same, mechanical completion in 2026. [It’s deviated from the previous schedule] by two years, it turns out. Commissioning in 2027.

Q.: How long might it take to deliver ethane and LPG from the Amur Gas Processing Plant to the Amur Gas Chemical Plant for each product? What volume of supplies is Gazprom guaranteeing?

A.: We have signed contracts with Gazprom, and there is no doubt that there will be both ethane and LPG by the launch dates that we are announcing now.

Q.: Will Chinese contractors be involved in building the Amur Gas Chemical Complex?

A.: Many contractors are involved, including Chinese ones, of course.

Q.: You pay them in yuan. Is there now a foreign exchange balance given that you supply a substantial volume of products to China?

A.: Regarding yuan, we piloted 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 increased, and the balance allows us to buy equipment and chemicals in China and pay subcontractors without any problems at all.

Q.: Amur Gas Chemical Complex did not manage to draw down project financing. What are the new terms for financing the project?

A.: The terms we have in 2022-2023 are deposits and loans from shareholders, and we received a bridge loan from one of the largest Russian banks. The complete financing arrangement will be determined after the project’s updated technological configuration has been approved. You know that our pyrolysis is original, and everything else is being redesigned - we are changing engineering contractors and licensors for polyethylene and polypropylene.

Q.: There was a project cost estimate of $10 billion. What is the updated cost estimate based on the current stage of the configuration?

A.: We more or less know now, but we’ll have the full picture when the process tie-in takes shape. We are changing the project as we go, so it’s clear that it won’t be cheaper, unfortunately. But it’s too early to talk about the final amount.

Q.: Are the markets and contracts for the project’s products already known?

A.: The project was built in general for Southeast Asia - both geographically and in terms of demand. Consumption in Russia is now about 4 million tonnes of polymers per year and thanks to us it will rise by several hundred thousand tonnes by 2028. SIBUR alone produces 4.5 million tonnes of polymers per year, and there are other Russian producers as well. It is clear that the Russian market will not immediately absorb all of the 2.7 million tonnes that will appear in 2027, so most of it will flow to Southeast Asia and China.

Regarding China, we have signed an agreement with Sinopec, our partner in the Amur Gas Chemical Complex. From the outside it may look like cause for comfort - Sinopec will sell everything in China. But that's not the case. China is not only the largest consumer of polymers - about 70 million tonnes of polymers are processed there, about a third of the world market. And being the largest, it is the least premium market. So building on the base in China we’ll look at Vietnam, other Southeast Asia and, India, and, if there’s arbitrage, even Latin America. Some, of course, will remain in Russia, because there are types that we do not produce now, but will be produced at the Amur Gas Chemical Complex. In this sense, supplying the domestic market remains our priority.

Q.: Have the contractors of the DGP-2 polypropylene facility already been selected?

A.: Some work has already begun, the first pile was driven recently, but the contractor has not yet been determined, tenders are ongoing. I think we will make a decision no later than this autumn.

Q.: Might any new partners join the project?

A.: I don’t see any need. We have our own propane, we have obligations to the government that we assumed at one time by signing the agreement on reverse excise. It's not really clear why we should reconfigure.

Q.: What about the financing arrangements?

A.: For now we're financing with our own funds, we don't see project financing there. There will be our own and borrowed funds.

Q.: Do you have an idea who from?

A.: Yes.

Q.: Is it still a big market?

A.: It is. Lenders are happy to lend the company money: the projects are clear and we really do have a good history, so I honestly don’t see any problems.

Q.: Does the project need additional infrastructure to deliver products to foreign markets?

A.: No.

Q.: Will it be railway or road transport?

A.: Railway and road, as usual. The proportions depend on where the product goes, to Russia or abroad. The new production facility in Tobolsk will make it possible to produce about a hundred types of propylene and some of them have not been produced in Russia before.

Q.: What types, for what purpose, for what products?

A.: For example, it is expected it’ll produce terpolymers, which are used to produce certain types of BOPP film and other types of packaging. This would dispense with the need to import them. With the construction of the new unit we’ll have three polypropylene production plants in Tobolsk with approximately the same capacity. And with three units, we will be able to work more smoothly with fewer transitions from one type to another, which will be good for cost-effectiveness and will enable the market to better and more fully meet its needs.

Q.: Is there an estimate in terms of tonnage? To what extent will the new DGP-2 products cover imports?

A.: There are those types that are now imported - tens of thousands of tonnes. Everything else is produced in the country one way or another, enough to meet the current needs of our own processing plants; surplus polymers are exported.

But polypropylene consumption will increase by the time we launch DGP-2, around 2027. We see that polymer processing has grown by at least 100,000 tonnes per year since 2014, when we launched the first polypropylene production in Tobolsk. Even if we approach forecasts conservatively, based on market trends, additional demand in the market will already be comparable to its capacity by 2027.

Q.: Pipes drove most of the increase in polymer consumption last year. How are other sectors doing?

A.: This segment did grow the most last year, but this year packaging is showing the biggest growth. As for pipes, everyone expected growth against the backdrop of the infrastructure projects that are being rolled out - we even considered producing more feedstock and storing it in anticipation of seasonal demand. But there was no explosive growth like last year. The segment is likely to grow in absolute terms, but the rate of growth will be lower year-on-year.

Q.: Is polymer consumption growing internationally? What are the growth prospects?

A.: Consumption is growing, but not as quickly as in previous years. The impact of the pandemic was quite serious in 2020 and 2021, but we still saw growth. Not 4% per year, as before, but growth nonetheless. At the same time, there was an increase in demand in certain segments in 2020-2021, for example, in medicine and packaging, while consumption fell in construction and the automotive industry.

But in 2022-2023, segments related to the automotive industry began to grow, while demand in medicine fell. Overall, this results in steady growth, but not as much as in previous periods. I think that in 2024 we will see not a turning point, but slightly more positive growth in consumption.

Q.: What about global production and profit margins in the sector?

A.: More and more new capacity has been commissioned since 2017. But production is growing more slowly. In general, 80% of the world's polymer production capacity is utilized. The world's high-density polyethylene production capacity is 65.2 million tonnes with consumption of 53.4 million tonnes, low-density polyethylene capacity is 24.4 million tonnes with consumption of 20.6 million tonnes, and for polypropylene it is 108.3 million tonnes with consumption of 87 million tonnes. The biggest segments for polymer consumption are usually film at more than 40%, molded products at more than 20%, and raffia and fibers about 20%.

Demand is now also affected by the general deterioration of the macroeconomic environment and inflation. Experts expect pressure on margins and capacity utilization to continue as capacity continues to grow amid weak growth for demand. In this case, the balance will be regulated precisely by the extent of utilization and review and reduction of plans for commissioning after 2025-2026.

It is already clear that efficiency is very important - small, old projects, those that we see in Europe, will no doubt die gradually, while large and new ones, above all energy efficient, will flourish. Our projects - ZapSib, Amur Gas Chemical Complex and DGP-2 - are all competitive, in this sense we feel comfortable. We are on the leftmost side of the cost curve.

In Europe, production is declining amid the energy crisis, high inflation and slowdown in consumer demand for products both in the domestic market and for export, and pressure on prices and margins from the ongoing introduction of new capacity in Asia. According to Cefic data, chemical production in Europe in the first four months of 2023 decreased 13.5% compared to 2022. Analysts and market participants do not expect any recovery before 2024.

Q.: Are hopes for the Chinese and Indian markets justified? Is there potential for price growth given the fairly large number of new projects?

A.: The Chinese market remains a driver of global growth. The market volume for polymer products is more than 70 million tonnes per year, with a growth rate of 5% per year. This is almost 35% of the world market.

Q.: Do you see any risks to raw materials the supply in conditions where gas production by companies differs considerably, and production by oil companies is being adjusted in the framework of the OPEC+ deal?

A.: Based on the experience of previous oil production cuts, we do not see any risks of a shortage of feedstock for petrochemicals and gas-to-chemicals and our processing capacity.

Q.: What possible areas for further processing of ethylene from Nizhnekamskneftekhim are there following the launch of the new EP-600 production?

A.: Of the 600,000 tonnes of ethylene, about 70% will go toward further utilizing existing capacity, capacity that is being expanded and already under construction. We are building a unit to produce hexene [that will use] about another 55,000 tonnes of ethylene. We will launch it in 2024. And we are now overhauling one of three reactors at Kazanorgsintez. We began this year and by the end of this year we'll finish the reconstruction of the third reactor. Another 150,000 tonnes of ethylene will be directed there.

We will make a decision on the remaining 30% at the beginning of next year depending on the best efficiency and demand on the market, foremost Russian.

Q.: How is the project to increase ethane supplies from the Orenburg Gas Processing Plant going?

A.: For a time there was not a very active discussion of the project with Gazprom, but now we are seeing a good dynamic. The parties are actively discussing the project and I think that we will be able to get increased amounts of ethane from Orenburg. In order to carry out the project, Gazprom needs to make certain changes on its part and we need to at Kazanorgsintez in order to be able to receive the additional amounts. But the ethane pipeline, the link between our plants, shouldn’t be forgotten either. We really are on a very good footing with Gazprom today.

Q.: How does a stronger dollar affect the cost of your projects? How comfortable is the current ruble exchange rate for the company?

A.: Perhaps the word “comfort” is not quite the right one here. From a comfort point of view, any strong ruble volatility will be bad. Sharp fluctuations either way in the market are harmful, because our consumers cannot predict their prices and demand and do not understand whether to buy feedstock, how to conduct tenders, or what commitments to make.

Q.: Are you revising financial forecasts and indicators for the year in connection with changes in the exchange rate?

A.: There is no such practice at the company. As I can recall only once have we thought about whether we needed to change the business plan. We simply do factor analysis: we look at what happened at the end of a year and analyze whether we could have done anything to influence it. But we don’t do this in the course of a year, unless there are any serious changes that could affect production volume above all.

Q.: SIBUR has kept prices for Russian consumers at a certain level since March 2022. Now you are putting prices up. Is effective demand growing? How is the Russian consumer feeling?

A.: We did fix the price in rubles at the beginning of March 2022, we gave a signal to the market. This had a positive effect in terms of the utilization and efficiency of local processing. This year we are adjusting prices gradually. But if we take ruble quotes as the basis, then it was only by mid-summer that we reached the early 2022 price level. But if we take 2022 and 2023 inflation into account, then we have not yet approached that level.

So it seems to me that the Russian polymer processing market is doing well: polymer consumption increased 13% in the first half of the year. Such growth does not happen in a stagnant or declining market. This is also borne out by a steady trend towards a decrease in imports of both polymers themselves and end products.

Q.: Do you now have to cultivate not only new consumers, but also new contractors to replace Western ones?

A.: I am absolutely convinced that nature abhors a vacuum. If we take catalysts as an example, we use dozens of types of catalysts in our production. They need to be replaced with domestic ones or purchased from friendly countries, which is what we have done, although it hasn’t been easy.

It's the same with contractors. There were engineering and construction contractors that we knew and could understand. The engineering contractors were from unfriendly countries. The construction contractors are almost all alive and well.

But is it necessary or not to develop new ones? It is necessary, of course, because construction here does not stop, plus new projects will appear. As with catalysts, some give a better effect than the original ones, and there are those that are less efficient, but work.

Q.: You mentioned substituting catalysts. Is SIBUR thinking of setting up its own production of catalysts?

A.: Yes.

Q.: What catalysts? In what volumes? Will you be producing them just for yourselves or for the market as well?

A.: We propose to work in two directions - independently and with partners. There are Russian producers who already produce catalysts for us with whom we share our scientific know-how and to whom we provide a certain guarantee that we will buy their products. But we are already looking at our own project to make catalysts. I think that we will be able to talk about this officially at the beginning of 2024.

Q.: But in any case, as far as I can tell you have to consolidate demand. But it’s probably not very profitable to do it only for yourselves, is it?

A.: The catalyst production is effective only for ourselves, but in general the more capacity the more effective it is.

Q.: How is the project to produce n-Butyllithium going? At the end of 2022, it was reported that you had developed the technology and were considering construction.

A.: I think we will be able to give some information in the near future.

Q.: How do you rate the prospects for engineering plastics production? In general, should Russian companies take this on or is it better to import it from China?

A.: There have been a lot of developments in our fundamental science. And even now, science has been on the go, despite the sometimes deplorable state of some fixed or laboratory assets. The question is how quickly did the rest of the world develop and how far ahead of us did it get? The answer will be different for different types of plastics. I think we have a chance for some, including on a Russian foundation, to create something competitive. But for the most part, no.

Some will say let's import it from China, but here the issue of technological and even political independence may arise.

Q.: In general, how widely do you cooperate with government institutions?

A.: I think we would all like it to be a broader collaboration. We are not fully tapping that complex potential. For years we lived in a paradigm where we bought the best technology available for almost all areas. Buying the best technology, the best license, bringing in and building something in the country - this was the main concept for almost everyone, not just us. Now that we need to develop on our own, we and our fundamental science do not yet fully understand each other’s capabilities.

Q.: This is probably a topic that all corporations are talking about now: there is a growing shortage of employees in the economy, and competition for them is growing. How big a challenge is this for you?

A.: Big enough.

Q.: And what solutions to the problem do you propose? How are you hunting for talent?

A.: We work with leading institutions in different regions - in Bashkortostan, Tyumen, Tomsk and Moscow - and we have our programs there. We, among other things, are helping to update and change the program because we see that the quality of students in terms of vocational skills is actually very low. So we are helping to update and adapt programs for modern realities, for modern technologies and equipment. Every year we receive 10,000 applications from students for internship programs, but we select very few - up to 500.

Another issue is that the problem can be solved with the help of robot technologies. Modern technologies generally make it possible to do this, and sites like the Amur Gas Chemical Complex can be maintained by quite a small number of employees.