BMI's Executive Summary

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Russia's petrochemical sector will fail to keep up with burgeoning domestic demand unless it can attract sufficient foreign capital and expertise. This will require an improvement in the country's business environment, notably the improvement of the regulatory system and tackling infrastructural impediments to access to abundant feedstock, according to BMI's latest Russia Petrochemicals Report.

Strong growth is being generated by high rates of retail growth, which have raised demand for packaging, as well as growth in the industrial sectors and a rise in construction. The expansion in domestic polymer demand is faster than the growth rates in local production, raising the possibility of faster rates of growth in imports and a rise in PE prices. Added to this is the failure of local producers to supply certain grades of PE to meet domestic demand. Russian producers are therefore unable to meet the market demand either in terms of volumes or in terms of the brand mix.

The government is placing emphasis on the need to achieve greater self-sufficiency in petrochemicals and to bring down the level of imports. BMI believes that if the government's petrochemicals strategy for 2007-2012 achieves its target of US$125 of private and public investment in the sector, it will reach its production targets for 2015 three years early. This would mean polyethylene (PE) will rise to 1.9mn tpa (up 80% over 2005 levels), polypropylene (PP) production will reach 690,000tpa (up 130%), polyvinyl chloride (PVC) output will reach 900,000tpa (up 50%) and polystyrene (PS) output will amount to 335,000tpa (up 170%). BMI believes these are conservative estimates. Russia's ability to become selfsufficient would be helped considerably by the US$2bn joint venture (JV) proposed by Sibur and Novatek, which plans to add 270,000tpa of PP and 500,000tpa of PE capacity by 2010, rising to 1.3mn tpa of PP by 2013. Meanwhile, Gazprom has plans to increase ethylene capacity by 350% to 7.66mn tpa, while increasing plastics capacity to 1.7mn tpa from 470,000tpa and fertiliser production to 4.5mn tpa from 1.8mn tpa.

A law passed by the federal government in 2007 to reduce the flaring of gas is likely to lead to an increase in investment in the petrochemical sector. Around 20bn cubic metres per annum of associated petroleum gas (APG) is flared. The government has decreed that 95% of APG output must be used by 2011, up from the current 64%. With APG set to rise to 60bn cubic metres in 2011, 57bn cubic metres will be used by the petrochemical sector compared to the current 35bn cu m. In order to increase APG processing capacity, Sibur is investing US$1.7bn in increasing its APG processing capacity by 50% to 22bn cu m per annum by 2011. As a result of the investment programme, the company's feedstock output will increase from 3.2mn tpa to over 5.2mn tpa.

Russia retains its commanding pole position in BMI's petrochemical rankings for Emerging Europe, with a composite score of 68.9 points, compared to the regional average of 52.2 points. The main weakness for investment in the petrochemicals sector is the absence of an industrial policy and a legislative framework aimed at overhauling the chemical sector, as well as foreign investment and its associated operational and management expertise, which could limit the prospects for growth. Russia's business environment record is shaky, especially with regard to the government's intervention record. While efforts have been made to reform tax law and administration over the past five years, foreign firms sometimes struggle to interpret rules. Direct investment can be particularly tricky in Russia's regions. Corruption remains a serious issue, and the treatment of foreign investors in Russia's privatisation programme is far from consistent.

Contents

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Chapter 1 - Executive Summary

Chapter 2 - SWOT Analysis

Russia Chemicals & Petrochemicals Industry SWOT

Russia Economic SWOT

Russia Business Environment SWOT

Chapter 3 - Market Overview

Petrochemicals Trade

Market Structure

Foreign Investment

Table: Cracker Capacity Data – Historical Data & Forecasts (000 tpa)

Chapter 4 - Industry Trends and Developments

Sibur

Other Companies/Projects

Financial

Regulatory Issues

Projects and Expansions: Related Industries

Table: Future Projects at Sibur Neftekhim

Chapter 5 - Industry Forecast Scenario

Table: Russia Petrochemicals Sector Forecasts

Chapter 6 - Economic Outlook

Economic Activity

Table: Russia Macroeconomic Data & Forecasts

Chapter 7 - Business Environment

Foreign Investment Policy

FDI Regime

Foreign Trade Regime

Tax Regime

Chapter 8 - Company Monitor

Nizhnekamskneftekhim (NKNK)

Lukoil

Salavatnefteorgsintez

Sibur Holding

Chapter 9 - BMI Forecast Modelling

How We Generate Our Industry Forecasts

Chemicals & Petrochemicals Industry

Cross Checks

Competitive Landscape for Emerging Europe Petrochemicals Reports: Sample of Companies Ranked

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Comparative company analyses and rankings by US$ sales, % market share, employee size, registration date and ownership structure. Company SWOTs (Strengths, Weaknesses, Opportunities, Threats) on all leading international and national operators in each market, including competitive intelligence in the following: Overall geographic presence, competitive positioning against local companies; production capacity, sales and market share; joint ventures, foreign direct investment, projects and acquisitions strategy.