Ukraine Petrochemicals Report Q2 2012

Ukrainian petrochemicals output performed consistently well throughout much of 2011 with primaryplastic output up 25% y-o-y to 550,500 tonnes, according to BMI’s latest Ukraine Petrochemicals Report.Production was up on pre-crisis levels, despite the lacklustre performance of the domestic market.Ukraine’s chemical and petrochemicals industry was one of the leading sectors throughout the year with14.4% growth overall.

Output growth has been stimulated by both domestic demand and exports to Russia. As such, aweakening global growth picture bodes ill for Ukraine’s export-dependent economy, and a falteringdomestic demand picture underpins our lower growth expectations for 2012. A weak external scenariohas large implications for Ukraine’s economy, which is heavily geared towards the export sector onwhich petrochemicals depends, with exports of goods and services accounting for close to 50% of GDP.

The country’s export basket features low diversification being heavily geared towards the basic products.A slowdown in exports will weigh on chemicals and petrochemicals production. Seemingly endless gaspricing disputes with Russia colour the Ukraine’s energy landscape, putting pressure on the country tomaximise domestic production and diversify supply.

In Q112, Lukoil announced plans to invest more than EUR45mn in 2012 to expand Karpatneftekhim,its Ukrainian subsidiary and the country’s largest producer of petrochemical products. Most of the fundsare to be allocated towards the launch of PVC production for window profiles, as well as modernisationof production facilities of the plant. In addition, Karpatneftekhim also plans to start the design of facilitiesfor the production of emulsion PVC with a capacity of about 30,000tpa. The investment is an increasefrom the EUR25mn spent in 2011, a significant part of which was allocated in the launch of PVCproduction with a capacity of 300,000tpa. In 2011, the Ukrainian PVC market amounted to 125,000tonnes in volume terms, the majority of which accounted was supplied through imports, mostly from theUS and the EU countries.

Ukraine remains in 8th place in BMI’s Central and Eastern Europe Petrochemicals Business Environmentmatrix, although its score has risen by 1.3 points to 40.9 points. This puts Ukraine 1.6 points ahead ofBulgaria and 4.2 points behind Romania. The score had been strengthened in recent months due toprogress on a 300,000tpa PVC plant in Kalush, an improvement in market risk ratings due to a deal withRussia over cut-price gas supplies and the election of a new Moscow-oriented government that providessome stability in the operating environment for the petrochemicals industry and trade relations with itslargest market, Russia. The score has improved as a result of a rise in its long-term financial marketsoutlook related to the support of IMF credit, although Ukraine still faces a struggle keeping to the termsof the loans.