According to Kommersant business daily, the conflict between Kazanorgsintez (KOS) and Sibur-Holding on raw material supplies has reached a new level: the parties have launched negotiations about KOS' takeover by Gazprom' business structures which own a blocking stake in Sibur-Holding.
For the record, the conflict between the companies broke out in March 2007 when Orenburggazprom (Gazprom's subsidiary) suspended ethane supplies to Kazanorgsintez. The conflict concerns the processing agreement and another one of the monopoly's business Sibur Holding accused Kazanorgsintez of breaching the agreement. In 2006, Gazprom assigned to Sibur agent's powers to process ethane produced by Orenburg Helium Plant at Kazanorgsintez's production capacities. KOS was to process half of ethane for Sibur on processing terms and another 50% were to be purchased for the company itself. Gazprom was to supply to KOS 253,000 tons of ethane in 2007. However, KOS said it was only prepared to accept around 12,000 tons per year. 30,000 tons of ethane were supplied to KOS in January and 12,500 tons of this amount were to be sold, while 17,500 tons were to be processed. Thus, in January, Sibur estimated Gazprom Group's losses from short supplies of polyethylene at Rub 1.8 bln ($69.20 mln) in annual terms.
On March 1, Orenburggazprom suspended ethane supplies to KOS, thereby depriving the company of 70% of its feedstock. However, production at KOS was not halted, since Minnibaevsky Gas Processing Plant supplies 30% of raw materials and the company managed to partly offset the remaining supplies on account of Nizhnekamskneftekhim which supplies ethylene to KOS. In mid-March, Sibur-Holding filed a claim to FAS against KOS.
For the record. Kazanorgsintez is one of the largest Russian chemical companies which accounts for over 38% of domestic polyethylene output and is the largest polyethylene exporter. The company's annual output is 1 mln tons of chemical products. TAIF Group owns 51.74% in KOS and Tatar state-run company Svyazinvestneftekhim holds 28.57%. The company's 9M06 revenue amounted to Rub 10.9 bln ($419.07 mln) and net profit amounted to Rub 1.15 bln ($44.21 mln).
Overall, both parties are interesting in resolving the problem. Orenburggazprom is the main ethane supplier to Kazanorgsintez and the latter is the only ethane consumer. This means they are parts of a single production line. In this case, the Tatarstan-based company will be fully stocked with raw materials and supplies will be reliable, while Orenburggazprom will have a sales market. In the event that ethane supplies are not resumed, profits of both companies could plunge in annual terms.
In our opinion, it would not be advisable for the company's owners to sell Kazanorgsintez. For this reason, the parties will most likely limit themselves to signing new contracts, albeit on new terms.
Our recommendation on Kazanorgsintez (RTS: KZOS) is Sell with a target price of $0.53.
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