Research Notes

The petrochemicals industry is marked by rising demand for its products. Petrochemicals producers have to spend huge amounts to upgrade and ramp up their production facilities in order to maintain their market positions. Thus, the absence of an investment program simply shows that a certain company does not hold any significant upside potential, or, even that it is likely to lose its market share in the long-run. On the other hand, capital spending today could begin to exert a tangible impact on bottom lines no sooner than in 2 or 3 years. Consequently, the petrochemicals sector could be of interest mainly to investors with a long-term investment horizon.

Since oil and gas condensate are the key feedstock, petrochemical prices are largely tied to hydrocarbon prices, especially given that feedstock outlays account for 60-70% of producers’ operating costs. Due to high export tariffs, Russia’s petrochemicals industry is primarily focused on the domestic market. The plastic boom in Russia and soaring export tariffs for basic monomers has helped to balance out petrochemical prices in Russia and abroad.

Russia’s petrochemicals sector is represented by a number of key players with an integrated production cycle, ranging from the manufacture of basic monomers to end polymerization products. Russian petrochemicals producers (including Bashkortostan-based companies) accounts for 70% of the domestic plastic market and 75% of the artificial rubber market. There are companies in the segment which occupy highly specific niches, produce no basic monomers and are extremely dependent on feedstock supplied by the industry majors and, as a result, hold limited investment appeal.

This research note is focused on Russia’s largest listed petrochemicals producers with an integrated production cycle, i.e. Kazanorgsintez, Salavatnefteorgsintez, Ufaorgsintez and Nizhnekamskneftekhim. We have no official recommendation on the latter due to the potential risks associated with a possible additional share issue. We advise investors with a long-term investment horizon to Hold the shares of Kazanorgsintez and Salavatnefteorgsintez and to Sell Ufaorgsintez.

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Anastasia Sarapultseva

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