Throughout 2018, PJSC Nizhnekamskneftekhim (NKNK) was actively preparing for the construction of new plants by entering into contracts and leveraging loans for, among others, the ethylene plant, its biggest construction project. Azat Bikmurzin, Director General of NKNK, speaks about the company’s last year’s results, development plans and the challenges of the competitive world rubber and plastic market in his interview with Interfax.
We publish translated excerpts from this interview.
WHAT ARE NKNK’s 2018 ANNUAL RESULTS?
But for some difficulties in the synthetic rubber segment, 2018 was a generally successful year for NKNK. Saleable output increased and preliminary sales figures show a 189 bn RUB revenue, which is 27 bn RUB more than in 2017. The finalized figures will be available in March. Saleable output in comparable prices for the same period last year grew by 3.2%. A total of 716 KT of synthetic rubber was sold. It is 2% more than in 2017. As for plastics, the 2018 sales volume grew 2.8% from the previous year to about 717 KT.
It is not just the production output that has grown; the brand assortment has also expanded. For example, we started producing bimodal polypropylene with unique physical and mechanical properties, very similar to foreign-made products, as well as new brands of polystyrene for food packaging. NKNK pioneered the production of medium-density polyethylene in Russia, which is used to manufacture products by rotational moulding. We have been successfully working on new brands of functionalized styrene butadiene and neodymium butadiene rubbers used in the production of premium tires.
The performance could have been even better but for certain challenges in the synthetic rubber segment. We had a significant financial exposure with synthetic isoprene rubber (SIR) in 2018. This was due to the exponential growth in the cost of crude hydrocarbons while natural rubber prices that drive SIR cost were tanking. The suppliers’ prices of crude hydrocarbons increased by 49% and 100% for two feedstocks over the first ten months of 2018. At the same time, the price of natural rubber in the global markets dropped by 17% in 2018. Our financial performance in isoprene rubber severely deteriorated in the year 2018, and yet we delivered on all our contractual commitments.
NKNK HAS SIGNED DEALS FOR THE NEW ETHYLENE COMPLEX, WHAT DO YOU PLAN TO START THE CONSTRUCTION WORK?
We are actively working on the new ethylene complex contracts and the basic design phase is almost completed. We now need to secure the endorsement by the Main State Expert Review Board as well as construction permits. In parallel, we are working on a contract with the general construction contractor. Once it is signed, the construction of the plant can begin in 2019.
WHEN IS ETHYLENE-600 DUE TO BE COMMISSIONED AND POLYMER PRODUCTION TO BE LAUNCHED?
The ethylene plant is scheduled to be commissioned in 2023, with polymer production to start 3-4 months before that.
DO YOU CONSIDER RUSSIA YOUR MAIN MARKET FOR PLASTICS IN THE FUTURE, AS IT IS NOW?
We wish we could sell the totality of our plastic output in Russia but, sadly, it is not possible. Today’s Russian market consumes quite a lot of polyolefins, almost 3.2 MTY, and it can be expected to grow a bit more by the time of our project’s launch. In any event, once SIBUR commissions its ZapSibNeftekhim the Russian market will experience polyolefins glut. And this is even before we bring our products to the market. Thus, some of our production will inevitably have to be exported. The world polyolefins market is outpacing the world average GDP, so we are confident that our polymers would be in demand both domestically and abroad.
IT WAS REPORTED EARLIER THAT YOUR ETHYLENE PROJECT WITH POLYMER PRODUCTION COULD BE ESTIMATED AT 234 BLN RUB. NKNK TOOK THE 807M EUR LOAN FROM A BANK SYNDICATE AND A FURTHER 40 BN RUS WAS SECURED IN RUSSIA. WHAT IS THE POINT IN GETTING A BOND-SECURED LOAD? DO YOU INTEND TO RAISE MORE BORROWED FUNDS IN THE MEDIUM TERM? WHAT FINANCIAL INSTRUMENTS ARE BEING CONSIDERED?
Funding was leveraged for the construction of Ethylene-600. The Linde Group has provided technology and is contracted to perform design and to procure equipment and materials for the new ethylene plant. Linde contracts will be paid with the loan we secured from the bank syndicate against the guarantee of Euler Hermes, an international credit insurance company. Shell and core will be covered, in particular, by long-term loans.
One option NKNK has been mulling over is raising up to 40 bn RUB under the programme of exchange bonds, which was registered last December. Diversification of the sources of liquidity is in line with the NKNK investment programme financing philosophy, where a substantial portion of expenditure is nominated in Russian roubles. In addition, this would be a good opportunity for us to raise our visibility in the Russian bond market, where we last floated more than 10 years ago, and to assess investors’ interest in our company.
THE ETHYLENE PROJECT WAS REPORTED TO TOTAL 1.2 MTY OF ETHYLENE PRODUCTION, WITH TWO STAGES OF 600 KTY EACH. WHEN DO YOU PLANT TO START STAGE2? WILL IT “MIRRO” STAGE 1?
The plans are in place and NKNK has proceeded as planned with an intention of increasing the ethylene production by 1.2 MTY in two stages (NKNK’s currently produces 600 KTY of ethylene – Interfax). The first stage is scheduled to be completed in 2023. Immediately after that we will proceed with the second stage with the same 600 KTY capacity, which is to be completed in 2027. The two plants will indeed ‘mirror’ one another thus enabling us to minimise the design costs and optimise the construction resources. However, deciding upon the structure of processing such basic monomers as ethylene, propylene and benzene would depend on market for polyethylene, polypropylene and so on.
WHAT IS THE EXPECTED IMPACT ON THE BOTTOM LINE FROM ETHYLENE-600 AND ASSOCIATED PRODUCTION REACHING THEIR PROJECTED CAPACITIES?
NKNK revenues are expected to at least double once the plant is commissioned in 2023.
NKNK PLANS INCLUDE THE CONSTRUCTION OF A 500 KTY METHANOL PRODUCTION FACILITY, WITH THE RATIONALE BEING THAT IT IS REQUIRED FOR COMPLETING THE PRODUCTION CHAIN OF SYNTHETIC ISOPRENE RUBBER. DO YOU SIMPLY INTEND TO CUT THE DEPENDENCY ON THIRD-PARTY FEEDSTOCKS OR IS THERE A PLAN TO FURTHER EXPAND SIR PRODUCTION?
The methanol project is very important to us. It will improve our feedstock security and reduce costs of synthetic rubber production. I have to admit that competing with natural rubber whose prices have been decreasing globally for 8 years running is very difficult, especially while the cost of synthetic rubber feedstock has been consistently rising. If we produce our own methanol, we will no longer depend on suppliers and will complete our own SIR production cycle. The new production capacity will help us remain competitive in this market.
WHAT TECHNOLOGY WILL BE USED FOR METHANOL PRODUCTION? WHEN DO YOU PLAN TO COMMISSION THE PRODUCTION FACILITY? WHAT IS THE ESTIMATED COST OF TEH PROJECT?
We will produce methanol under Haldor Topsoe technology companies from natural gas and carbon dioxide. We will use carbon dioxide from our own production facilities and will buy natural gas elsewhere. Being immensely important strategically, the implementation timeframe of the project is very compact. Investment costs can be estimated later when all contracts have been concluded.
NKNK BOOSTED ITS ISOPRENE RUBBER OUTPUT TO 330 KTY LAST YEAR, AND FURTHER PLANS INCLUDE AN INCREASE UP TO 420 KTY AND 1 MTY FOR ALL RUBBERS IN 2020. WHAT PROJECTS NEED TO BE IMPLEMENTED TO ACHIEVE THIS?
This is what I would like to point out – increasing the production of synthetic rubbers is not an end in itself for us. Our goal is to become the most customer-oriented company which is able to offer its buyers enough of products from the widest range at competitive prices. Being competitive is the current order of the day from synthetic rubber companies. There is a lot of cost competition in the market. It is no longer enough to produce quality rubbers, now the prices need to be attractive as well. How can it be possible to compete with, say, natural rubber that has no prime cost essentially? There are associated costs still but they are significantly lower than the costs of synthetic rubber producers, especially with escalating oil prices. The production volumes of these two types are not comparable either. The total world demand for SIR-3, for example, is just 580-600 KTY while the demand for natural rubber is estimated at 14 MTY. We are but a very small part of this market. With our global competitors cranking up, we should be taking appropriate measures to safeguard our sales. Thus, expanding production addresses two tasks – reduction of unit cost of rubber production and maintaining our market share.
IN YOUR OPINION, HOW WILL THE GLOBAL SYNTHETIC RUBBER MARKET TRANSFORM IN THE MEDIUM TERM AND WHAT WILL BE THE SITUATION OF NKNK? AND WHAT WILL BE THE BEHAVIOUR OF RUBBER PRICES?
We believe that the global synthetic rubber market will keep its steady growth in the future. Some slowing down is inevitable from time to time but the overall trend will continue upwards. The number of vehicles in Russia and elsewhere will keep growing whereby driving more tyre production and use of rubber. We systematically develop new grades of rubber and are ready to supply more to the market. It makes us believe our market position should at least maintain as is. Projecting rubber prices is quite taxing. They are driven by prices for crude and its fractions used in synthetic rubber production as well as by natural rubber costs, global economic landscape, performance of the motor and tyre industries and new regulations. And, of course, by politics and geopolitics. We are now in the midst of a trade war between China and the United States, for example. Major world economies have started stagnating as a result, which has slowed down the demand for rubber and its prices. There is no telling how long this confrontation will persist. It definitely has had a profound impact on our industry. Such turns of events are impossible to predict or to prepare for in advance. Cost reduction is about the only thing each and every business can and should commit to. Strengthening one’s competitive edge is key to survival in today’s market.
THERE HAVE BEEN PLANS TO START MAKING A NEW PRODUCT, DYVINIL-STYRENE RUBBER (DSR) AT NKNK. WHAT IS PROGRESS THERE?
In 2018 we contracted the licensor for the basic design and DSR technology in a pilot production facility. The new production site was identified. Following last year’s public hearings we obtained the required endorsements. As per the licensor’s basic design, detailed design was done by the general designer (Soyuzkhimproject design institute) and the project documentation was submitted to the Main State Expert Review Board. The general contractor was identified and the construction camp was developed. In 2019 we plan to complete the construction design documentation, start procuring the equipment and materials and perform the bulk of the building and installation work. The project is due to be completed in 2020.
Photo source: Interfax
Nizhnekamskneftehim is attending the CIS Petrochemicals conference in Moscow.
We started producing bimodal polypropylene with unique physical and mechanical properties, very similar to foreign-made products, as well as new brands of polystyrene for food packaging
In any event, once SIBUR commissions its ZapSibNeftekhim the Russian market will experience polyolefins glut.
We plan to secure funding in the medium term under the existing loan agreements, which include long-term buyer loans against Euler Hermes’ guarantee. At the same time, our financial model incorporates raising borrowed funds and we are ready to examine various instruments of securing long-term debenture debt, such as an exchange bonds programme or bank commercial facilities.
The methanol project is very important to us. It will improve our feedstock security and reduce costs of synthetic rubber production.
Being immensely important strategically, the implementation timeframe of the project is very compact. Investment costs can be estimated later when all contracts have been concluded.
Our goal is to become the most customer-oriented company which is able to offer its buyers enough of products from the widest range at competitive prices. Being competitive is the current order of the day from synthetic rubber companies.
The number of vehicles in Russia and elsewhere will keep growing whereby driving more tyre production and use of rubber. We systematically develop new grades of rubber and are ready to supply more to the market. It makes us believe our market position should at least maintain as is.
In 2018 we contracted the licensor for the basic design and DSR technology in a pilot production facility. The new production site was identified.