Hungary Petrochemicals Report Q3 2009

BMI's latest Hungary Petrochemicals Report raises concerns over the divestment of a stake in the Hungarian refiner MOL to a Russian oil company, which could put the refinery and petrochemicals industries at the mercy of Moscow's political interests.

In April, Austria's OMV announced that it had sold its 21.2% stake in MOL to Russian oil company Surgutneftegaz for EUR1.4bn. The stake was acquired as OMV sought a US$20bn hostile takeover bid of MOL, which was abandoned in August 2008 following an investigation by the European Commission (EC). However, MOL has complained that it was not consulted over the deal and voiced concerns that the sale to Surgutneftegaz, which is owned by a close ally of Russian Prime Minister Vladimir Putin, could undermine the company's independence and threaten European energy security. The sale of the MOL stake to a Russian company that has very close links to the Kremlin represents an expansion of Russia's presence in Central Europe at a time when most countries are seeking to reduce Russian influence over their energy sectors following the gas dispute between that country and Ukraine in January 2009. MOL operates Hungary's only gas supply network and owns all the country's major oil refineries, thus playing a vital role in the country's energy security. Economy minister Jnos Kka has stated that it is in Hungary's interests for domestic companies to expand into multinational companies, rather than allowing foreign companies to acquire a monopoly in the country.

Further downstream, efforts are underway towards further consolidation. In April 2009, BorsodChem put its PVC business up for sale and was reportedly in talks with potential buyers. Its chlor-alkali business is not included in the planned possible sale, which is being carried out to enable the company to concentrate on its isocyanates business, regarded as being more profitable in the long-term. The reported sale comes after the appointment in December 2008 of Wolfgang Bchele as BorsodChem's CEO; he had previously argued for consolidation within the PVC industry and contended that it was not considered a strategic business over the long-term. In contrast, the isocyanates market is forecast to grow at a higher rate than Hungary's GDP. Meanwhile, the government has pledged support for the company in order to avert the planned lay-off of 550 employees at its Kazincbarcika industrial complex.

Hungarian petrochemical production will suffer as a result of an expected deep recession in 2009.

Hungarian industrial production contracted by a staggering 23.3% y-o-y in December 2008, by far the worst outturn recorded in Hungarian Central Statistical Office (KSH) figures dating back to January 2002.

Slowing domestic demand, coupled with reduced export demand from the EU, will depress demand for petrochemicals products. With 75% of Hungary's polymer output sold abroad, the performance of export markets will be a major determinant of the sector's performance. A decline in production of up to 30% is expected. While we still expect a recovery beyond 2009, we caution that this is likely to be more modest.

It will take until 2011 before the Hungarian petrochemical industry achieves output at 2008 rates.

Recent expansions in cracker capacity to 610,000 tonnes per annum (tpa) have helped reduce ethylene feedstock imports to virtually zero, with 90% of olefins output consumed within Hungary. Despite a sharp drop in polymer exports in 2009, export levels should recover by 2011. By 2013, we expect polyethylene (PE) exports to have reached 515,000 tonnes, 5% up on 2008 levels, while polypropylene (PP) exports should be about the same level as they were in 2008, at 115,000 tonnes. By 2013, the Hungarian petrochemical industry's ability to expand its exports is expected to be constrained by capacity.