Romania Petrochemicals Report Q3 2009

BMI's latest Romania Petrochemicals Report argues that the merger of state-owned chemicals producer Oltchim Ramnicu Valcea and its feedstock provider Petrochemicals Arges will be crucial to the muchneeded consolidation of the country's petrochemicals industry, but the financial crisis is proving to be a major obstacle for the sector as a whole.

According to local media reports, the government may be prepared to divest some of its interest in Petrom in order to obtain control of Petrochemicals Arges; the government currently holds a 20.63% stake in Petrom, the majority of which belongs to Austria's OMV. The proposal is that a new group could be created from the merger of Oltchim and Petrochemical Arges. The government hopes the move will rescue Oltchim, which relied on the olefins producer for feedstock until Petrochemical Arges stopped supplies in November 2008. Oltchim has suffered financially as a result of the plant closure and is operating well below capacity. BMI believes that the merger would be a positive move for both Oltchim and Petrom, with the former guaranteed feedstock supplies and the latter gaining financially from the sale.

The main obstacle to the merger is the credit crisis, with Oltchim struggling to fund the deal, which it originally expected to be finalised by end-2008. Some reports have suggested that the company has approached the Romanian government about a rescue plan that would help it complete the transaction. In 2009, Oltchim plans to finance its investments almost entirely through domestic loans worth RON500mn (EUR125mn), from a total investment budget of RON601.49mn (EUR150mn).

In April 2009, Petrom said that it expected its net profit to edge up this year to RON1.1bn (US$345mn), from just over RON1bn in 2008. BMI believes this forecast is optimistic, given that oil prices are not likely to recover substantially above US$60 per barrel. The company is also facing litigation by the firm's former and current workers over holiday pay. The company forecasts revenues of RON11.1bn in 2009, down from RON16.6bn in 2008. Petrom has cut its investment budget for this year to RON4.7bn from RON6.4bn in 2008.

Petrochemical producers worldwide are suffering from a decline in demand, but the industry in Romania also faces significant structural challenges. Romania's industry needs a massive amount of investment to improve its efficiency and throughput after years of underinvestment. The petrochemicals sector was proceeding along a course of modernisation before the recent turmoil hit, but the prolonged downturn threatens to significantly slow the process of economic reform.

Romania has capacities of 400,000tpa of PE, 80,000tpa of PP and 170,000tpa of PVC. Rompetrol's plans for a 240,000tpa PET plant and a 250,000tpa PP plant are unlikely to be realised. Increasing integration with the markets of the EU will raise Romania's status as a cost-effective entry point through which to access other European economies. On the downside, the domestic downstream petrochemicals sector is uncompetitive and in need of more diverse feedstock sources to ensure stability.