Ukraine Petrochemicals Report Q2 2008

Ukraine is set to witness growth in petrochemicals output, with increased optimism of further capacity expansion following approval in February of the country's World Trade Organisation (WTO) accession, according to BMI's latest Ukraine Petrochemicals Report.

Output has followed the trend of the economic cycle. In 2007, chemicals and petrochemicals industrial growth was 6.2%, compared with 3.2% in 2006. This included a 3.9% rise in chemicals output and a 14.1% rise in rubber and plastic products output. Plastic production in primary form amounted to 511,500 tonnes, up 12.4% year-on-year (y-o-y). This followed a strong performance in 2006, when plastic output rose 15.8%.

In March 2008, KarpatNaftoKhim, part of Russia's Lukoil Group chemicals division Lukor- Neftekhim, began construction of a new polyvinyl chloride (PVC) plant in Kulush, Ukraine. Run by Lukoil's Ukrainian Zao Lukor subsidiary, the Kulush-based firm is investing around US$210mn to establish Ukraine's first PVC production facility with planned capacity of 300,000 tonnes per annum (tpa). Uhde has been appointed the contractor for the plant. The new unit is expected to be completed and operating some time during 2009. The demand for PVC profiles in Ukraine is set to grow by more than 28% in 2008, although in 2007 only 15% of the 140,000tpa consumed in the country came from national producers.

Ukraine received a green light for WTO accession in early February 2008, a process which should be completed in the coming months. For Ukraine's petrochemicals producers, WTO membership is a major positive step, easing access to both raw materials and promising better access to Western markets in the future. Membership will effectively end Ukraine's trade agreement with Russia, which enables Russian petrochemicals to be exported to Ukraine free of duty. Under WTO rules, Ukraine will be unable to grant preferential import tariffs. Once the trade agreement is abolished, Russian petrochemicals products will be subject to a 10% tariff. This will be of benefit to Ukrainian producers of raw materials, but will push up the cost of feedstock for plants operating further downstream which often rely on raw materials imports from Russia.

Ukraine remains second from last in BMI's Emerging Europe Petrochemicals Business Environment matrix with 41.5 points, compared to a regional average of 50.8 points. This represents a reduction of 1.6 points over the previous quarter, due to BMI's reassessment of Ukraine's available polymer production capacities. The revision has not affected Ukraine's overall ranking in the region. Ukraine's uncertain political environment coupled with rising gas import prices and the possibility of supply disruption are undermining the country's potential for increased petrochemical production capacity. The sector is dominated by Russian petrochemicals majors and remains tied into the old Soviet economic framework as a satellite of Russia. However, further investment is seeing greater self-sufficiency in some areas of petrochemicals production, notably in the EDC-VCM-PVC production chain, with the establishment of new plants in Kalush.