Upgrading technology and passively adhering to existing business models might not be enough in a world of scarce resources – innovative business models are needed and research is a must. The [petro] chemical industry inherited from the communist regime in 1990, driven geo-politics, was hardly compatible with such requirements. The basic manufacturing, mostly based on relatively important hydrocarbon resources [compared to Europe], provided in 2011 a temporary impetus to the overall chemical industry but it adds dubious gains in terms of value added. Sector’s competitiveness remains low overall and is mainly driven by cheap natural gas and labour cost – thus remaining unsustainable. Basic chemical manufacturing, but also more value added segments like paints and plastic products manufacturing were in the red in 2011, while the sectors making profits were fertilizers, rubber [tyre mostly] production and wholesale trade with chemicals [mostly importers].
Romania’s chemical companies face the rising challenges of environmental requirements while operating in highly competitive European and global markets. Furthermore, even the companies in developed economies, more market-driven and having already adhered to high environmental standards, must develop innovative strategies since basic manufacturing [which is what most of Romanian companies do] can no longer thrive in a world of scarce resources. Speaking to a plastics conference, but relevant for whole chemical industries, European Commissioner for Environment Janez Poto?nik stressed that the European chemical industry will not only need technological development and innovation but also new business models that increase value added.
Romanian companies thus have to cope with multiple challenges and this is particularly problematic for incumbent enterprises inherited from the communist regime. Few of them survived the past two decades. Chemical plant Oltchim, running losses for years on a combination of corrupt management and inefficient business model, best illustrates the sector’s problems. It survived mostly due to its size, but can hardly further operate after the country’s integrated chemical complex was dismantled.
Consequently, Romania’s foreign trade in the sectors covered in the report [chemicals less pharmaceuticals and cosmetics] remains in the deficit area – with two notable exceptions: fertilizers, where the competitiveness is provided by the regulated low price of natural gas [besides strong demand driven by high food prices] and tyre manufacturing where three major global groups [Michelin, Pirelli and Continental] have established production units.
It is thus not by surprise that the local manufacturing companies in a representative sample of companies that we have used below increased their revenues in 2011 at a slower rate than the companies trading chemicals: by 16% y/y against 25% y/y. The net profit to total revenues ratio was also slower in manufacturing, 2.4% versus 3.7% in wholesale trade – yet up from 1.9% in 2010. The significant rise in revenues and the rising profitability were driven by progress in the sectors of fertilizers and tyre making.
Short-term developments
Total turnover of Romanian representative chemical companies, included in our sample, increased by 18% in 2010 -- or by 17% y/y in euros, to RON 30.8bn (EUR 7.26bn). The rise in manufacturing was however softer and it was particularly due to the 31% expansion in the fertilizers production segment and 28% rise in rubber manufacturing. Notably, the profitability of the two industry segments is also the highest. The net profit to total revenues ratio increased from 8.1% in 2010 to 13.1% in 2011. This is consistent with the interest of global commodities trader Ameropa for the largest local fertilizers Azomures. Ameropa completed the takeover deal discussed in late 2011 with Azomures’ Turkish owners. The sector’s profitability is notably provided by the cheap local natural gas and will predictably diminish as the country is liberalising the natural gas market. Nonetheless, the need for high vegetal yields [visible in high grain prices] will keep strengthening the demand. Separately, the profitability in rubber manufacturing is mostly due to the foreign ownership and management of the three large tyre makers.
The toughest problems at the level of industry segments are in the basic chemicals manufacturing. The paints segment also features low profitability and this may explain the pressure for mergers and acquisitions. Fabryo and Atlas’ paints division are merging this year to create the largest player in terms of sales. The profitability in plastics manufacturing is also negative, but the market size is expanding much steeper than the segments of paints or basic chemicals.
On broader level, the output in the chemical industries followed in this report has gradually increased in 2009-2011 after a sizeable contraction in 2009. Nonetheless, the output projected for 2012 based on 1H12 data show that both segments lost ground as the economic growth in Europe weakened. The gloomy outlook for 2H12 support the projections based on Jan-June data. Notably the output even decreased below the 2008 level in both industries. Oltchim’s problems must have contributed to the problems in the chemicals industry and will likely make a negative impact. The rubber and plastics industry also lost ground this year.
Corporate Round-Up
Oltchim.The company, controlled by the government, ceased operations in August. The government failed to sell its 55% stake in September and, according to the calendar drafted under the stand-by agreement with the IMF, it should liquidate the 3,300-employees plant. Nonetheless, PM Ponta announced plans for another privatisation attempt in 2013 - after the company resumes operations.
Fabryo, Atlas.The owners of two of Romania's largest construction material producers – Fabryo Corporation and Atlas Corporation, have reached an agreement to merge their home paints and finishing divisions. The merger would create the largest home paints company on the domestic market with sales worth some EUR 42mn, higher that the EUR 39mn sales of current market leader Kober.
Azomures.Swiss grain trader Ameropa wrapped up the takeover of Romanian fertilizers producer Azomures after Romania's antitrust body has cleared the deal. Ameropa acquired 75.8% of Azomures and acquired further 20.6% for RON 240.8mn (EUR 54mn) via a buyout bid.
Michelin.French Michelin tyre maker, which owns two production facilities in the western Romanian town of Zalau, Salaj County, might go forward with a new investment there, former economy minister Lucian Bode announced earlier this year. He mentioned that the Michelin's decision on a location for the new investment will be made in 2012, but he could not provide any further details.
