The shadow of the chemical industry

During the global economic crisis, the chemical sector did not record a severe drop in terms of turnover. The relatively stable condition changed during recent years, with the downturn in the automotive and construction industries.


Together with the related impact on the demand for chemical products, this determined the closure, within one year and a half of 22% of chemical producers and distributors that were active at the end of 2011. (According to BMI report, chemical production in Romania fell by 2.3% y-o-y in 2012, a decrease higher than that of EU countries).
According to a Coface report, the chemical industry sector in Romania was estimated at RON 47.4 billion at end of 2011. The global downturn did not allow chemical producers to start new operations and compensate for entities which closed business.
Thus the risk affecting this sector could be roughly estimated at a turnover loss of RON 2 billion and the disappearance of 1,900 workplaces.
The same report addresses the insolvency threat for many Romanian chemical producers, as well as their failure to start the recovery in terms of profitability for 2008-2011.
Moreover, only 22% of chemical companies succeeded in returning to profit position after losses incurred in the previous year. More than 25% of entities had liabilities to state budget at end of 2012 and moreover, their value increased significantly compared to the end of 2011.
An increase of gas prices for industrial consumers could worsen the financial performance of the petrochemicals sector that is highly reliant on gas, particularly for methanol and fertilizer production. The European competition in the chemical sector is intense and, under the condition of increasing fuel prices, operational profitability is in danger, with even lower margins determined by higher production costs. Gas price in Romania is the lowest in the European Union, which is not sustainable due to pressure from the EU and the IMF to raise prices ahead of gas market deregulation. The only important variable with regards to this expected change is the timing, how much it will take to reach and thus how much time do the chemical producers have for adapting to the increasing prices.
On a larger perspective, the European Chemical Industry Council (CEFIC) estimated that the European chemicals industry will contract by 1% during 2013 compared to the previous year, determined by the decline in construction and automotive sectors, as well as the high energy and feedstock costs compared to the other markets (e.g. Asia).
Very few chemical producers have managed to resist and maintain or increase their competitiveness in the local and export market mostly. One example is Azomure?, which during 2012, despite a fall in the net profit of 33% compared to 2011, increased its turnover by 12.5% due to strong international demand for fertilizers. More importantly, in 2013, the company has concluded a EUR 75 million contract for the modernization of the urea production facilities and it also plans to modernize two ammonia factories. Azomures was purchased in 2012 by Ameropa A.G., a Swiss cereals and fertilizers trader.

In contrast, the situation of Oltchim became dramatical.
The company’s decline began in 2008, once Arpechim stopped the ethylene and propylene deliveries. After a failed and well known attempt of privatization to Dan Diaconescu in late 2012, the company entered the insolvency procedure at the beginning of 2013, not being able to meet its obligations to creditors. Later on, 930 people have been fired, while 715 others were forced into technical unemployment.
Oltchim, once one of the largest producers of PVC in Europe, was forced to shut down production after running out of raw materials in 2009. Its main supplier, Arpechim, a refinery owned by Petrom Group, was closed in 2011 after Austrian shareholders decided that it is not cost effective.
The media announced the interest of several entities for acquiring Oltchim (e.g. the Turkish chrome producer Yildirim Holding Inc., Fortissimo Capital, an investment fund from Israel or SOCAR, the Azerbaijan petrol company, and Oil Gas Trade LLC, a Russian group). Interest may also apply to Oltchim and Arpechim package.
Rompetrol Petrochemicals is the only producer of propylene and polyethylene in the country. In 2012, the turnover of the company has declined by 20% compared to 2011. However, its losses plummeted 58% during the same period. During 2013, the Group decided to integrate the entity with Rompetrol Rafinare.
According to Mediafax news agency, the management of Uzinele Sodice Govora declared in the summer of 2013 that the going concerns of the company, as well as that of its suppliers of commodities and utilities are at risk, unless the EU regulation regarding silt settling tanks will not be modified. According to the company reports, 2012 financials show a loss of RON 56.7 million, up from RON 35.2 million in the previous year.
The persistent feedstock shortages and volatile price of natural gas created cost pressures on the domestic chemicals industry. Still, after almost 45% of companies active in the chemical industry increased their risk of insolvency (as per a Coface report), the Romanian chemical industry might have a chance to recover in the upcoming years. Attracting direct domestic or international investment can turn the sector into a success, taking into account the estimated global growth of 12%.
On one hand, the estimated growth could be dismissed by lack of incentive for foreign investments, since there is a political risk that Romanian Governance might fail to meet IMF conditions to release outstanding tranches from the country's financial balance. On the other hand, favorable trade market integration within EU regulatory framework would enable an increase of chemical products exports.
This context might be an interesting access point for cost-effective Romanian chemical industry companies, in their attempt to enter other European markets.