Russia’s leading petrochemical producer Sibur won’t hold its highly anticipated IPO this year, or even next year, as profits were up but revenues were down on poor market conditions. However, the shareholders remain committed to listing the company when the market conditions improve, Sibur’s CEO Dmitry Konov told bne IntelliNews at an investors’ day in London on February 20.
“The shareholders are committed to taking the company public, but the timing will depend on both the situation on the Russian market and the petrochemical industry as a whole,” Konov told bne IntelliNews.
The situation on the Russian capital markets have improved noticeably in the last year. Russian stocks were amongst the world’s best performing in 2019, up almost 50% y/y. This year the markets are doing less well after a good start in the first half of January and have sold off on the back of the Conronavirus epidemic fears. However, analysts say that the fundamentals remain good and expect the stock market to recover in the second half of this year once the first phase of the epidemic passes.
The outlook for the petrochemical industry over the next two years is also not so rosy as new capacity comes on line and depresses prices, according to Konov. That means the earliest the IPO could happen is probably not before 2022.
But in the meantime the company continues to develop. Last year saw its new facility ZapSibNeftekhim (ZapSib) in the Siberian city of Tobolsk come online that bne IntelliNews featured in December 2018 when it was almost finished in “Plastics in the snow” in December 2018.
With the completion of ZapSib Sibur’s current investment cycle has come to an end. Although ZapSib has yet to significantly add to revenues, the cash flow of the company has already improved as its capex on the plant falls away.
In a testament to the improving financial standing of the plant, despite the market conditions, last year the shareholders decided to take advantage of the improving free cash flow and awarded themselves a bigger dividend payout, hiking the ratio from 25% of net profits to 35%.
Market conditions remain tough
Sibur announced results in London that saw net profit rise by 27.6% to RUB141.4bn in 2019 y/y despite challenging market conditions. It expects that 2020 will also be a tough year thanks to a range of issues, including new capacity coming online in the global petrochemical business, as well as the US-China trade war and the decreasing oil price. However, as both global and Russian demand continue to grow faster than the rate of GDP growth business should pick up after that.
“Our revenues were down in 2019, but by less than the sector average and as demand continues to grow and per capita consumption in the developing markets is still way behind that in developed markets we are not really worried,” Sibur CEO Dmitry Konov told bne IntelliNews.
Sibur’s revenues fell from RUB569bn ($8.8bn) in 2018 to RUB531bn ($8.2bn) last year, while EBITDA fell by 15% over the same period from RUB201bn to RUB170bn, although the EBITDA margin remains a health 32%, but slid a little from 35% recorded the year previously.
Amongst revenues of its main products, while plastics and intermediate products fell a bigger 44% to RUB20bn over the same period, this was compensated by a 30% increase in the sale of olefins and polyolefins, which grew by 30% to RUB49bn in 2019 year-on-year, the company said.
The net debt to EBITDA ratio was also up slightly to 2.1x, but that increase was also partly caused by exchange effects as five sixths of Sibur debt is in foreign exchange.
ZapSib comes online
Despite the mild decline in revenues Sibur counts 2019 as a successful year. The major event was the completion and launch of production at its new ZapSib facility.
ZapSib is a major expansion of Sibur’s production capacity and includes a steam cracker made by Germany’s Linde AG that has a capacity of 1.5 mtpa of ethylene, around 500 ktpa of propylene and 100 ktpa of butane-butylene fraction (BBF), along with other units with a total capacity to produce 1.5 mtpa of various grades of polyethylene and a polypropylene unit of 500 ktpa.
The point of the facility is that it uses natural gas liquids (NGLs) and liquefied petroleum gas (LPG) derived from associated petroleum gas (APG), a by-product, from Russia’s oil and gas majors, as feedstock. ZapSib adds a new type of polyethylene to the company’s portfolio and moves production up the value chain to improve the margins.
ZapSib started producing polypropylene in the first quarter and then polyethylene in the third quarter – basic plastics that mostly go for export to be used in the construction and packaging industries amongst other things -- but its still early for revenues earned from this production to make an impact on the company’s results in 2019 as it will take another six to 12 months to bring ZapSib up to full production, according to Konov.
“It’s like an orchestra,” Sergey Komyshan, the executive director, told bne IntelliNews in an exclusive interview. “It talks time to warm up and fine tune the instruments.”
As bne IntelliNews previous reported, ZapSib dramatically alters the production profile of Sibur as it uses the production at the nearby legacy facility as feedstock, rather than sourcing hydrocarbons from its oil and gas producing partners. Export is an important source of revenue, but Sibur is also focused on the large Russian market as well where demand is a long way from being satiated and provides a foundation to Sibur’s business.
“The Russian market is not yet saturated and consumption of polyethylene in Russia is at half the level of European and American markets in per capita terms,” says Komyshan.
The company’s net income was boosted in 2019 by FX gains as while the ruble appreciated over the year it fell in the last quarter which is when assets, including its debt which is five sixth in foreign currency, has to be re-valued and marked to book.
“The upshot is we made a short-term FX gain due to the currency dynamics,” Sibur’s CFO Alexander Petrov told bne IntelliNews.
Petrov went on to say that FX effects are less important than they used to be as the ruble has become more stable in recent years. The government use of the so-called budget rule which forces the Ministry of Finance to sterilise any oil revenues when oil prices climb over $42 per barrel has in effect greatly weakened the link between the ruble exchange rate and the price of oil.
ESG & environmental concerns
As a large chemical producer, like most of its industrial peers Sibur has decided to take the rapidly changing attitudes to the climate crisis serious and put in place policies to address the issues before governments around the world start to regulate. In December 2019 the company adopted a comprehensive ESG (environment, social and corporate governance) strategy to make sure it compliant when the time comes. But Konov argues that the way packaging and materials are used needs to be completely rethought and Sibur is actively investing into research to facilitate these changes.
“We have to change the way we think about how plastics are used. For example, the emissions from making a plastic bottle are half as much as those produced in making a glass bottle,” says Konov. “Moreover, rather than making single use bottles we should think about multi-use plastic bottles. That would also greatly reduce both emissions and waste. From this perspective plastic doesn't look as bad.”
Sibur argues that apart from things like waste in the sea, plastics are not necessarily a problem for the environment as they capture and lock up CO2.
Another programme Sibur is pursuing is to develop more and better ways of recycling plastics. The company is already considering adding some recycled plastics to the production of its products and through a variety of mechanical, chemical and other means it hopes to increase the share of recycled plastics in some of its products to 25%.
The new ESG strategy now affects all the investment decisions as well as the way the company is run and set itself targets that it has been meeting so far as part of a strategy that runs through to 2025.
“ESG is not always about incurring costs. We often have choice when building facilities between using different technologies that produce the same results. We are already assessing the environmental impact of these technologies when making investment decisions and have excluded some choices on the basis of their environmental impact alone,” says Komyshan.
As bne IntelliNews reported, while companies can be heavily punished for a bad ESG score – Norway’s pension fund has banned investing in companies with low ESG scores completely – companies with especially good ESG are not yet being rewarded: there is no alpha in being a green company yet.
But change is clearly coming. Komyshan points to the speech given by the current managing director and chairwoman of the International Monetary Fund (IMF) Kristalina Georgieva at this year’s Davos World Economic Forum summit, where she said the IMF would start costing ESG compliance and called on all the world’s government to set up similar schemes.
“There are no taxes on carbon emissions or other restrictions, but they are coming. At some point exports could be affected if countries start imposing a carbon tax on those that don't meet specific standards,” says Komyshan. “The problem is when you make an investment decision the results will last for decades. You have to get it right now. And these changes require a raft of internal changes in thinking and processes that take years to implement. If you want to be ESG friendly you need to embed it in the corporate DNA as early as possible.”
Consumption and demand
Sibur is in a growth industry. And based in Russia it can tap the abundant hydrocarbon resources, as all the major oil and gas producers in the country are happy to sell off the lighter and heavier hydrocarbon fractions that are not part of their core oil or natural gas businesses.
Today the use of plastic is still rising faster than economic growth throughout the whole world. In places like Europe and other developed markets the rate of growth is slowing and is now 1.2 times the rate of GDP growth, but in emerging markets the growth is higher at between 1.5 and 1.6 times GDP growth, according to Konov.
“The growth in the use of plastics is a problem but it not such a big problem,” says Konov.
However, the plastics market had a tough time in 2019. Demand for petrochemicals has been depressed as a lot of new capacity came online last year.
Komyshan says the “shale revolution” created a window of opportunity for petrochemical producers as associated with shale oil and gas is a higher share of light hydrocarbons than with traditional crude production that is ideal for use as the feedstock for petrochemical production. That led to a rush to build new plants that have been coming online now.
“If you add the economic slowdown expected in Asia as a result of the coronavirus then you have something of a perfect storm at the moment,” says Komyshan.
However, as the demand for petrochemicals is running ahead of GDP growth Komyshan says the world needs to add new capacity equivalent to at least two ZapSibs every year just to keep up. As this new capacity is not being built Sibur thinks the pendulum will swing back to demand outstripping supply from about 2022 onwards.
And in Russia the market conditions are even more favourable. Russian domestic demand remains strong as the market is still not saturated and the ongoing economic growth and consumption is driving demand for construction materials and packaging among other products and will do for years to come.
On top of this organic growth, the Kremlin’s 12 national projects that were launched last year are expected to give and extra fillip to the business as billions of dollars will be invested in infrastructure and urban redevelopment.
“I believe that civil investment will produce demand for more modern materials that we can supply,” says Komysshan highlighting the fact that for example urban water mains are still often made of steel, whereas a plastic alternative is half the cost and more durable. Sibur is already in talks with several Russian regions to explore similar solutions of their urban development plans.
Negative excise tax and Amur
One of the concrete consequence of the launch of the national projects is the tax system has had a total overhaul. The government is on the hunt for new revenues and has started to reengineer the system to help remodel the economy for growth.
One of the big changes in the last year has been the so called “tax manoeuvre” where export duties have been shifted from sales to costs. “However those who process naphtha will be entitled to receive not only the excise tax that had been paid but also a 70% incentive fee from the government to encourage conversion of naphtha to higher value added petrochemicals. A similar approach will be extended to other feedstock products – ethane and LPG though the rate will be lower,” says Konov.
The tax manoeuvre caused a problem for the petrochemical producers. Although the duties on exports were reduced, that caused prices for raw materials to rise on the domestic market as prices moved to align with international prices. In effect the duties protected domestic petrochemical producer but following the tax manoeuvre they were punished.
The government stepped up to the plate and provided relief by introducing “negative excise duties” – effectively a subsidy to negate the impact of the change on prices caused by the tax manoeuvre.
The subsidy has already been introduced to the production of naphtha but the same negative duty is supposed to be introduced to a broader group of LPG hydrocarbons – things like butane, ethane and propane -- which make up a much larger part of Sibur’s business. The government was supposed to reach a decision last September but missed the deadline and the details of the decision will be key to Sibur in its plans to built a new petrochemical complex in the Amur region.
The next big investment project will be the Amur petrochemical complex in Russia’s Far East. However, the final investment decision has not been made yet and depends on the details of the government’s decision to extend the negative excise duties.
Work on planning is well advanced. Komyshan says that designs have been more or less completed, contractors chosen for the key technical components and a preliminary feedstock supply agreement signed with Gazprom. Sibur could partner with Sinopec to build the plant in a 60/40 joint venture that will export its production mainly to Asia.
“If it goes ahead then Amur will be largest site of its type in the world. We are only now waiting on the government decision on the negative excise duties,” says Komyshan.