TOP MANAGERS TAKING QUESTIONS

If we take a look at the synthetic rubber prices over the last 5–7 years, we will see that they are notably volatile. This is due to a number of key factors, including the price of butadiene (a raw material for the synthetic rubber production), the price of natural rubber and national governmental programmes for the development of rubber-consuming industries (such as automotive).

As regards 2016, it was highlighted by a number of important price drivers.

Significant shortage of butadiene

The price of any product, including butadiene, depends on the supply and demand balance. Last year, a number of Asian steam crackers (producing the C4 fraction used as a raw material for butadiene) and butadiene production capacities were affected by prolonged unscheduled downtime leading to a drop in supply and subsequent shortage of butadiene. Despite increased exports of European surplus to Asia the butadiene shortage persisted and its prices rallied globally affecting all regions and continents.

Changes in the natural rubber market

Natural rubber is a plant product and its output directly correlates with the size of rubber tree plantations. In the period of natural rubber shortage back in 2008–2010, the rubber planting area was enlarged with the trees starting to harvest in 2015. This lead to higher supply causing negative price movements. The trend reversed in Q3 2016 when many natural rubber producers in the South East Asia were hurt by adverse weather conditions (rain and flooding) and the demand for rubber picked up in China backed by the launch of a governmental programme to support the country’s automotive industry (as rubber is mainly used in tire production). This simultaneous reduction of supply and growth of demand have led to a price surge.

Industry experts have no common view on how the situation will evolve going forward. With the existing natural rubber plantations and global synthetic rubber production capacities, we can expect the global market to remain in surplus in the next five to seven years. However, recent developments have shown that other significant market impacts also take place, with some of them, such as natural hazards or government action (subsidies, restrictions, etc.), rather difficult to predict.

We do realise that it is hard for processing companies to pay for feedstock in advance and then sell finished products under a deferred payment scheme. In the past 10 years, SIBUR has invested over RUB 500 bn in ramping up production and developing its product mix. Many of our new projects (PP, PVC, EPS, PET, etc.) have greatly contributed to import substitution in the Russian market, with benefits most notably felt by Russian processors after the national currency meltdown. We are currently working on ZapSibNeftekhim, a new production facility worth an estimated USD 9 bn. Another RUB 600 m is spent annually on SIBUR's R&D centre and its active work on grade range expansion. All of this is done for the sake of our Clients and their current and future needs. Still, investments of such scale call for a strict financial policy.

It is no secret that European companies operate in a different environment. The CBR’s current key rate is 10%, so it is the minimum rate at which we can borrow. In contrast, the ECB’s refinancing rate is at the record low of 0%. Overall, Russia has higher financial risks, particularly those relating to inflation and currency.

However, more often we do not change the basic payment terms due to the current economic environment.

Still, we are willing to meet our Clients halfway in terms of payment. To that end, over the past few years SIBUR has enlisted the help of reliable banking organisations to work on factoring solutions. Alternatively, processing companies may negotiate the desired payment terms when buying our products from a distributor.

Right now, our payment terms are not Client specific and instead are set for specific product markets based on their nature. However, we intend to change this approach. We are currently working on unifying the payment terms for individual consumers, starting with the largest and most diversified companies.

The decision to join forces with Sinopec in this strategic partnership comes on the back of SIBUR’s development policy – the Company is a long-established leader of the Russian petrochemical industry, with its next logical step being a focus on global markets. SIBUR’s partnership with Sinopec opens up unique opportunities for the Company to implement new projects, including those in the Chinese market.

Here, I would like to mention the Amur Gas Chemical Complex construction project, which is in the early stages of consideration. If the decision is made to go on with the project, the new complex, due to its location, will target the Asian market, China in particular. Sinopec is interested in developing its basic polymers business and is the largest player in China and a major one in the global market. The companies have been sharing best practices, including ways to improve customer focus.

All our production processes provide for unit cooling or heating circuits. These are sets of pipes filled with flowing water.

In below-zero temperatures, suspended circulation leads to water freezing in the pipes with subsequent pipe ruptures and major equipment failures. That is why in Russia’s climate any shutdown maintenance is carried out in summer, when water circulation can be suspended without any negative consequences and there is no risk of residue water freezing in the pipes. Information on the time of shutdown maintenance is communicated to the Company’s clients in advance, so that they could adjust their production plans.