Restrictions help find more efficient suppliers

Pavel Lyakhovich
member of the Management Board and SIBUR's Executive Director

Western sanctions forced SIBUR to look for alternative suppliers of equipment and catalysts, but some of them have proved even more efficient, says Pavel Lyakhovich, member of the Management Board and SIBUR's Executive Director. In the interview - where SIBUR had managed to find new partners, what potential the Russian polymers have in the Chinese market, and how the Company had helped its Russian suppliers and clients grow their business.

– Mr Lyakhovich, what is the current state of Russia's petrochemical industry? How optimistic are you about its future?

– Quite optimistic. Objectively, the petrochemical industry is one of the most advanced sectors globally. Therefore, it simply cannot be depressed. Of course, it may meet various challenges. As to the Russian petrochemical industry, these challenges mostly stem from the constraints imposed in 2022. But, trite as it may sound, they also unlock additional opportunities. Faced with restrictions on chemicals and catalysts supplies to Russia, we found new producers, and some of them, surprisingly, turned out to be even more efficient than the ones we used to partner with earlier. That is, new suppliers may offer lower prices, feature better feedstock consumption, and higher output.

– Let us discuss import substitution. In terms of the production chain, how well is SIBUR shielded from external constraints now?

– Last year, we found replacements for 743 out of 749 imported specialty chemicals. We have initiated in-house development for critical components left without replacements. We have already designed a technology to produce such special components as zirconium tetra-isobutyrate, n-Butyllithium (zirconium tetra-isobutyrate is a catalyst required to manufacture normal alpha olefins and n-Butyllithium is the key component for producing synthetic rubbers and styrene-butadiene-styrene polymers – Ed.).

Our capacities were underutilised only for two products, i.e., styrene-butadiene thermoplastic elastomers and a type of rubber, due to long logistics of Butyllithium delivery. But even in this domain, the cumulative decline in 2022 was about 150,000 tonnes, about 2% of SIBUR's total output of petrochemicals. The substitutes were mainly imported components from Asia. Therefore, we cannot claim that we are completely self-reliant. That said, in switching from European and US manufacturers to Asia, we have found manufacturers in Russia too. We continue collaborating with them and developing them. We discuss general medium- and long-term plans and help them to forecast production.

– Are you seeking full import substitution?

– SIBUR’s key goal is to secure a stable, efficient, and safe production process. We don’t believe we have to buy only Russian-made catalysts, if our neighbours have a cheaper and more effective technology. We seek to have at least two suppliers for each of our catalysts or additives, from both Russia and abroad. This protects us from force majeure events and this way we don't rely on a single supplier. Before 2022, such risks had also been taken into account, but they may not have always been the top priority.

– For the most part, Russia's own production of basic polymers meets domestic demand. Nevertheless, certain grades, including specialty grades, continue to be imported from abroad. How critical do you think it is and is it worth building local production of the whole existing range of grades?

– Our flagship project – ZapSibNeftekhim in Tobolsk, which reached full capacity in 2020, – played a big part in minimising the reliance of Russian polymer processors on imports of certain grades. This was an important element in solving the puzzle of developing domestic supply in the petrochemical market, which we had set ourselves long before the restrictions imposed in 2022. Following the launch of the facility in Tobolsk, we started producing virtually everything that used to be imported in vast quantities from abroad.

– We can see that polyethylene and polypropylene imports from non-FSU countries are steadily declining, even irrespective of the restrictions. Technologically and physically, we can bring it down virtually to zero, but it is not always economical. It’s pointless for SIBUR to produce a grade with a market of 2,000 tonnes a year at a facility as large as ZapSibNeftekhim. So, if we can import it, both the Company and the industry will benefit. Nevertheless, there is still enough potential for polymer import substitution, and we are persistent in our effort, bringing new solutions to the market every year.

– In 2022, processors faced polymer supply constraints and had to engage in import substitution as well. Has SIBUR managed to find alternatives for them?

– For those clients who had previously bought products in international markets, SIBUR looked for similar grades that could serve as a replacement. We made combinations, adjusted the equipment, tweaked formulae with some other chemicals. I can boast that though the substitution faces certain compromises, quality is consistently high. We continue our efforts.

– How is the balance between domestic consumption and exports of SIBUR's polymers changing in the context of the Western sanctions?

– The key market for us is certainly Russia, and we are focused on its continuous development. You can see it is growing, as we discussed above. Hence, if polymer production is flat, the balance will shift towards Russia. Exports in 2022 were lower than in the preceding year, and this wasn’t triggered by the sanctions. In 2023, I think exports will be about the same, because we manufacture more products now. But the Russian market’s share in our portfolio will go up continuously. We take steps to achieve that.

– And how have export trade flows changed?

– Exports have changed a lot structurally. We have refocused our sales of polypropylene since early summer when the EU banned polypropylene imports, and by autumn we virtually stopped selling it to Europe. Our supplies went to China, Turkey, and Vietnam. We had made supplies to those countries before, so our goal was simply to turn trickling streams into rivers. This was also the Company's strategy – not to put all our eggs in one European basket (albeit a high-margin one). We consciously developed other supply geographies as well. This bore fruit last year: we quickly “turned our vessel from west to east”. New markets have also emerged: North Africa, South-East Asia, and Latin America. Since autumn, we have also stopped selling polyethylene in Europe under the pressure of new sanctions packages. Our goal for 2023 is to grow our share in the above markets.

– Do you trade in local currencies?

– Among other things. We trade with Vietnam in dong, and last year we switched completely to yuan with China. We sell our products to Turkey for lira, but we will also be exploring other exotic currencies.

– Which countries are you currently considering to tap into?

– We are looking at several factors: market, competition, regulation, logistics. For example, in terms of logistics efficiency, we are interested in North Africa and perhaps part of West Africa. But East Africa is rather out of reach for us: producers from Saudi Arabia are closer to it and therefore slightly more competitive than we are. Step by step, we are starting to sell to Bangladesh, Myanmar, Indonesia, and Malaysia. So far, transportation rates are unpredictable, but if we are regular players in these markets, it will be possible to have some other tariffs, and we are working on it.

– China is Russia's No. 1 trading partner, including for SIBUR. That said, it is steadily increasing not only local polymer processing but also its production. How promising is the Chinese market for SIBUR? Will China remain a key customer?

– China consumes about 70 million tonnes of polymers a year, nearly a third of global consumption (200 million tonnes). It is rapidly ramping up its capacities indeed. Three million tonnes was added last year and an increase of five million tonnes is expected this year. Nonetheless, consumption is growing at a faster pace, so China remains a net importer and there will certainly be room for us.

Right now, in the entire Chinese polymer market, SIBUR's share hovers around 1% and stands at 2–3% of its imports. China accounts for about 12% of our sales portfolio. However, we see our strengths in the figures: it’s not only about production efficiency, but also about other components of our value proposition, and China is and will be one of our key export markets. There is a potential to increase our share in China after the launch of Amur GCC, which is focused on the Chinese market first and foremost.

Our sales to China are supported by our mature sales system, financial instruments, technical service, and stable supply logistics. We ship about 20% of our supplies by rail, and 80% via Russian ports mainly in the Far East. In March, we made our first successful delivery by road directly from our Tomsk facility to a client in Qingdao.

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