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PE deficit stymies Russia's pipe market

May 1, 2006

5 Min Read
PE deficit stymies Russia's pipe market

Demand for polyethylene (PE) pipe in Russia is rising by 12%-14% per annum, twice as fast as the country''s gross domestic product growth rate. But lack of supply continues to hinder the market''s growth, says its top participant.

The huge Russian market, and the government''s acknowledged desire to improve the country''s infrastructure, must be enticing to plastics pipe processors. But the lure of suppressed demand must be balanced against domestic issues, especially the lack of suitable material. Evrotrubplast Group (Moscow) is the leading Russian processor of PE pipes. Its CEO, Miron Gorilovski, spoke with MPW on market development in Russia.

MPW: How would you describe the market for raw materials for polyethylene pipe production in Russia?

Miron Gorilovski: Last year was marked by 25%-28% increases in the price of polyethylene. There are only two significant plants for pipe-grade PE in Russia, belonging to Lukoil-Neftekhim and Kazanorgsintez. Since these plants came online in 1985, Russian capacity for PE production has remained the same. In 2005 Lukoil-Neftekhim produced 99,000 tons of pipe-grade PE. Kazanorgsintez produced only about 35,000 tons, a reduction in its output. The total amount of PE produced in Russia did not meet the demand of pipe processors, so that about 25,000 tons needed to be imported. This deficit in domestic supply prompted the PE price increases.

MPW: Why is the use of plastics pipes in Russia so limited compared to the U.S. and Western Europe?

MG: In the first place, the cause is our historical adherence to metal. Since the early 1980s, most developed countries actively cut production of metal pipes and increased production and market share of plastic pipes. PVC and PE were the plastics of choice. In Russia the active development of metal pipes'' production continued, with production of metal pipes reaching 20 millions tons. By 1990 metal pipe output in Russia was larger than the sum of the metal pipe processing industries in the U.S., Japan, and Germany. After the economic collapse in Russia in the early 1990s, the production capacity of metal pipe remained high, but eased to about 6-7 million tons per year. It is still a large volume, but it is in demand.

Second, pipe fitters and housing and communal services are accustomed to using metal pipes. Breaking their habit is very difficult. Most of our pipes are unprofitable for fitters. First of all, installing PE pipe is not as labor-intensive as with metal pipe, thus fitters earn less money per kilometer of a pipeline. Second, plastic pipe has a service life of more than 50 years, so it is not necessary to lay pipe every five to seven years.

You know, it is very difficult in Russia to introduce new technologies. In addition, it is necessary to teach workers again, and to apply new standards in pipe networks. All this requires introducing new norms and changing people''s minds.

MPW: How dense is the PE pipe processing landscape in Russia?

MG: There are about 75 companies in Russia extruding a total of about 149,000 tons of PE pipe in 2005. The leading pipe producers are Evrotrubplast and Kazanorgsintez that respectively extruded 36,000 tons and about 30,000 tons in 2005. Large processors have their market niche; they produce the whole range of PE pipes, including large-diameter pipes, and serve as crucial points for further development of the pipe industry.

An auspicious recent trend is the increase of the market share of medium-sized processors, ones with annual output volume between 2000 and 10,000 tons. The market share of such firms has increased from 17% in 2003 to 28% in 2005. The optimum share of medium-level processors is 40%, I think. They are of importance in supplying Russian regions, since it is too expensive to transport pipes more than 1000 kilometers. It is a very positive development as it has come about through the decreasing market share of small processors.

Among mid-sized processors, Sibgazapparat must be listed in first place. It has significant capacity (about 25,000 tons) and consumed about 10,000 tons last year. Next is PTK Politek, which recently increased its capacity to about 5000 tons per year for PE pipe [it also produces pipes from other materials]. Other notable medium-level producers include Borodinoplast, Novokuybyshevsk, Omsk, and others. Most mid-sized processors offer good quality.

Small processors with capacities of less than 1000 tons a year hurt the pipe market, since they cannot afford adequate quality control systems; they use inappropriate raw materials, and pursue unclear price policies. In 2003 the small processors controlled about 35% of the PE pipe market; in 2005 it is only 20%. I think a 10%-15% share for these firms is optimal.

MPW: What''s your outlook for the industry?

MG: Exports increasingly account for the supply of raw materials for pipe production. Within the next two years we are not counting on any significant increase in domestic production of pipe-grade PE. Because of this, we''ll need to continue dealing in 2006 and 2007 with the acute domestic deficit. This year the import volume is expected to reach 35,000-40,000 tons, accounting for about 20% of the total Russian market.

Russian PE suppliers plan to take advantage of the country''s low oil prices to increase their ethylene production capacities. To produce polyethylene, it is necessary to increase ethylene production [cracking facilities] with large investments of about $1 billion and a three-to-five-year timeframe. There are many projects to build new, and to reconstruct existing, cracking facilities, including ones at Lukoil Neftekhim and Kazanorgsintez.

In all probability, at least by 2009 new plants for pipe grade PE will appear in Russia and existing suppliers will reconstruct their facilities. As a result, Russia could become again a net exporter of PE, as it was up to 2003.

MPW correspondent Kirill Koryakin

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