BMI believes that export weakness, both for petrochemical products and key petrochemicals-using industries, such as the automotive sector, are dragging down the recovery of the Czech petrochemicals industry, according to BMI’s latest Czech Republic Petrochemicals Report. Industry growth will be heavily linked to eurozone demand (particularly that from Germany), given that exports make up are 72% of GDP overall, with almost one third sent Germany, and 57% going to the eurozone as a whole. As long as the German industrial machine continues to power ahead, Czech exporters will stand to gain. However, we are firmly of the opinion that Q210 marked the peak in Germany's economic recovery cycle, and that its growth will slow through 2011 due to cooling global demand and fiscal austerity programmes. Such an outlook does not bode particularly favourably for Czech exporters since Germany is the single largest destination for petrochemicals, industrial and consumer goods by a considerable margin. Germany’s 31% dominance of the Czech export market is far ahead of the 8% of shipments bound for Slovakia, and we therefore highlight that the slowing of German economic growth that we expect, from 2.8% in 2010 to 1.6% in 2011, will weigh heavily on Czech export growth.
Another downside risk for Czech petrochemicals production is the appreciation of the koruna; we expect that the central bank may allow some modest upside in the koruna over the course of 2011 with some scope for currency appreciation being deployed in order to combat import-cost driven price inflation. A likely 50bps cumulative hike in interest rates is expected by the end of 2011. This casts a shadow over hopes of a revival in exports of Czech petrochemicals and products that utilise petrochemical products, and will force players in the sector to diversify markets. It will also influence decisions by domestic petrochemicals consumers that can easily source from neighbouring Poland.
With regard the domestic petrochemicals market outlook, most indicators point to a weak picture for the Czech Republic’s construction industry, which poses a challenge to the revival of the PVC and PP pipes markets. Prospects seem gloomy and there is a possibility of a contraction in the Czech petrochemicals market in 2011, which could be counter balanced by continued restocking and capacity expansion. The Litvinov cracker, which has capacity to produce 525,000tpa of ethylene, was scheduled to be expanded to 545,000tpa by the end of 2009 with a further expansion to 595,000tpa planned during a turnaround in 2011. A rise of 70,000tpa of ethylene capacity will provide additional feedstock for any potential downstream development. However, the recovery will be a drawn out process, with dampened demand in the eurozone set to ensure no speedy pick up in output growth rates until 2012, when we believe the industry will be operating at full capacity. Growth after then will be limited owing to capacity constraints.
In BMI’s Petrochemicals Business Environment Ratings for CEE, the Czech Republic scores 56.4 points out of a maximum of 100, unchanged since the previous quarter. It is in third place, 1.0 point ahead of Hungary and 1.4 points behind Poland. The Czech Republic’s score is unlikely to improve significantly over the next five years, with other countries in the region set to raise petrochemicals capacity at a higher rate.
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