Although Russia’s chemical sector has been hit by the global economic downturn and falling oil prices, in the longer term, its advantaged feedstock position should ensure healthy growth prospects.

Even though the market for chemicals in Russia experienced a significant setback in 2008, recovery is expected within the next five-year period. In 2008, the size of the chemical market stood at USD 70.1 billion. The average growth rate for the Russian chemical market in the years from 2004 to 2008 was 4.9 percent.

Base chemicals accounted for the largest share of the market in 2008, 35.6 percent, or approximately USD 25 billion. The sale of special-order chemicals and fine chemicals constituted only 30.1 percent of the market, or USD 21.1 billion.

The pace, at which the market develops, is expected to go down in the next forecast period. The market will likely expand at a rate of 4.4 percent for the next five years, according to Datamonitor International. By the end of the forecast period, the market size will likely increase to USD 86.9 billion.

Market performance

The chemicals market in Russia decreased by 4.2 percent in 2008, falling to USD 70.1 billion. The average annual growth for the period of years from 2004 to 2008 stood at 4.9 percent.

Base chemicals accounted for nearly 35.6 percent of the market. Specialty and fine chemicals took a 30.1 percent share. Pharmaceutical products amounted to 22.8 percent, and agricultural chemicals to 11.5 percent.

The size of the Russian market constitutes only 7.3 percent of the European market. Germany accounts for 20.7 percent of the market, France for 14.5 percent, and the U.K. for 11.5 percent.

Chemicals are utilized in a wide array of manufacturing activities and construction. Hence, the chemical industry is inextricably tied to the overall economic situation in a given country. The global economic downturn that spread to many countries across the world throughout 2008 and 2009 caused a significant decline in regional chemicals markets, including the Russian market.

Overview

As the Russian market stands right now, the strength of buyers is reaffirmed by the ability of customers to procure similar materials from more than one producer. As a consequence, end users have become very price-conscious. There are only a few isolated cases where a certain chemical product can be purchased from only one manufacturer. The producer’s control over the entire supply chain is common on the Russian market. The market segment of commodity chemicals in particular exhibits pronounced vertical integration. Enterprises engaged in natural resources extraction add value to the raw materials they acquire through the process of chemical production.

The process of entering the Russian chemicals market is capital intensive. Trying to enter the Russian market on a small scale will not lead to good results in the long term. Companies should be prepared to invest in large-capacity processing facilities.

Competition is intense, because companies are mostly selling unbranded products. Product substitution is unlikely to occur, as consumers need to purchase products of particular chemical composition, available only from local producers. The main product categories on the Russian market are base chemicals, including both inorganic and organic solution, specialty chemicals, pharmaceutical products, and chemicals for use in the agricultural industry.

Key buyers in the Russian chemicals market include manufacturers of plastic products, pharmaceuticals, consumer chemical manufacturers, as well as utility companies. Oil and gas companies are considered to be key suppliers for the sector. The buyers are large-scale to medium businesses that have good negotiating positions with respect to key producers.

Base chemicals

Traditionally, bulk base chemicals are not differentiated and are referred to only on the basis of their composition. At the same time, in view of the myriad of different application of base chemicals, the number of potential clients for these products is high. It is not uncommon for base chemical manufacturers to operate in several regional submarkets.

Regional variety and the diversity of product application, in turn, can work to curtail buyer power. Base chemicals are usually essential supply materials for the buyers. Chemical production is very often contracted for on a long-term basis.

Specialty chemicals

Specialty chemicals constitute one more set of chemicals industry products that have a diverse application across several industries and that are highly priced. Specialty chemicals are generally derived through innovative processes, and are sold on the basis of their specially designated purpose. It only matters what a particular compound can do, not what chemicals it contains. The versatility of application of specialty chemicals means that these products are easy to sell, or to transform for other uses. The cost of remaking one specialty chemical product into another may include expenses associated with the loss of time from waiting until a previous unprofitable contract expires. The power of buyers in this market segment is well-balanced by the leverage that the producers enjoy.

Suppliers

The chemicals industry is heavily reliant on the oil and natural gas sector for basic materials that are combined to produce both carbon-based chemicals and inorganic substances. Suppliers are strong and few in number, as the Russian oil and gas industry is very centralized.

The positions of suppliers are even stronger, as the price of hydrocarbons continues to rise. Chemical producers have formed strong relationships with the suppliers of their raw materials in a struggle for profitability. Additionally, a number of key suppliers in the oil and gas industry have chemical and petrochemical manufactures. Thus, the influence of suppliers over downstream chemical producers that do not have their own natural resources is strong.

The power of suppliers, on the other hand, is constrained due to the lack of differentiation in raw materials supplies. The materials a particular chemical manufacturer would buy from one hydrocarbons producer would be the same that it would get from another oil or gas producer.

Still, as the raw materials are bought and sold on an open market, manufacturers are not able to control the price. Strategies for hedging risk and reducing the instability of prices are necessary.

There also are chemicals that are not dependent on oil, but rather require certain minerals or water. Sodium chloride, for instance, can be formed by evaporating sea water or extracted in mining operations. The chemical is then used to create other sodium compounds. Another element from the periodic table, sulfur, is also critical to the production of many base chemicals.

Existing economic conditions have forced many chemical producers to reduce output volumes. These reductions negatively affected the suppliers of raw materials.

Market entry

While chemicals do have inherent value and may have immediate uses and applications (i.e. cleaning chemicals), more frequently, chemicals are used as a starting point in a production chain that ends with the manufacture of valuable goods. Therefore, chemicals are produced in bulk quantities in order to enable manufacturers to profit from the sale of large volumes.

Accessing the Russian chemicals market therefore entails significant commitments. Large scale production facilities would be required for a foreign player to rise to the challenges of the Russian market. Therefore, the intensity of investment and the size of most chemical operations in Russia narrow the class of companies that would be capable of entering the country.

A number of factors, however, make the Russian market attractive. The products of the chemical industry are sold as unbranded commodities. As a result, marketing strategies are greatly simplified. Absent contractual commitments, a consumer would be just as likely to buy from a new player on the market as from an established producer. The processes and formulas used to manufacture chemicals used by the Russian industry have been around for decades, in many cases without intellectual property restrictions.

Many large and middle-size companies are present on the Russian chemicals market. Because producers of chemicals sell commodities, it is not easy for market participants to offer tangible incentives not to seek a better deal from a different manufacturer. Overall, the market requires high capital outlays and infrastructural investment. The dominant players on the Russian market are local producers, such as Nizhnekamskneftekhim, Togliattiazot Chemical Company, and Uralkali.

The combination of all the factors outlined above naturally breeds competition. Competition is generally tolerable at times of market growth, but can be very aggressive during periods of economic slowdown.          

Market value forecast

In 2010, the Russian chemicals market is expected to reach the size of USD 74.8 billion. In 2011, the volume of the market is forecast to be USD 77.6 billion. The market size in 2012 will likely reach USD 81.5 billion, and in 2013 – USD 86.9 billion.