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SIBUR-TAIF

SIBUR-TAIF Agreement 23 April 2021

Moscow, 23 April 2021. Today, SIBUR and TAIF have initiated a number of steps to combine their petrochemical businesses. Existing TAIF shareholders will receive a 15% stake in PJSC SIBUR Holding in exchange for the transfer of a controlling interest in TAIF’s group of petrochemical and energy companies. The remaining stake in JSC TAIF can be subsequently purchased by the combined company.

The deal will be closed subject to completion of the relevant corporate procedures and receipt of necessary regulatory approvals.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This combination will make the new company’s petrochemical operations more competitive in the global market, improve its resilience to market fluctuations, and also unlock further growth potential of Russia’s petrochemical industry through joint realization of capital intensive projects, and also boost chemical non-commodity exports. The transaction will also bring new jobs and opportunities for sustainable development and environmental management. Furthermore, the new combined company will benefit from improved resource base diversification, distribution and logistics optimisation, joint R&D development, and sharing operational best practices to maximize the efficiency of its assets. Upon realization of SIBUR’s and TAIF’s already approved investment projects, the combined company will be one of the world’s top 5 producers of polyolefin and rubber products.

The merger will also facilitate more efficient distribution of feedstock to ensure full capacity utilisation and further development of the petrochemical cluster in Tatarstan. The new company is expected to continue with funding for TAIF’s approved capex programme and development of the group’s assets, bringing together TAIF’s business management expertise and strength in human capital to all of the combined group’s entities.

Dmitry Konov, Chairman of the Management Board at SIBUR Holding:

“TAIF Group boasts an unrivalled portfolio of products and technologies. Powered further by SIBUR’s capabilities, the new combined company will be able to deliver an industry leading growth programme. By combining our assets and professional teams, we will further boost productivity at Russia’s leading petrochemical facilities and also significantly improve the competitive position of the Russian petrochemical industry on global markets.”

Albert Shigabutdinov, Chairman of TAIF’s Board of Directors:

"Through the merger of our companies, we can unleash the huge potential for further efficient development of the nation’s petrochemical industry. The deal will help TAIF Group to substantially accelerate the key projects in its 2030 Strategic Development Programme that will see over RUB 1.5 tn of investment over the next ten years, improve productivity at our facilities, and expand our product mix. By 2030, we expect tax payments, including those to Tatarstan’s consolidated budget, to increase significantly – to up to RUB 50 billion per year."

Outline

SIBUR and Taif recently announced the start of a merger of the oil and gas company business.  The merger has been a possible option for both groups over the past decade who remain competitors on the domestic market but have considerably less influence in global context.  The two entities have neem unable to agree terms to any partnership until now but have now proceeded to the merger which can be seen largely as a marriage of convenience.  The reasons for deciding

Shares

Existing TAIF shareholders will receive a 15% stake in SIBUR Holding in exchange for the transfer of a controlling interest in TAIF’s group of petrochemical and energy companies.  The remaining stake in TAIF can be subsequently purchased by the combined company. 

The deal will be closed subject to completion of the relevant corporate procedures and receipt of necessary regulatory approvals.

Competition benefits

This combination will make the new company’s petrochemical operations more competitive in the global market, improve its resilience to market fluctuations, and also unlock further growth potential of Russia’s petrochemical industry through joint realization of capital-intensive projects, and also boost chemical non-commodity exports.  

The new combined company will benefit from improved resource base diversification, distribution and logistics optimisation, joint R and D development, and sharing operational best practices to maximize the efficiency of its assets. Upon realization of SIBUR’s and TAIF’s already approved investment projects, the combined company will be one of the world’s top 5 producers of polyolefin and rubber products.

Background reasons for TAIF joining with SIBUR

The start-up of the ZapSibNeftekhim complex at Tobolsk, combined with SIBURs existing plants and other projects, provides the major challenge to the leading Russian domestic market position of petrochemical plants based in Tatarstan.  Not only has ZapSibNeftekhim put pressure on domestic market sales in polymers, but it has forced Tatarstan’s chemical holdings TAIF and Tatneft to examine their own structure and product direction. 

In essence, Kazanorgsintez and Nizhnekamskneftekhim ultimately cannot compete against SIBUR due to its feedstock base and there is a case put forward for higher added value products.  Given the raw material orientation of the development of the complex in other regions, the strategic advantage of the republic may be the orientation towards the production of structural plastics, composite materials, and small-tonnage chemistry.

In the medium term Kazanorgsintez claims it only will be able to increase ethylene production if additional ethane feedstock capacity is created.  This could be possible if the Kazan GPP is commissioned and if gas processing capacities at Orenburg were increased.  Tatarstan is interested in the construction of a gas processing plant near Kazan which would supply ethane to Kazanorgsintez and providing an alternative or addition to the Orenburg Gas Processing Plant.  Investments into petrochemicals for Kazanorgsintez has been limited in recent years by feedstock availability and the insufficient pipeline deliveries of ethane from the Orenburg Gas Processing Plant.  The only alternatives for Kazanorgsintez are to use more expensive propane or ethylene from Nizhnekamskneftekhim.

Tatarstan, competition from SIBUR and alternative strategies

Tatarstan has recognized that focusing on plastics in the face of increasing competition may represent an error in the long run, particularly considering bans on plastic packaging in many countries and even in Russia.  Exports of Russian gas to China will not lead to gas shortages in the domestic market, but it may well create a powerful competitor to Russian chemical producers according to Tatarstan. 

Tatarstan is concerned about Tobolsk on its own polymer base, whilst Gazprom pending petrochemical investments at Ust-Luga and other projects at Svobodny and Ust Kut will mean that Tatarstan will not only cease to be the largest polymer producing region in Russia, but it will also result in more competition in the domestic market, resulting in lower margins and prices. 

The pace of petrochemical development in Tatarstan over the past five years has been lower than the national level.  Competitors are working quickly, are planning large-scale projects on base polymers in different regions. 

Feedstock advantage

The merger will also facilitate more efficient distribution of feedstock to ensure full capacity utilisation and further development of the petrochemical cluster in Tatarstan. The new company is expected to continue with funding for TAIF’s approved capex programme and development of the group’s assets, bringing together TAIF’s business management expertise and strength in human capital to all of the combined group’s entities.  TAIF Group boasts an unrivalled portfolio of products and technologies. Powered further by SIBUR’s capabilities, the new combined company will be able to deliver an industry leading growth programme.

The merged company will ensure the efficient distribution of raw material flows necessary for full capacity utilization and further development of the petrochemical cluster in Tatarstan, as well as continue to finance the approved investment program of TAIF PSC, develop the group's assets, and preserve the experience gained by TAIF in business management and human capital. group enterprises.

Main base for merger

Within the framework of the merger, a company will be created on the basis of SIBUR Holding, in which the current shareholders of TAIF will receive a 15% stake in exchange for the transfer of a controlling stake in a group consisting of petrochemical and energy enterprises. The remaining block of shares of TAIF can be subsequently redeemed by the merged company.   The deal will be closed subject to the necessary corporate procedures and regulatory approvals.

TAIF Group possesses a unique product portfolio and technologies that, together with SIBUR's competencies, will allow the combined company to successfully implement an ambitious growth program. The combination of our assets and professional teams will increase the productivity of leading petrochemical enterprises and significantly strengthen the position of the Russian petrochemical industry in the global market.

SIBUR may need to sell assets

SIBUR may sell a number of assets at the request of FAS in order to merge with TAIF.  SIBUR may now have types of business that FAS deems inappropriate as part of the combined company.  It will depend for an in-depth analysis of the FAS.   SIBUR is a private company, among the main beneficiaries of which are citizens from Putin's inner circle.  SIBUR's dividends for 2020 amounted to about 41.173 billion roubles.

Given the unequal value of the exchange, it is rather a takeover of TAIF's assets by SIBUR under the supervision of the Russian authorities.  It is unlikely that SIBUR is interested in the non-core TAIF: gas station, motor oil plant, aviation business, construction companies.

The acquisition of TAIF was expected for a number of reasons: Because of the lack of a resource base; unpopular decision of the Russian authorities in April 2020 to introduce a reverse excise tax for new projects in the field of ethane and LPG processing.  Without the resource base, it would be difficult to compete with the Amur Gas Chemical Complex (GHC) under construction and the Gas Chemical Plant in Ust-Luga, not to mention SIBUR.

The merger will take place in two stages.  The first should be completed by the end of 2021.  SIBUR plans to issue additional shares in connection with the merger of assets.

SIBUR will receive a controlling stake in the TAIF Group. In exchange, SIBUR will issue new shares (17.625% of the share capital) that will be transferred to the current shareholders of TAIF. As a result, TAIF Group will receive a 15% stake in the combined company.  The remaining stake in TAIF Group may subsequently be acquired by the combined company.

TAIF's petrochemical assets will complement SIBUR's business. TAIF Group owns a number of oil, petrochemical, telecommunications and electricity assets. The perimeter of the deal with SIBUR includes TAIF-owned petrochemical companies Nizhnekamskneftekhim and Kazanorgsintez, as well as the electricity company THC-16.

Financial impplications

SIBUR's revenue and EBITDA will increase by approximately 40% and 25% respectively after the merger with NKNH and Kazanorgsintez. According to our estimates, based on the results for 2020 on IFRS, as a result of the merger with NKNH and Kazanorgsintez, SIBUR's revenue will increase by more than 40% and will amount to about 740 billion roubles.  At the same time, THE EBITDA margin of SIBUR should be reduced, as NKNH and Kazanorgsintez have a lower profitability - about 20%, which is typical for traditional petrochemical producers, compared to SIBUR, which has an EBITDA margin of more than 30%.

SIBUR's free cash flow (SDP) is expected to decline slightly, as the NKNH SDP is currently in the negative zone due to the implementation of a large-scale investment project (new olefin complex).  Finally, despite higher net debt, SIBUR's net debt load should be reduced due to a higher EBITDA but will remain above the level of 2.0x in rouble terms.

TAIF-petrochemical projects

TAIF-NK has planned projects worth more than 1,500 billion roubles, including the new petrochemical complex to produce monomers and polymers (600 billion roubles), new ethane separation plants (690 billion roubles), the construction of a new olefin complex and its derivatives (230 billion roubles).  TAIF has outlined that it plans to invest around 70 billion roubles in the creation of a gas chemical cluster at Almetyevsk in Tatarstan, of which the first 0.5 billion roubles will be invested in 2019.  The group is considering new installations with a capacity of more than 3 million tpa including 32 types of products.  Some products targeted include maleic anhydride with a capacity of 50,000 tpa, polypropylene with a capacity of 247,000 tpa, acrylonitrile (10,000 tpa) and carbon fibre (10,000 tpa).

The chemical and petrochemical industries in Tatarstan are managed essentially by two groups Tatneft and TAIF.  In general, Tatneft manages the refining sector and tyre manufacturing facilities whilst TAIF is focused on chemicals and is the main shareholder in Kazanorgsintez and Nizhnekamskneftekhim.  However, Tatneft has become more active in petrochemicals particularly after the acquisition of Togliattikaucuk in late 2019 combined with the development of the aromatics complex at the Nizhnekamsk refinery. 



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