The rouble depreciation: Long-term contracts offer shelter / Sergey Komyshan, head of SIBUR's Basic Polymers

The rouble’s depreciation is having a dual effect on the Russian polymer market. While the falling rouble has led to a partial shrinking of internal market capacity and, as a result, boosted exports in some cases, the weakening currency is also facilitating import substitution, both of granulated or end products.

In the wake of unavoidable market volatility, Russian feedstock producers have been less concerned by daily exchange rate fluctuations, instead maintaining flat rouble denominated domestic sales prices throughout the autumn.

While the Russian currency has weakened by more than 30% since September 2014, LDPE and PP prices have changed only marginally. Generally, declining feedstock prices and the resulting decrease of more than 25% in global polymer prices have pulled domestic prices down. However, devaluation of the rouble sustained the prices in rouble equivalent at the pre-crisis level.

A stable PP pricing policy coupled with the growth in domestic supply following the launch of Tobolsk-Polymerhas enabled producers to practically cease imports of homopolymers [a threefold drop year-on-year in December 2014], while boosting domestic supply [by 3–4% against December 2013]. The rouble devaluation has forced import-dependent PP consumers (injection moulding, pipes, compounding) to reduce the procurement of block and random copolymers significantly. PE consumption, for example, has been steadily declining since October [down 3–5% year-on-year].

Meanwhile, a slightly lower output of LDPE has been offset by fewer export shipments, with many national processing companies cutting purchases on the back of sluggish demand for end products and poor credit availability. In the HDPE market, the continuing substantial shortage of domestic supply was only made up for through imports, with rising prices driving demand down by 10%. For the first time in along while, the LLDPE market, in its vast majority dependent on imports, shrank by 4% year-on-year.

As with any high-liquidity commodity product, polymer pricing has a benchmark from the most liquid market, while the domestic price relies on its netback. Even with zero consumption domestically, assuming virtually unlimited demand capacity of the global market, the domestic ex-works price will approximate the foreign exchange (FX)-adjusted export price. Given the above, the weakening rouble may, to some extent, offset favourable price developments. So, FX is important to factor in. What I would recommend to processing companies, acting mainly as intermediaries between us manufacturers and end-users, is to closely monitor FX rates in order to avoid being trapped by this factor, and to switch to long-term contracts, which we offer to execute on terms in line with local market pricing in roubles.

For instance, SIBUR has a positive experience of long-term contracts in the polypropylene segment: We enter into contracts spanning a year or more (up to three years) that are based on domestic market prices, often offering clients advantageous pricing due to the long-term nature of our relationship. In some cases we can even fix a price for up to three months. Thus our clients know what rouble price they will pay in a month, or even in a quarter, and can plan their participation in bidding tenders for their finished goods that are usually held on a quarterly basis without bearing any unnecessary price risk. We believe such a contractual framework will continue gaining popularity across all our business lines.