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Annual Report 2016

Market overview

According to the preliminary data released by the Central Statistics Office, in 2016 Poland’s GDP growth rate was 2.8%, the lowest in three years. The main drivers of the growth in 2016 were domestic demand and higher total consumption. Investments in capital goods grew at the slowest rate, as the flow of EU funds for infrastructure investments decelerated and a number of projects sponsored by local authorities was put on hold due to the election cycle and the political climate in the country. Exports grew faster than imports and the average exchange rate of the Polish złoty relative to the euro and US dollar depreciated, both factors serving to improve Poland’s trade balance. In 2017, the Polish economy is expected to expand by 3%, i.e. is slightly faster than in 2016, while domestic demand is forecast to grow 3.1%, just above the 2016 result. The Gdańsk Institute for Market Economics forecasts that private consumption will increase by 3.3% over the period on the back of the strong labour market and falling unemployment.

Economic conditions in agriculture

According to the Polish Institute of Agricultural and Food Economics, in 2016 market conditions for agricultural production improved slightly compared with 2014-2015. Between December 2015 and December 2016, the weighted average farm gate prices of basic agricultural produce increased by 4.3%, well above the increase seen in the previous two years and coming close to the price rises in 2013. However, the rise in farm gate prices was not accompanied by the 0.4% decline in prices of means of agricultural production observed in 2016. As a result, the aggregate equalised price differential index was 104.7 points, compared with 95.3 and 89.7 points in 2015 and 2014, respectively.

2016 saw strong crop yields and high global cumulative grain stock volumes. The grain supply pressures, on both the world and national markets, kept prices low with the weakening of the Polish złoty improving export profitability domestically. Poland’s wheat exports were particularly high in July–October 2016. Traditionally, EU subsidies provided strong financial support to farmers.

In 2017, growing prices on certain markets may drive investments in agriculture. Another meaningful factor may be the availability of funds under the 2014−2020 Rural Development Programme.

Oilseed rape, wheat and corn prices

Source: the Ministry of Agriculture and Rural Development.

Increase in farmers’ incomes in the fourth quarter of 2016 was exceptional, as in the past they would grow only in the periods of intensive agricultural activity. This was attributable to higher prices on agricultural produce markets and higher output, both observed in the preceding several months. Higher income improved the financial condition of farms, with their debts falling and the capacity to save improving. These changes were strong enough to reverse the downward trend prevailing for over two years.

Compared with 2015, prices of rapeseed and corn continued to grow, while prices of grains fell, as presented in the table below:

  Average 2015 PLN/t Average 2016 PLN/t yoy % 12-2016 PLN/t MIN 2016 PLN/t MAX 2016 PLN/t
Consumable wheat 699 645 (8)¯ 660 610 677
Corn 617 654 6 610 567 716
Rapeseed 1,559 1,700 9 1,828 1,613 1,828

Source: the Ministry of Agriculture and Rural Development.

The crop balance in Europe and around the world will not support increases in prices of agricultural produce. Competition between crop exporters is strong, particularly in the Black Sea region, and will further intensify following harvests in the Northern hemisphere. Exports from the European Union have slowed down compared with the previous season, a trend attributable to lower crop production, particularly in France.

Given the dwindling global supply of rapeseed in the 2016/2017 season, production of oilseeds, mainly soy, cotton, sunflower, groundnuts, oil palm seeds and copra, is expected to grow. Among the less significant crops, sesame output will increase, whereas linen and castor-oil plant production will decline. In terms of supply and demand, the 2016/2017 season should be marked by the strengthening of average prices, especially of plant oils, with palm oil as the main growth driver, and sunflower oil prices exhibiting the least volatility.

Nitrogen fertilizers

In the first half of 2016, demand in the nitrogen fertilizer market remained strong. Solid demand was particularly salient in the first quarter, i.e. during the spring application season, while the second half of the year saw a slowdown attributable to lower seasonal demand and continuing low prices of agricultural produce. The higher demand for nitrogen fertilizers in spring had no effect on their prices. The lowest prices of the fertilizers were observed in the third quarter of 2015, during harvest and when cheaper, competing imported nitrogen fertilizers entered the Polish market. From mid-October until the end of 2016, nitrogen fertilizer prices were rising. This coincided with improvement in the financial condition of farmers on the back of advance disbursements of direct subsidies in October 2016.

Prices of nitrogen fertilizers (urea, CAN, AN, AS,) and ammonia

Source: ICIS, Argus FMB, Profercy

In 2016, FOB Yuzhny prices of ammonia, the key feedstock used to manufacture fertilizers, continued on a downward trajectory prevailing since November 2014. Year on year, prices declined by approximately 39%, mainly on account of higher gas prices, disruptions in supply (e.g. in Ukraine) and movements of the USD/EUR exchange rate. Short-term forecasts for 2017 suggest that ammonia prices will rise.

Urea remains the key product in the fertilizer segment, and has a direct and indirect effect on other nitrogen fertilizer markets. The oversupply of urea, as well as macroeconomic factors (low agricultural produce prices, high crop stocks, turmoil on financial markets) caused prices of the fertilizer to fall by 29% year on year (FOB Baltic).

In 2016, average prices of all nitrogen fertilizers on international markets declined year on year.

  Average 2015 EUR/t Average 2016 EUR/t yoy % 12-2016 EUR/t MIN 2016 EUR/t MAX 2016 EUR/t
CAN 27% Germany CIF inland (bulk) 245 179 (27)¯ 196 149 230
AN 33.5% France, delivered (bulk) 317 239 (25)¯ 256 209 302
  USD/t USD/t % USD/t USD/t USD/t
Ammonia (FOB Yuzhny) 386 233 (39)¯ 215 168 279
Urea (FOB Baltic) 269 194 (28)¯ 215 175 215
AS (Black Sea FOB white) 142 119 (17)¯ 123 99 134

Source: ICIS, Argus FMB, Profercy

March and April are traditionally a period of increased demand for fertilizers. Similarly to previous years, the distribution of demand is consistent with the forecast continuing low prices of agricultural produce, and the situation in the global market of urea. It can be expected that farmers will postpone purchases of fertilizers for subsequent applications until the last moment; however, given the nature of agricultural production no major shifts in the distribution of demand for nitrogen fertilizers should be anticipated in 2017.

Throughout 2017, movements in prices of nitrogen fertilizers could be spurred by the considerable excess of urea production capacities on the global market and the Chinese manufacturers’ decision to curb output prompted mainly by the production becoming unprofitable. It the early months of 2017, given a very low stock of urea, chiefly in India and China, demand for urea as well as its prices should markedly increase. Recently, prices of ammonia have also been on the rise, and to maintain positive margins manufacturers will seek price increases. Excessive global production capacities of ammonia and the launch of new fertilizer production units may put pressure on its prices, particularly in the second half of 2017. The fact that only 12% of produced ammonia is traded internationally, coupled with limited stockpiling capabilities, may trigger fluctuations in its prices over very short time periods, although gas prices will remain relatively stable compared with 2016.

Market of compound fertilizers

The global compound fertilizer (NPK) market once again recorded lower sales year on year, with manufactures and distribution networks keeping high inventory levels. Excluding short, seasonal periods of increased purchasing, demand remained low, save for the markets of India and several countries in South-East Asia. For most of the year, demand for NPK fertilizers was solid only in Russia, Ukraine and Poland. Prices of NPK fertilizers on global markets were on a downward trend in 2016 and declined by 18% (FOB Baltic).

Prices of NPK fertilizers in Poland were affected by low prices of imported NPK fertilizers and the policy of distribution companies (bundling).

Prices of compound fertilizers (NPK, DAP), potassium chloride and phosphate rock

Source: WFM, FERTECON, Profercy

Demand for DAP, a two-component fertilizer, in the US, Europe, Brazil, China and India was weak. Many major manufacturers reduced output (e.g. China by 60%). Low internal demand in China prompted local producers to increase exports, contributing to low prices on global markets.

Despite the reduced output, DAP prices could not be maintained and dropped 27% (FOB Baltic).

The falling trend in compound fertilizer prices was a major contributing factor to the decline of prices of feedstock for their production.

The largest importers of salt, China and India, affected the level of feedstock prices by heavily stockpiling potassium chloride in 2015 and in the fist half of 2016. In the second half of 2016, contracts were signed for deliveries of several million tonnes at fixed prices until April 2017. This prevented any further decline and later helped stabilise potassium chloride prices. However, they eventually bottomed in December, having declined by 20% (FOB Baltic) from the beginning of 2016, similarly to prices of phosphate rock.

In 2016, output of potassium chloride was also reduced. One Canadian company even permanently stopped production at a newly built mine worth PLN 2bn.

  Average 2015 USD/t Average 2016 USD/t yoy % 12-2016 USD/t MIN 2016 USD/t MAX 2016 USD/t
DAP (FOB Baltic) 449 326 (27)¯ 302 302 366
NPK3x16 (FOB Baltic) 323 264 (18)¯ 235 235 307
Potassium chloride (FOB Baltic spot) 298 235 (21)¯ 223 223 265
Phosphate rock (FOB North Africa) 128 100 (21)¯ 97 97 105

Source: WFM, FERTECON, Profercy

Prices of NPK fertilizers have been trending downwards for several years and no significant changes should be expected in 2017. Good crops and growing global crop stockpiles will not encourage any price increases; however, depending on the 2017 harvest, the situation may be reversed in the second half of the year.

In contrast to NPK fertilizers, in 2017 DAP prices will be shaped by demand factors. In Saudi Arabia and Morocco alone the fist half of 2017 will see the launch of new production units with total capacities nearing 5m tonnes of DAP. These facilities will produce DAP exclusively for exports. Such a sharp increase in production capacities is likely to affect DAP fertilizer prices globally. On the other hand, planned shutdowns of DAP units in China should serve to stabilise the prices.

In 2016, prices of raw materials for the production of NPK fertilizers and DAP (phosphate rock, sulfur, potassium chloride), fell to their lowest levels since the 2007 crisis. In 2017, prices are expected to either stabilise or slightly increase.

CHEMICALS

OXO product chain

As in previous years, the market situation along the entire OXO chain was affected by prices of crude oil and naphtha. Demand for propylene remained broadly unchanged relative to 2015. Availability of propylene on the market significantly diminished from May 2016 due to industrial actions in the petrochemical sector in France, followed by planned maintenance shutdowns. After the summer season, the supply and demand situation improved, with propylene prices driven predominantly by the fall in crude oil prices. As a result, year-on-year spot prices of propylene fell by approximately 22%.

Prices of 2-EH, DOTP and propylene

Source: ICIS

  Average 2015 EUR/t Average 2016 EUR/t yoy % 12-2016 EUR/t MIN 2016 EUR/t MAX 2016 EUR/t
2-EH (FD NWE spot) 1,105 879 (20)¯ 933 820 940
DOTP (FD NWE spot) 1,382 1,252 (9)¯ 1,365 1,201 1,365
Propylene (FD NWE spot) 815 635 (22)¯ 640 523 745

Source: ICIS

The downward trend in prices of oxo alcohols at the beginning of the period was an effect of lower prices of raw materials (crude oil, propylene). In the second half of 2016, prices of oxo alcohols remained correlated with changes in propylene prices, and moved further up on the back of supply shortages. Eventually, the price of the key 2-EH alcohol reflected a downward trend in propylene prices and fell more than 20% year on year. In 2016, the 2-EH market remained balanced. Alcohol production volumes in Europe were adjusted to the current demand and the export possibilities that opened up in the context of competitive prices of petrochemical feedstock.

In 2017, prices of oxo alcohols will continue to be correlated with movements in propylene prices and will depend on demand drivers.

Demand for plasticizers grew throughout 2016. The market saw strong competition from regional suppliers and importers, which had a bearing on prices in Europe. In the fourth quarter of the year, the supply of plasticizers was limited due to production stoppages at BASF and Evonik caused by force majeure events.

In the first half of the year, product prices were affected mainly by lower prices of crude oil and petroleum commodities as well as by imports of competitively priced plasticizers from South Korea and Turkey. The second half of the year saw higher feedstock prices and lower output, which led to sharp increases in plasticizer prices. In 2017, the demand for the DEHP plasticizer will continue to decline due to REACH restrictions. In Europe, DEHP will be used mainly in medical applications that are not covered by REACH. Meanwhile, the output and consumption of the DEHT plasticizer will grow in Europe, on the back of rising demand for non-phthalate plasticizers.

Limited availability of the DINP plasticizer on the European market in the first half of 2017 will drive  the demand for DEHT.

Prices of plasticizers are forecast to grow in line with the expected increase in feedstock prices.

Sulfur

In 2016, there was a substantial decrease in sulfur prices globally, from USD 115 per tonne in January to as low as USD 70 per tonne in August (Vancouver spot FOB), due to the weakness of the phosphate fertilizer market. In the second half of 2016, the prices rebounded to approximately USD 90 per tonne, both in the Middle East and the US.

Sulfur prices

Source: FERTECON

  Average 2015 USD/t Average 2016 USD/t yoy % 12-2016 USD/t MIN 2016 USD/t MAX 2016 USD/t
Sulfur (Delivered Benelux refinery) 159 115 (28)¯ 96 96 142
Sulfur (FOB Vancouver contract) 138 83 (40)¯ 87 71 110

Source: FERTECON

Movements in sulfur prices in 2016 were caused by main importers of the product. There was a growing demand for this raw material in China and Morocco. The sulfur market is currently considered to be fairly balanced, as both the global supply and demand grew by approximately 5% year on year in 2016. Some changes in the supply and demand may occur upon completion of the delayed Barzan/Qatar project, originally scheduled to launch in October 2016. It is now expected to become operational in 2017. The United Arab Emirates’ share in the market increased following the launch of the Shah gas project. At the same time, the supply of sulfur from Iran, Kazakhstan and Turkmenistan was reduced, indicating a shift in the market’s trading model. Prices of sulfur may be expected to fluctuate slightly, but they will oscillate around ca. USD 87-92 per tonne, and the compound fertilizer market will continue to have a significant effect on them’.

Pigment chain

Market prices of titanium white and ilmenite

Source: ICIS, CCM

Titanium white, manufactured by Police only, is a product of particular significance for the Group. Its sales are highest in the spring-summer period (second and third quarters) on stronger demand for paints and varnishes in the construction industry.

  Average 2015 USD/t Average 2016 USD/t yoy % 12-2016 USD/t MIN 2016 USD/t MAX 2016 USD/t
Titanium white FD NWE 2,158 2,047 (5)¯ 2,180 1,955 2,180
Ilmenite ex Works China 87 120 38 200 79 200

Source: ICIS, CCM

Sales of titanium white usually decline during the winter season – in the first and fourth quarters of each year. Titanium white remains a seasonal product, but given its widespread application, the demand depends chiefly on general market conditions. The successful price rise in 2016, which reversed the downward trend, is considered by the leading producers of titanium white as a turning point in the long trend of price decline (started in 2012). The growth is expected to continue in 2017. Unfortunately, the gains reported as early as in the first quarter of 2016 were not significant and, year on year, the prices declined by 5%. Due to production constraints, prices of feedstock for titanium white production (ilmenite and titanium slag) increased in 2016. In 2017, a slight upward trend may be maintained but the prices of both commodities are expected to gradually stabilize.

Melamine

In 2016, the European market saw stable demand for melamine, with a temporary increase in demand in Eastern Europe, North and South Americas, Russia and India, driven by insufficient supplies from China and the US. Due to solid demand, the average contract price of melamine in Europe increased by EUR 40/t (ca. 3%) compared with 2015.

Prices of melamine

Source: ICIS, Global Bleaching Chemicals

The demand for melamine depends on the growth of the construction sector, including in particular its furniture and flooring segments. Globally, the demand is expected to grow until 2018 (by ca. 4.3%), though there will be regional variations.

  Average 2015 EUR/t Average 2016 EUR/t yoy % 12-2016 EUR/t MIN 2016 EUR/t MAX 2016 EUR/t
Melamine 1,349 1,389 3 1,390 1,375 1,390

Source: ICIS, Global Bleaching Chemicals

Strong demand, coupled with tightening supply in China, may undermine the stability of the global melamine market, which could contribute to a EUR 30-50/t increase in European prices in the first quarter of 2017.

ENERGY

Natural gas

2016 was the fourth consecutive year of declining gas prices on the European market. Over the period, the prices halved and retreated by as much as 30% relative to 2015. For most of the year, the gas market was oversupplied. An over two-fold increase in prices of coal, which began to be displaced from the energy mix by natural gas, the rise in oil prices as a result of the OPEC agreement to reduce output, and the cold start of the winter season led to a sharp rise in gas prices in the last quarter of 2016.

Prices of natural gas

 

  Average 2015 EUR/MWh Average 2016 EUR/MWh yoy % 12-2016 EUR/MWh MIN 2016 EUR/MWh MAX 2016 EUR/MWh
PGNiG tariff 25.6 18.7 (27)¯ 17.5 17.0 21.3
TTF DA, net of transmission costs 19.8 14.0 (30)¯ 17.7 11.9 18.0

Source: PGNiG tariff, ICIS

According to IHS Energy, the decline of coal prices after the winter season and the higher supply of LNG to the European market will bring gas prices to the level seen in the summer of 2016. Increased oversupply will put gas prices under pressure which will continue into the winter season. It the average price of gas is expected to remain stable relative to the previous year.

On the domestic market, PGNiG changed its strategy, with a shift towards defending its market share. The Polish gas incumbent first introduced discount plans and then aligned gas prices to the market for the largest customers, which made its offering more competitive against independent imports. In addition, an amendment to the Energy Law, whereby all gas importers (including those consuming gas for own needs, such as the Group) are required to maintain mandatory stocks, will reduce the profitability of direct imports in favour of gas supplies from PGNiG, thus leading to price increases for end users.

Electricity

In 2016, average monthly prices of electricity fell slightly relative to 2015 (by ca. 2.2%). Electricity prices were volatile over the year, and peaked in the second quarter. It was a result of disruptions in the operation and shutdowns of power generation units in Poland, unstable output of wind farms, and limited access to cheaper electricity from Scandinavia.

Prices of electricity

Source: Polish Power Exchange

IRDN − average price weighted by the volume of all transactions on a trading day, calculated after the delivery date for the entire day.

  Average 2015 PLN/MWh Average 2016 PLN/MWh yoy % 12-2016 PLN/MWh MIN 2016 PLN/MWh MAX 2016 PLN/MWh
Electricity 157.0 161 2 156 83.4 413

Source: Polish Power Exchang

The prices of electricity in 2017 may be driven by a combination of offsetting factors:

No considerable decline in electricity prices is expected in the near future.

Coal

In line with analysts’ predictions, in 2016 the average annual prices of coal rose by only 5% year on year. In the third quarter of 2016, following three years of decline, coal prices began to rise, and delivered an over 100% increase for the year. Prices grew on account of, among other factors, disruptions in the supply of Australian coal, increased demand from the Asia-Pacific countries, and oil price fluctuations (traditionally trailed by coal prices).

Prices of hard coal

Source: ARA

The long-term oversupply of coal on the Polish market finally disappeared on the back of the ongoing restructuring of the mining industry. According to estimates, in the coming months of 2017 coal prices may remain in the upward trend.

  Average 2015 USD/t Average 2016 USD/t yoy % 12-2016 USD/t MIN 2016 USD/t MAX 2016 USD/t
Coal 57 59 5 87 43 92

Plastics

Prices of PA6, caprolactam, benzene and phenol

In the reporting period, the market situation continued to be shaped by the supply, demand and oil prices. Price declines were not as sharp as a year earlier, though. Oil prices fell ca. 17% year on year, clearly affecting the prices of benzene (down by over 6%) and caprolactam, which added to the pressure on polyamide (PA6) prices.

Source: TECNON, ICIS.

During the year, the average prices of phenol decreased only slightly, by 1% (FD, NWE), an effect not only of the decline of crude prices but also of limited seasonal fluctuations of the supply and the stable demand.

During the year, the average price of caprolactam from Asia (CFR, NE Asia) was as much as 19% lower than in 2015, and prices of caprolactam from European manufacturers fell 5% in the period.

  Average 2015 EUR/t Average 2016 EUR/t yoy % 12-2016 EUR/t MIN 2016 EUR/t MAX 2016 EUR/t
Benzene (FOB, NWE) 635 594 (6)¯ 631 523 652
Phenol (FD, NWE) 1,212 1,201 (1)¯ 1,240 1,122 1,261
Caprolactam (Liq., DDP, WE) 1,613 1,524 (5)¯ 1,570 1,453 1,570
Polyamide 6 (PA 6) (DDP, WE) 1,669 1,521 (9)¯ 1,550 1,425 1,550
  USD/t USD/t % USD/t USD/t USD/t
Caprolactam (CFR, NEAsia) 1,633 1,320 (19)¯ 1,460 1,153 1,460
  USD/bbl USD/bbl % USD/bbl USD/bbl USD/bbl
Crude oil (BRENT) 53.7 44.4 (17)¯ 53.34 31.95 53.34

Source: ICIS, Tecnon, Rzeczpospolita

The relatively low caprolactam prices are expected to change as prices of oil and petrochemical commodities stabilize and the demand in the European market strengthens in the near term (the increase is currently estimated at 1.3%). The price increase may also be prompted by the manufacturers seeking to earn higher margins in the context of the growing demand and a possible impact of changes in commodity prices driven by economic growth and seasonal fluctuations.

The strong growth of production capacities in China in 2013−2016 adversely affected export opportunities for non-Asian manufacturers and strongly contributed to the oversupply of caprolactam. However, it was gradually reduced by the growing demand, a trend that is expected to continue in the coming years. Manufacturing assets on the European market need and are expected to be restructured, whereas the market itself must be optimized towards a considerable reduction of the production capacities. The process to rationalise the European caprolactam market will depend solely on consumption levels along the entire product chain in Europe. Long-term forecasts do not suggest any threat from the Asian market to European manufacturers but only indicate that the Chinese production capacities are sufficient to meet the country’s demand for PA6. Thus, the Asian markets’ impact on Europe will only lead to reorientation of caprolactam exports, while the polyamide market will not be affected to any significant degree.

The relatively strong demand for PA6 in Europe was driven mainly by the automotive and construction industries. The overall structure of demand for PA6 is expected to change, mainly because of the growing significance of engineering plastics, foil and flexible packaging. Therefore, within the next decade the automotive industry will be the main customer for polyamide-based engineering plastics. The polyamide producers’ exposure to the transport sector is very high and may be expected to increase even more.

There were attempts to meaningfully reduce the polyamide oversupply in the European market in 2016, which noticeably improved the trade balance thanks to favourable conditions in these areas. Intense competition among integrated manufacturers of polyamide 6, further compounded by the oversupply, led to an even tighter market, with volatile benzene prices also affecting the situation. Changes in the pricing trends, reflecting seasonal fluctuations in demand, prompted producers to adjust prices. As in the case of caprolactam, the decisive factors which had an effect on the PA6 market were the drop and then stabilisation of prices of crude oil and petroleum products along the entire product chain, as well as the structure of supply and demand. In 2016, the average price of polyamide 6 (PA6, Engineering Resin Virgin, DDP, WE) was EUR 1,521 per tonne. Compared with 2015, it went down rather significantly, by 9%.

In the near future, the prices of products and raw materials used by this segment will be largely affected by commodity pressures, the balance of supply and demand in the plastics processing industry, and − to the greatest degree – the exonomic growth, expected by the IMF to reach 1.6% in the Eurozone. Stabilisation of crude oil prices at the levels seen in 2016 would create a favourable environment for the restoration of market equilibrium in the sector, thus supporting the anticipated increase in demand for plastics, not hampered by other factors.

Other drivers of the increase will include stable economic growth globally and supportive economic policy in the EU.


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