Significant growth factors

Interest rates in Poland

In 2016, interest rates in Poland did not change. As announced by the Governor of the National Bank of Poland, despite inflationary impulses, partly attributable to the rising prices of energy carriers and partly to stronger consumer demand, interest rates should remain at their current level until the end of 2017. Some analysts expect interest rate increases in the fourth quarter of 2017, if domestic inflation exceeds PLN 2.5%, i.e. moves above the target set by the Monetary Policy Council.

Accordingly, the Group’s base interest rate (1M WIBOR) should stay at 1.7%, which has a positive effect on stabilising the Group’s borrowing costs at a relatively low level. Moreover, it ensures secure debt service also if the borrowing grows to finance investing activity.

Deflationary pressures continue to persist in the Eurozone and, given additional threats to economic growth related to Brexit, the European Central Bank will continue its quantitative easing programme and a policy of negative interest rates. On the other hand, the Fed is almost certain to raise interest rates for USD-denominated debt in 2017 given the sustained, stable growth of the US economy and concerns regarding increased inflationary pressures.

To conclude, any adverse changes to the current low interest rates on debt in currencies used by the Group to finance its activities (PLN and EUR) are unlikely before the end of 2017. Thus the risk of the Group’s financial condition or results of operations deteriorating on higher borrowing costs is considered low.

In terms of market rates, a relatively narrow spread between credit and deposit rates available to the Group is expected to continue, although they may increase slightly following the introduction of the tax on bank assets in Poland.

Interest income earned on free cash under the cash pooling arrangement and fixed-term deposits will partially offset the borrowing costs.

As at December 31st 2016, the Group did not carry any unrealised interest rate hedges.

Market overview

The World Bank estimates that in 2016 the global GDP grew by 2.3%. According to forecasts presented in the ‘Global Economic Prospects’ report, in 2017 the global economy will expand at a pace of 2.7%, driven mainly by emerging and developing economies. In 2017, developed economies are expected to grow at a rate of 1.8%, a modest improvement on the 1.6% recorded in 2016, with an outlook to maintain this growth rate in 2018. The World Bank estimates that in 2016 Poland’s GDP grew by 2.5%, down on the 3.9% recorded in 2015. The World Bank further predicts that the growth of the Polish economy will again exceed the 3% mark in 2017, when it will expand at a rate of 3.1%.

The growth of the chemical industry will continue to depend on changes in the global economy. Following a stagnation in 2016, CEFIC estimates that in 2017 chemical production in the EU will increase by 0.5%, despite the impact of globalisation and challenges related to the growing costs of doing business in the EU. It is expected that internal demand will compensate for weaker demand for European chemical exports. Despite the forecast growth of chemical production in Europe, the share of the European chemical industry in the global market is diminishing as it currently ranks third, trailing behind Asia and the US. Zacks Investment Research predicts that given the current economic environment, chemical manufacturers around the world may seek opportunities to improve their competitive positions through such measures as further cost synergies, expanding activity in market segments offering the best growth potential, and building the scale of business through consolidation.

Factors which will affect results of the Group’s operations over at least the next reporting period include:

• situation on the markets of natural gas, coal, electricity and petroleum products (mainly propylene, benzene and phenol) and the continuing low price environment,
• situation in agriculture and the fertilizers industry, including prices of agricultural produce staying low in the long term,
• conditions prevailing in the main sectors which purchase the Group’s products and on the markets where those sectors sell their products.

External factors

In line with the Strategy until 2020, the main objective of the Group’s development initiatives is to improve its competitive position and reduce exposure to negative macroeconomic factors, such as growing costs of energy and environmental protection.

In the Fertilizers segment, the key initiatives will focus on the optimisation of production structure, and on leveraging the segment’s synergies with caprolactam production. The Group plans to increase the output of granulated fertilizers, reduce production costs, and improve the quality of fertilizers.

In the Plastics segment, the key initiatives will be to increase the output of polyamides, to balance the production capacities for caprolactam and polyamides, and to reduce caprolactam production costs. The main goals are to utilise the caprolactam output of the Group in a more efficient manner, to increase sales of caprolactam, and to reduce costs of its production.

In the Oxoplast segment, the range of plasticizers will be expanded to include next-generation products – non-phthalate plasticizers.

In the years ahead, the focus will be on projects related to upgrading the Group’s power generating assets. The plants in Tarnów, Police, and Puławy will be brought into compliance with the requirements of the IED Directive on industrial emissions, and a new energy source will be built at the Kędzierzyn plant.