EY ROMANIA

 | 

VIORICA LUNGU

  |  2014-12-12

A battle against losses or seeking for other business niches

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EY Romania


VIORICA LUNGU

VIORICA LUNGU

CONSULTANT – TRANSACTION ADVISORY at EY ROMANIA

A battle against losses or seeking for other business niches?

Oltchim, insolvent since last year, reached a turnover of RON 271 million (EUR 60.7 million) for the first half of 2014, a rise by 30% comparing to H1 2013, while losses were reduced by 22% in the same period.


In 2013, Oltchim stopped production at its units, each with capacity of around 120,000 tonnes per annum (tpa) because of a shortage of feedstock. Oltchim is reportedly operating at under a quarter of its capacity, a situation which is undermining its profitability at a time when the government is planning to privatize it. The government is seeking to boost the capacity utilization to 50%, at which it claims the plant would break even. Also, due to capacity underutilization, Oltchim is planning to expand its business into several new areas, including cultivation and manufacture of wooden materials.


Although the company has reduced its losses, the company still struggles to find a buyer, the next attempt of selling out the company Oltchim SPV which owns the assets of the chemical producer being appointed in December 2014.


The fall in demand from domestic customers in the energy industry and ferrous metallurgy had significantly reduced chemical consumption in the case of Chimcomplex. As a response, the company has developed sales on other niches, namely consumers of non-ferrous metallurgy, water treatment and food.


The chemical plant Chimcomplex Borzesti reported a reduction in profit by 85% to RON 0.63 million (EUR 0.14 million) in the first six months of the year compared with the same period a year earlier, according to results published quarterly on BSE. Chimcomplex announced its intention to contract additional funding for its current activity, also planning for 2014 investments amounting EUR 14.2 million, twice higher than those effective in 2013. The biggest investment for 2014 was targeting a cogeneration plant estimated at EUR 11.9 million, which would have to be completed during the third quarter of 2014, while next on the list would be an investment of EUR 9.85 million in a salt crystallization plant.


Uzinele Sodice Govora (USG) is among the few chemical plants in Romania that have increased production in recent years willing to get rid of losses, reaching a turnover of RON 144 million in H1 2014 and a net loss of RON 0.6 million, an impressive turn on since H1 2013, when the net loss was at RON 63.8 million. The business has been severely affected by the insolvency of Oltchim – one of the main customers for providing steam and brine, basic raw materials needed for production in the chemical sector.


The company will continue to restructure its activity regarding the staff and by concluding long-term contracts with major suppliers of steam and brine. After reaching a financial stabilization of the company the focus will concern the acceleration of an investment program to increase capacity by 15% in 2014 and to purchase new equipment with an estimated value of EUR 10 million.

 

While some chemical producers are looking for new niches, others are considering the exit as the only way out

Interagro is shutting down all its chemical plants, 4 of which were already closed and 4,000 people were laid off. The existing plants Viromet Victoria and Chemgas Slobozia have stopped working and could be closed soon, leaving another 2,000 employees without jobs. The management of the company blames the government for the gas prices rise in 2013, being practically doubled by a government decision. Leading to an increase by 34% in transportation costs, the company’s performance was reflected by losses of nearly USD 10 million from stopping the activity in order not to register loss.

 

Effects which affect

The effects of the closure of six chemical plants will result in sending about 6,000 people in unemployment and the bankruptcy risk of related businesses like agriculture, which might be affected, being exposed to an annual deficit of about 3 million tons of fertilizers.


The overall economy will be dragged down primarily because of the disappearance of almost an entire industry, related businesses and thousands of jobs. Also, exports will suffer a negative contract with immediate effect in the GDP. On the other hand, the former minister of privatization considers that the Interagro factories could be taken on by other potential investors with more competitive business plans.


The low capacity utilization, the persistent feedstock shortages, the volatile price of natural gas likely to place pressure on margin and the “opportunities” for the privatization of state-owned industries lead to the absence of interest for investments in the chemicals industry in Romania.

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