BMI Industry View - Ukraine - Q1 2018

17 No v 20 17 Ukraine P e tro che micals

The reopening of the Karpatneftekhim complex in Kalus h in June 2017 has revived Ukrainian chemicals and plas tics production. However, demand is s lug g is h
and this is undermining imports as Ukraine moves towards s elf-s uciency, albeit in the areas s till ruled by the g overnment in Kiev. The country's ong oing
civil war continues to repres ent a major obs tacle to reviving petrochemicals production to pre-cris is norms . In turn, this pos es a major ris k to the long -term
viability of the indus try.

The Ukrainian economy will continue to record moderate, if not s pectacular, g rowth in the coming years in the face of a trade blockade of the occupied
territories in the Donbas . Notwiths tanding our bearis h outlook for Ukraine's exporting indus try, we believe that private cons umption will g radually recover
and pos itively contribute to real GDP g rowth over the next two years . In terms of how this affects petrochemicals , it is likely to boos t packag ing , with PE lm
already s eeing ups ide and polyethylene terephthalate (PET) likely to be s imilarly boos ted. Polypropylene (PP) is als o s eeing s trong ups ide in demand, albeit
from a low bas e, as companies rebuild s tocks amid ris ing demand for finis hed g oods .

In 9M17, Ukraine's chemicals output ros e 8.4% y-o-y with s treng thening production activity following the res umption of activity at Karpatneftekhim's
petrochemical complex in June 2017. The complex has als o helped boos t plas tic production which g rew 11.8% y-o-y over the period. However, other
s eg ments have s tag nated. While rubber production g rew 5.4% y-o-y over the period, but from May 2017 it s aw s everal months of contraction, apart
from June. At the s ame time, the domes tic market remains well below par, with s lug g is h hous ehold cons umption g rowth, his torically low levels of
manufacturing activity and a national economy torn in half due to the los s of Crimea and the two-breakaway republics in the eas t.

Ukraine's Petrochemicals Ris k/Reward Index s core increas ed 0.2 points to 37.2 in Q1 2018. Operations have recommenced at Karpatneftekhim with the
pos s ibility of the reopening of Stirol, while the economy is s howing s ome promis e of improvement even as the country remains divided and well below
its pas t s treng th. As a res ult, it remains 8.7 points behind Romania and 0.1 point ahead of Bulg aria in the Europe RRI ranking .

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