Stirol Discloses Plans To Diversify Into Ethanol Production

In an interview on Friday, Stirol’s (STIR: SELL) chairman Nikolay Yankovskiy announced plans to build a 100 ths mt ethanol plant within its subsidiary company, Stirolbiotekh. The time horizon was not disclosed. He also mentioned that the company plans to start production of dimethyl ether, which is a substitute for diesel fuel, by 2020. In the meanwhile, Yankovskiy said the company can cut polystyrene production costs by gradually shifting from imported styrene (the input for polystyrene production currently being bought in Russia) to producing it locally from ethanol. Yankovskiy also mentioned that Ukrainian nitrogen fertilizer producers will always be more competitive compared to European ones, since Ukrainian plants are closer to Russian gas resources and will always buy gas cheaper than European plants. Vladimir Nesterenko: Yankovskiy’s statements mean that Stirol is going to capture opportunities in alternative fuels to fight a sharp drop in its margins, squeezed by gas price inflation. At the end of 3Q06, the company had more than USD 250 mln cash, and part of that, about $15-20 mln, can be invested in production of alternative fuels. We take these initiatives with caution, as their success is heavily dependent on the availability of raw materials, which is perhaps a more complex issue than the construction of new production facilities itself. The statement that Ukrainian N-fertilizer producers will always be better positioned versus European peers is not exactly correct in our view. We would say they will be at least as competitive as European plants, if and only if their efficiency is improved up to the level of their European peers, which we believe is quite problematic. Even more importantly, in the future, Ukrainian plants are going to face the toughest competition not from European producers, but from those located in gas-rich regions, like Russia, South America, Central Asia and North Africa.