SPECIAL REPORT
Split of Czechoslovakia Means Changes for Chemical Industry Eastern Europe's largest chemical producer begins 1993 as two nations, with the Czech Republic likely to show most initial strength Jay K. Mitchell, PlanEcon Inc. zechoslovakia, the leading chemical producer in Eastem Europe, became two countries last week as the federation that had held the Czech and Slovak republics together for three quarters of a century came to an end. Elections in both republics last June drove the nail into the coffin of national unity with the victory in Slovakia of a highly nationalistic leader, Vladimic Meciar, who wants to go slowly on economic reforms, and in the Czech Republic of Vaclav Klaus, who favors swift action on economic transformation. The two lead ers agreed on Jan. 1 as the date for the two countries to come into being, and in November the Czechoslovak Parliament formally approved the separation. In contrast to events in several other East European nations, such as the former Yugoslavia and the former Soviet Union, the split of the Slovaks from the Czechs has been generally peaceful and almost amiable. Nevertheless, it marks an important crossroads in the economic development of both parts of the former Czechoslovakia, and will have profound effects on the chemical industries of both emerging nations. Czechoslovakia had one of the more developed economies in Europe at the start of World War II. Its industry, especially in what is now the Czech Republic, was on a par with that of Belgium and more advanced than Austria's. Its chemical industry was heavily integrated into the European, and hence the world, chemical industry. However, nearly half a century of communist rule and economic mismanagement have cut many ties with the West and left both parts of Czechoslovakia with problems similar to those of other centrally planned economies of Eastern Europe. Among these are low levels of technological sophistication and automation, excessive employment, low worker productivity, an irrational pricing system that misallocates resources, lack of financial incentive for managers or workers, and serious pollution damage. The chemical industries of the new Czech and Slovak republics face at least four key challenges as the two nations begin coexistence. First, the chemical industry they inherited is underdeveloped compared with those of Western countries with which it must compete. And although
C
Czechoslovakia's chemical output was the most diverse and sophisticated in the former East bloc, it is much less impressive when compared with West European countries of similar size such as Belgium or Switzerland. Second, nearly five decades of communist rule hurt Czechoslovakia's chemical industry by reducing contacts with the outside world. Trade was diverted to the less discriminating markets of the former East bloc, reducing pressures to innovate and remain competitive. Czech and Slovak chemical factories were often forced to accept inferior machinery or technology from other socialist countries rather than superior Western technology. Reasons for doing so were both political, to support other socialist economies, and economic, because of shortages of hard currency. Even though it was the largest chemical producer in Eastern Europe, Czechoslovakia's chemical industry had many fewer contacts with Western chemical firms in the 1970s and 1980s than did its counterparts in Hungary, Poland, or Yugoslavia. Third, mismanagement by successive communist regimes led to irrational development of Czechoslovakia's chemical sector. Chemical development in Slovakia was given high priority in order to better integrate this more agrarian region into the federation. But the massive chemical complexes built in Slovakia since the 1950s have contributed to inefficient chemical production patterns. For instance, cyclohexanone produced at Strazske in eastern Slovakia is shipped all the way across Czechoslovakia to Neratovice, a distance of about 350 miles, where it is processed into caprolactam and by-product ammonium sulfate. The caprolactam then travels back to Humenne, less than 10 miles from Strazske, where it is used to produce nylon fibers. Fourth, pollution is a major concern for the Czech and Slovak chemical industries, as it is in virtually every country of the former East bloc. Inept management of Czech chemical development added new production capacity to the heavily polluted North Bohemian and North Moravian districts as part of an economic policy that favored closer economic cooperation with other communist nations of Eastern Europe, particularly Czechoslovakia's northern neighbors—Poland and the former East Germany. The chemical industry's debt to the environment is massive and will require considerable resource expenditure in coming years. This expenditure will literally represent payment for JANUARY 4, 1993 C&EN
9
SPECIAL
REPORT
Chemicals hard hit in Czechoslovakia's economic downturn Average annual growth, % 8
• Total industry Π Chemical industry
6
4
2
0 1971 - 8 0
1981-90
past economic mismanagement, and it will take away from both countries' ability to modernize chemical plants and equipment. Pollution may also deter foreign investment, since liabilities for cleanup of past pollution as well as the need to reduce present emissions may be costly. Nevertheless, the Czech and Slovak republics may be in a better position to deal with these challenges than most East European countries. The economic situation in these republics is one of the most favorable in the re gion, boasting the lowest per capita debt, the lowest in flation rate, and one of the best monetary and fiscal controls in the region. Czechoslovak chemical workers and managers are among the most highly skilled and most productive in Eastern Europe (though still below Western standards). The region's geography is also fa vorable: Prague, the capital of the Czech Republic, is farther west than Vienna, and that republic enjoys a long border with both Germany and Austria. Bratisla va, the capital of Slovakia, is near the border with Aus tria, less than 50 miles east of Vienna. Finally, Czecho slovakia has attracted more Western investment for its chemical industry in the past two years than any other East European country.
Recent industry performance During the 1970s, the chemical industry was the fastest growing major industry in Czechoslovakia. The gross value of chemical output rose at a 7.6% average annual rate after adjusting for inflation, which was fairly low in Czechoslovakia during this period. This contrasts with the country's 5.7% average annual growth of total indus trial output during the 1970s. This decade was generally characterized by sizable production capacity expansions, which led to swiftly rising output. During the 1980s, the chemical industry began to run into trouble. Growth of chemical output fell to an average annual rate of 1.39c, well below the growth rate of most major sectors of Czechoslovakia's economy. After decades of relatively rapid expansion, during the 1980s the Czechoslovak chemical industry began to face several constraints on growth. The industry had not modernized its production capacity sufficiently to 10
JANUARY 4, 1993 C&EN
maintain competitiveness and efficiency. Environmental ca tastrophes were also forcing serious measures to counteract the damage, such as shutting down the most serious pollut ers and spending large amounts of money and staff time to clean up damage. In addition, like other centrally planned economies of Eastern Europe, Czechoslovakia was simply finding it increasingly difficult to maintain respectable eco nomic growth in the absence of a market economy. By the end of the 1980s, the Czechoslovak chemical in dustry was in a recession. Gross chemical output rose an al most negligible 0.7% in 1989 and fell 8.4% in 1990. This re cession intensified in 1991 with a 20%o decline in chemical output, exacerbated by the government's strict fiscal and monetary policies, as well as by a near total collapse in or ders from the former Soviet republics, which hit Slovak chemical producers particularly hard. Better marketing in the future may help find alternative markets in Western Europe, North America, and the Third World for chemical exports that were traditionally destined for the former U.S.S.R. At least a portion of these products, however, can not compete on the world market because they are of infe rior quality.
Ten Czech chemical firms had sales of over $100 million in 1990 Location/company
1990 sales 1990 exports 1990 employment (thousands) ($ millions) ($ millions)
$840.0
$201.0
10,785
Kralupy/Kaucuk Works
491.0
86.4
3,058
Neratovice/Spolana Works
248.0
37.1
5,123
Pardubice/Synthesia Chemical Works
203.0
48.7
8,391
Usti nad Labem/Spolchemie Works
157.0
26.1
4,512
Litvinov/Chemopetrol Works
Prague/Barvy a Laky Works
133.0
9.4
1,915
Otrokovice/Barum Works
115.0
24.0
3,952
Valasske Mezirici/Deza Works
110.0
13.0
1,869
Ostrava/Moravske Chemical Works
109.0
32.0
2,840
Pardubice/Paramo Works
105.0
2.7
833
Lovosice/Northern Czech Chemical Works
94.6
6.1
2,944
Prague/Leciva Works
85.0
19.4
2,250
78.6
6.7
2,246
Chropyne/Technoplast Works Breclav Gumotex Works
73.7
8.6
2,068
Sokolov/Chemical Works
65.4
23.9
1,497
Kolin Koramo/Works
57.7
3.9
789
Velka nad Velickou/ Kordarna Works
54.4
10.9
1,170
Plana nad Luzici/Silon Works
54.3
3.4
2,007
Komarov u Opavy/Galenika Opava Works
51.7
18.7
1,304
Prerov/Precheza Works
48.5
5.9
3,379
Stare/Mesto Colorlak Works
42.4
1.8
679
Kolin/Lucebny Works
41.3
4.3
798
Breclav/Fosfa Works
39.7
2.4
703
The recession continues, and chemi cal output is not expected to turn up ward until late 1993 or 1994. For chem icals, however, this recession has not been so severe as that in most other East European countries, notably Po land, Hungary, Bulgaria, or Romania. Nevertheless, it is devastating in a coun try like Czechoslovakia that has been ac customed to a rather steady and impres sive expansion of chemical output. To understand the full impact of the recent recession and prospects for recovery and expansion of the chemi cal industry, it is crucial to take a close look at the chemical industries in the Czech and Slovak republics in dividually. The chemical industries of these two republics have different histories and probably face much dif ferent futures as well.
Chemopetrol Works of Litvinov is the Czech Republic's largest refinery and petrochemical complex
^ Λ V» M J1
The Czech chemical industry The Czech chemical industry began in the late 19th and early 20th centuries with the founding of several chemical complexes that are still in operation. The Precheza Works, lo cated in Prerov in northern Moravia, founded as the "First Joint Stock Factory for Concentrated Fertilizers and Chemicals in Prerov/' started production of powdered superphosphate and sulfuric acid in 1896. Chemical production at Usti nad Labem in northern Bohemia dates from the first decade of this century, and the Synthesia Chemical Works of Pardubice in eastern Bohemia, one of Czechoslovakia's most diversified chemical producers, was founded in 1918. Products of this fa cility include fertilizers, plastics, pharmaceuticals, varnishes, dyes, pigments, adhesives, and explosives. During the communist era, the government's bias toward development of heavy industry led to intensive construc tion of new chemical capacity in many parts of the Czech Republic, especially in northern Bohemia (which borders on the former East Germany), northern Moravia (bordering on Poland), and eastern Bohemia (the industrial heartland of the Czech Republic). Quantitative rather than qualitative output gains were emphasized; in fact, much of the nation al investment funds that might have been used to upgrade and modernize Czech chemicals were used instead to build up Slovakia's chemical industry. Despite these drawbacks, Czech chemical output became more specialized during the postwar communist era. In particular, the Czech chemical industry became a major producer of chemical intermediates used to synthesize such finished products as dyes, pharmaceuticals, and agricultur al chemicals. Although the success of the industry might appear modest when compared with progress in the West, it was impressive when compared with other communist countries such as Poland, Bulgaria, Romania, and the former U.S.S.R., which remained firmly entrenched in pro duction of mostly bulk inorganic and organic chemicals. The chemical industry now accounts for about 10c/i of to tal Czech industrial output and 25% of total Czech exports. About four fifths of this output is consumed either in the Czech Republic or Slovakia. Major areas of production in
clude primary and secondary plastics (26% of total output in 1990); small-batch chemicals (22%); basic inorganic prod ucts and fertilizers (16%); basic petrochemicals (11%); and rubber processing (10%). Nearly 50 chemical producers operate in the Czech Repub lic, ranging in size from companies with more than 10,000 employees to some with less than 100. The producers are widely spread throughout the republic, although the highest concentration is in northern and eastern Bohemia and adja cent northern Moravia. The largest chemical complex in the Czech Republic is the Litvinov Chemopetrol Works in north ern Bohemia. In 1990, it employed 10,785 people, produced products valued at $840 million, and exported nearly one quarter ($201 million) of this output. Litvinov is the Czech Republic's largest refinery as well, and its output, which leans heavily toward petrochemicals, includes ammonia, urea, eth ylene, polyethylene, propylene, polypropylene, benzene, tolu ene, xylenes, butanols, octanols, butadiene, and ethylbenzene. Northern Bohemia's other major chemical complexes are the Spolchemie Works at Usti nad Labem (with 4512 employ ees in 1990) and the Northern Czech Chemical Works at Lovosice (employing 2944 people in 1990). Spolchemie, a ma jor producer of dyes and dye intermediates, also produces chlor-alkalies, plastics, and chlorofluorocarbons, although production of the latter is being phased out. The Lovosice fa cility produces fertilizers, viscose fibers, and various inorgan ic chemicals. The second largest Czech chemical complex in terms of employment, Synthesia Chemical Works in Pardubice, in eastern Bohemia, is in the Czech industrial heartland. Synthe sia employed 8391 people in 1990, and is one of the oldest and most diversified chemical producers in Czechoslovakia. Several large chemical complexes are located in and around Prague, including the third largest Czech chemical producer, the Spolana Works at Neratovice. Spolana em ployed 5123 people in 1990 and had sales totaling $248 mil lion. It produces fertilizers, plant protectants, plastics (it is a leading producer of engineering plastics in Czechoslova kia), synthetic fibers, and pharmaceuticals. A new 120,000metric-ton-per-year α-olefins unit came on stream there in JANUARY 4, 1993 C&EN
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SPECIAL
REPORT
1992. The unit was built by Litwin of France and uses Chev ron's proprietary technology. Much of this unit's output was originally intended for sale to the Soviet Union, but the breakup of that country in 1991, along with great economic uncertainty in Russia and other successor republics, makes the prospect of α-olefin sales much less certain for Spolana (C&EN, April 13, 1992, page 46). Another major chemical complex located just north of Prague is the Kaucuk chemical complex at Kralupy. This complex is the leading producer of styrene and polystyrene in the Czech Republic and also produces butadiene, synthetic rubber, and methyl fcrf-butyl ether. It employed 3058 people in 1990 and had sales worth $491 million. Several chemical producers are located within the city of Prague, including the Leciva Works, one of the largest and most diversified pharmaceutical producers in Czechoslova kia; the Barvy a Laky Works, a leading paints and varnishes producer; the Linde Technoplyn Works, a joint venture with Linde of Germany that produces industrial gases; and Dental Praha, which produces dental aids and pharmaceuticals. Another heavily industrialized region of the Czech Repub lic is northern Moravia. Several important chemical producers are located here, including Prerov Precheza Works (Czecho slovakia's only titanium dioxide producer as well as a pro ducer of other pigments and agricultural chemicals); Ostrava Moravske Chemical Works (with a wide range of products including agricultural chemicals, plastics, pigments, industrial gases, and various organic intermediates); Valasske Mezirici Deza Works (a leading producer of carbon black that is cur rently modernizing capacity in a joint venture with Cabot Corp. of the U.S.); and Galenika Opava Works (a producer of pharmaceuticals and cosmetics). The rest of the Czech Republic has fewer chemical plants, although one of the country's most modem is the Sokolov Chemical Works in western Bohemia. This complex was the target of acquisition efforts by Dow Chemical of the U.S. dur ing most of 1992, although there were problems in setting a fair price for it. It produces acrylic acid and esters, hydrogen peroxide and other inorganic chemicals, and plastics. The Czech chemical industry is confronting many of the same problems and issues as chemical industries elsewhere
Recession eases for Czechoslovak chemicals Production change, %
-10 -15 -20 1985
1986
1987
a Estimate.
12
JANUARY 4, 1993 C&EN
1988
1989
1990
1991
1992 a
in the former East bloc. Although the Czech economy has little foreign debt, other forms of debt are crushing. The long tradition of chemical and other heavy industrial activ ity in the Czech Republic has left portions of the new coun try—including northern Bohemia, northern Moravia, and some parts of central Bohemia—with serious air, soil, and water pollution. For example, pollution is especially acute at the Spolchemie Works in northern Bohemia where chemical waste has been dumped since 1908. The chemical and toxic waste dump at this chemical complex has grown so danger ous that it threatens to displace all the inhabitants of the nearby village of Chabarovice. Estimates of the cost of cleaning up this site range from about half a billion to sev eral billion dollars. Virtually every chemical producer in these regions has seri ous environmental liabilities, which have kept Western inves tors cautious so far about investing there. The environmental problems have been exacerbated by burning soft coal (or lig nite) and by air pollution coming across the border from heavily polluted regions in Poland and eastern Germany. With notable exceptions, Czech chemical facilities are old er than those in Slovakia or in most Western countries. Ev ery chemical complex in the Czech Republic today requires major investment to make it competitive on the world mar ket. To the credit of the Czechs, they have thoroughly real ized this need for years and, even under communist rule, had drawn up detailed plans for overhaul of many impor tant chemical production facilities in the republic. The chemical industry also faces a serious monetary cri sis. Strict monetary and financial policies carried out by the Czechoslovak authorities since the fall of communism in late 1989 have won praise from the International Monetary Fund and have kept inflation far below that of neighboring Hungary and Poland. But the policy has all but eliminated domestic sources of funds for investment and business ex pansion and has left many chemical factories unable to pay for raw materials and intermediates they need. Many chem ical and other industrial enterprises in both the Czech and Slovak republics are unable to pay their bills. At the same time, the Czech chemical industry has sever al advantages that help to outweigh its problems. It is one of the best diversified in Eastern Europe. Poland's chemical industry is excessively dependent on inorganic chemicals and sulfur, Hungarian chemicals are dominated by phar maceuticals and plastics, and the Romanian chemical indus try is heavily biased toward bulk petrochemicals. By con trast, the Czech chemical industry has a fairly impressive product mix ranging from basic bulk chemicals to more so phisticated specialty products. One of the reasons for past development of a wide array of output was to minimize dependence on imports. This leaves the industry among the least dependent on imported chemical intermediates of all the countries of Eastern Europe. Czech chemicals also benefit from proximity to West Eu ropean markets. Czech chemical plants have traditionally sent a larger share of their exports to the West than Slovak plants, so that many Czech chemical producers are finding it somewhat easier to reorient exports toward the West fol lowing the collapse of the market in Russia and other former Soviet republics. Close proximity to Germany and Austria as well as similar historic and economic develop ment up until the communist era has also greatly enhanced
Most chemical plants are in northern Czech Republic and western Slovakia Germany Poland
^^Jlkmä twJt
Slovak chemical producers 1 Bratislava—Petrochemicals, agricultural chemicals, synthetic fibers 2 Puchov—Rubber products 3 Sala—Inorganics, agricultural chemicals, plastics, petrochemicals 4 Humenne—Synthetic fibers 5 Novaky—Industrial gases, inorganics, plastics 6 Strazske—Inorganics, agricultural chemicals, organic intermediates 7Svit—Plastic products, synthetic fibers 8Zilina—Inorganics, agricultural chemicals, plastics, petrochemicals 9 Hlohovec—Pharmaceuticals 10Senica nad Myjavou—Synthetic fibers 11 Nitra—Plastic products 12 Hnusta—Organics, plastic and rubber products
mi
/
Austria
Czech chemical producers Ufvinov—Petrochemicals Kralupy nad Vitavou—Plastics, synthetic rubber, petrochemicals Prague—Paints, plastics, rubber, pharmaceuticals Paldubice—Agricultural chemicals, plastics, pharmaceuticals Ä Neratovice—Organics, inorganics, plastics, pharmaceuticals |Jstfnad Labem—Inorganics, plastics, dyes Ostrava—Inorganics, agricultural chemicals, plastics Otrokovice—Rubber products Breclav—Rubber and plastic products Valasske mezirici—Organics, plastics Lovosice—Inorganics, agricultural chemicals Sokolov—Inorganics, plastics, organics Napajedla—Plastic products Plana nad Luznici—Plastics, synthetic fibers Prerov—Agricultural chemicals, pigments Nachod—Rubber products Rakovnik—Detergents and household chemicals *
the attractiveness of Czech companies to Western chemical investors. It is no accident that one of the first serious attempts by a Western company to acquire a large chemical complex in the former East bloc took place at Sokolov, less than 30 miles from the border with western Germany. In addition, the Czech chemical industry enjoys one of the highest qualified and best disciplined work forces in Eastern Europe. Czech workers have the reputation much like that of their German neighbors of having a strong work ethic, being efficient on the job, and taking an orderly approach to tasks. These traits helped the Czechs enjoy one of the highest standards of living among socialist countries in the 1980s, being equaled only by that of the East Germans. Since the implementation of economic reforms began in 1990, Czech workers have been much more reluctant to strike than have their counterparts in Poland or Hungary. In the chemical sphere, in particular, the excellent training and work ethic of Czech chemical engineers has already earned praise from many Western chemical executives who have visited factories there. And Czech chemical research institutes are rated among the best in Eastern Europe, thanks largely to highly qualified personnel. Other than in pharmaceuticals (where Hungary reigns supreme), no one
Hungary
in Eastern Europe has been more successful at commercializing their basic research and selling their chemical processes abroad than the Czechs. Because of its advantages, the Czech chemical industry has attracted greater interest from potential investors to date than has the chemical industry of any other East European country. Notable investments in Czech chemicals include formation of a joint venture to produce carbon black between Cabot Corp. of the U.S. and the Deza Works of Valasske Mezirici, worth at least $90 million; formation of an industrial gases joint venture between AGA of Sweden and the Vitkovice Steel Works of Ostrava, worth a reported $40 million; and total acquisition of the Rakona Industrial Fats Enterprise (a detergents producer) by Procter & Gamble of the U.S. for about $20 million. These investments and others recently signed are expected to produce nearly half a billion dollars of investment in the Czech chemical industry, three to four times the current level of chemical investment attracted by Poland, even though the population of the Czech Republic is only about one fourth that of Poland. And more investment is likely. Dow Chemical signed a letter of intent in early 1992 to purchase a majority interest in Sokolov Chemical Works for a reported $75 million. SubseJANUARY 4,1993 C&EN
13
SPECIAL REPORT
Foreign investment at Sokolov has not been easy The Sokolov Chemical Works of western Bohemia in the Czech Republic may well become the site of the largest investment of Western capital in the chemical industry of the former Czechoslovakia. Yet the road to that investment has been far from smooth. Last March, Dow Chemical signed a letter of intent to acquire 53% of Sokolov for $72 million with the option to raise its share to 90% within three years, subject to Sokolov's performance. Dow also announced its intention of investing an additional $153 million in the complex by the end of the decade in order to transform Sokolov into a world-class acrylates complex. In choosing Sokolov, Dow passed over other potential investment targets in both Western and Eastern Europe. Moreover, Dow's announcement of its intended acquisition of Sokolov took place as the Czechoslovak chemical industry was suffering through its worst recession since World War II. Why did Dow choose Sokolov? Several factors make Sokolov one of the plums of Eastern Europe's chemical industry and a likely candidate for large-scale Western investment. First, Dow wanted to establish an
acrylates manufacturing base in Eastern Europe, and Sokolov, a largescale producer of acrylic acid and esters, fits that bill. Second, Sokolov is fairly modern, with virtually all of its capacity dating from the 1970s and 1980s. Its acrylates production facilities were built in 1985 and a hydrogen peroxide unit was added in 1990, built by Eriksson of Sweden. Thus, Dow would have relatively few obsolete production units to close in coming years. Third, Sokolov does not have any serious pollution problems, which minimizes the environmental liability that has plagued many potential investments in Central and Eastern Europe. Fourth, Sokolov is conveniently located— fewer than 30 miles from the border with western Germany. Its output could be marketed easily, not only to the growing East European market for acrylates, but to the huge market in Germany and the rest of Western Europe as well. In July 1992, however, Dow asked the Czechoslovak Ministry of Privatization to reduce the price the company had agreed to pay for the 53% share in Sokolov from $72 million to $23 million. Dow's reasons included
quent disagreement between the Czechs and Dow over a fair price for Sokolov led to a breakdown of the negotiations, but Dow is reportedly still interested in Sokolov. DSM of the Netherlands is in negotiations with Spolana of Neratovice to acquire its caprolactam unit. Spolana is also reported to be discussing investment in a world-scale hydrogen peroxide plant with a number of Western firms. One of the Czech Republic's most desirable investment targets after the Sokolov Chemical Works, is Kaucuk of Kralupy, the republic's leading synthetic rubber and polystyrene producer. Kaucuk is talking to Elf Atochem of France and Neste of Finland about possible joint polystyrene projects. At least half a dozen other Western firms are reportedly negotiating with Kaucuk of Kralupy about possible projects ranging from production of extruded polystyrene foam to polybutadiene rubber. Japanese companies, including Japan Synthetic Rubber and Übe Industries, also are quite mterested in synthetic rubber opportunities at Kralupy Kaucuk. Thus, the Czech Republic could represent the first large-scale entry of Japanese investors into Eastern Europe's chemical industry. The Spolchemie Works of Usti nad Labem is discussing joint production of unsaturated polyester resins with several Western firms. The Chemopetrol Works of Litvinov, Czechoslovakia's largest refinery and petrochemicals complex, is talking with several Western firms—including Agip, Conoco, Neste, OMV, Shell, and Total—about possible investment 14
JANUARY 4, 1993 C&EN
deterioration in Sokolov's financial situation, initial underestimation of the cost of upgrading acrylates facilities at Sokolov, and a downturn in the world acrylates market. In November, officials from Dow and the Czechoslovak government agreed to suspend negotiations. The possibility of Dow or some other Western company investing in Sokolov is far from dead. Both Dow and the government authorities appear anxious to come to agreement, which should help to ensure their success. Both sides agree that Dow and Sokolov should develop a close commercial and technical relationship in the near future. Neither rules out Dow's making a significant investment in Sokolov at some later date. And if Dow does not acquire Sokolov, other buyers are likely to be found. The market for acrylates in the Czech Republic and the rest of Eastern Europe as well has strong potential for growth, especially in the late 1990s. But the experience of Dow with Sokolov shows that even when the conditions arerightin Eastern Europe and a Western investor is able to identify a winning facility to invest in, serious obstacles are likely to remain.
projects. Neste, in particular, is interested in a joint venture to produce polyethylene at Litvinov. The Synthesia Chemical Works of Pardubice is also discussing possible joint ventures with a number of Western firms, including Ciba-Geigy of Switzerland, which is interested in pigment production at Pardubice. Tioxide of the U.K. is reported to be considering the Precheza Chemical Works in Prerov as a possible site for investment in a new titanium dioxide plant in Europe. Prerov is reportedly competing against sites in the U.K., Spain, and Italy. Even if only half of these investment possibilities come about over the next two years, they are likely to add another $400 million to $500 million to the volume of Western investment in the Czech chemical industry, bringing the total to nearly $1 billion. This investment will contribute considerably to modernizing the republic's chemical plants and making them more competitive worldwide. The large number of Western chemical firms doing business in the Czech Republic as well as investing there can also be expected to speed its reintegration into the European and world chemical industry.
The Slovakia chemical industry Chemical production began more recently in Slovakia. Until the 1950s, largely agrarian Slovakia did not have what could truly be called a chemical industry. In 1948, for instance, the value of Slovak chemical output was less than
one fifth that of the Czech republic. One of the few chemical factories in Slovakia before World Czech, Slovak republics produce ιmany chemicals War II was an explosives and agricultural chemi % annual change cals producer in Bratislava that was part of Dyna Production 1990 production total production mit Nobel. Today, this complex is known as the Czech Slovak 1991 1990 Thousands of tons 1990-91 Istrochem Chemical Works of Bratislava. Another Basic inorganic chemicals early firm, dating from 1941, is the largest pharma 13% 36.2 36.2 0 40.8 Calcium carbide ceuticals producer in Slovakia, now called the Slo-11 113.8 221.0 334.8 298.1 Caustic soda vakofarma Works, which is located at Hlohovec, 65.2 -3 65.2 0 63.6 Chlorine northeast of Bratislava. -14 0 203.3 236.2 236.2 Hydrochloric acid, 32% Rapid industrialization was a top priority dur -31 68.3 47.1 0 68.3 Phosphoric acid ing the early communist period in Czechoslova -48 0 54.6 104.4 104.4 Soda ash kia, and the Slovak portion of the country bene Agricultural chemicals fited particularly from this policy. Throughout 434.1 -36 559.6 876.6 442.5 Mineral fertilizers, Eastern Europe, communist governments in the 100% active 1950s sought to catch up with Western economic -31 268.8 356.7 513.9 245.1 Nitrogen development by rapid expansion of industrial -35 110.8 168.3 256.9 146.1 Phosphate output. In Slovakia, this policy was also intended -67 54.5 51.3 34.6 105.8 Potassium to better integrate this territory with the heavily -59 8.7 8.4 17.2 7.1 Plant protectants industrialized Czech lands so as to strengthen 4.6 6.0 ηa 1.4 Herbicides — central political control over the two regions. 4.1 7.1 11.2 na Other — One of the first chemical complexes built after Plastics and synthetic resins World War II was at Novaky. Acetylene produc Thermoplastics tion started up there in 1951, followed during the -9 223.6 419.6 460.9 237.3 Polyolefins 1950s and 1960s by ethylene, vinyl chloride, poly -25 83.2 83.2 0 62.6 Polystyrene vinyl chloride, calcium carbide, and other prod -5 76.7 Polyvinyl chloride 187.8 197.6 129.9 ucts. Also started during the 1950s was the Bioti6.0 29.3 35.3 Polyacrylates and na — ka Enterprise of Slovenska Lupca of central Slo methacrylates vakia. -46 2.5 2.1 3.9 1.4 Polyamides Thermosets During the 1960s and 1970s, several chemical -11 1.7 0 Amino aldehydes 1.7 1.5 complexes were built in western Slovakia, includ -49 0 11.9 11.9 6.1 Phenol aldehydes ing production facilities for chlor-alkalies, agricul -22 7.1 13.7 10.7 6.6 Cellulose esters tural chemicals, and acetylene derivatives at Sala; 166.2 -31 253.4 365.9 199.7 Other for polyester fibers at Senica; and for paints and resins at Smolenice. The most important complex -32 75.7 137.1 200.2 124.5 Synthetic fibers built during this period was a new refinery and Paints and dyes petrochemicals facility at Bratislava in the early -49 48.8 79.5 155.1 106.3 Paints and enamels 1960s called Slovnaft. Today, it is the largest chem -26 85.4 20.1 65.3 63.3 Other coatings ical producer in Slovakia. -35 0.2 15.4 15.3 10.1 Synthetic dyes In recent decades, Slovak chemical production Basic organic chemicals has been gradually moving eastward. During the 9 0 62.6 62.6 68.1 Aniline 1960s and 1970s, new factories were built in eastern -27 82.0 256.0 350.0 268.0 Benzene and central Slovakia, including those at Humenne -20 231.0 Ethylene 498.5 619.0 388.0 (nylon fibers), Strazske (agricultural chemicals, rub 192.0 77.0 269.0 na Formaldehyde, 40% — ber chemicals, and adhesives), and Svit (plastics -36 2.1 6.1 8.3 Methanol 5.3 products and synthetic fibers). Czechoslovak eco -36 69.7 0 69.7 44.7 Synthetic rubber nomic policymakers deliberately sited these plants near the republics of the U.S.S.R., which were by na = not available. far the region's largest foreign market. Just how intensively Slovakia's chemical indus try built up during the period following World War II is evident in the industry's production statistics. Al benefits to Slovakia. Since I960, the region has received enor though chemical output accounted for less than 4% of to mous investment resources from the government that are dis tal industrial production for the region in 1950, by 1990 it proportionate to either its population or its own financial re sources. Put shortly, Slovakia's chemical development took had reached 17%, higher than the comparable share in the place much more rapidly than it would have without subsidi Czech Republic. Slovakia's contribution to total Czecho zation by the Czechs. The fraction of Czechoslovak invest slovak chemical output rose from less than 15% in 1950 to ment in the chemical industry taking place in Slovakia rose more than 40% in 1990. Slovak chemical output is now from an already high 40 to 45% during the 1960s to nearly beginning to rival that of the Czech Republic, even 60% in 1980. In per capita terms, Slovakia received three times though Slovakia has barely half the Czech Republic's pop the volume of investment in chemicals in 1980 as did the ulation. Czech Republic. This rapid buildup of chemical facilities provided definite JANUARY 4,1993 C&EN
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Now that Slovakia is independent and must finance chemical reorganization and development completely on its own, funds are expected to be much tighter there than in the Czech Republic. Given the current depressed state of the world market for most bulk chemicals, Slovakia will have a difficult time finding markets for its products anywhere. And profits from exports are the most likely avenue for funding chemical investment, since domestic resources are scarce and foreign investment in Slovak chemicals has so far been modest. The situation vividly illustrates how past economic policies of the Czechoslovak government that once benefited Slovakia by building up its chemical industry can come back to haunt the region. The type of industry that the government created, based largely on bulk chemicals, is inappropriate for the tiny new country's resource-poor economy. Slovakia formerly exported a significant share of its chemical output to the U.S.S.R. Because it borders Ukraine, Slovakia enjoyed better proximity and access to Soviet markets than did the Czech lands. The massive size of the market of the former U.S.S.R. (approaching 300 million people) made it seem that no chemical complex built in Slovakia could be too large. This further encouraged concentration of most Slovak chemical output in relatively few, very large chemical complexes. But the rapid buildup of Slovak chemicals, particularly its emphasis on bulk petrochemicals, left the Slovak chemical industry much more vulnerable than the comparable Czech industry once the country began to move toward a market economy. The collapse of the former Soviet market for East
Slovakia's largest chemical complex is located in Bratislava Location/company
Bratislava/Slovnafl Joint Stock Company
$613.0
$91.9
8452
Puchov/Gumarne Barum Joint Stock Company
194.0
47.3
6550
Sala/Duslo Works
162.0
76.0
5100
Humenne/Chemlon Works
153.0
57.1
6018
Novaky/Chemical Works
120.0
24.0
3763
Bratislava/lstrochem Works
116.0
44.5
5663
Strazske/Chemko Works
91.9
43.8
3646
Svit/Chemosvit Works
84.9
22.3
4888
Zilina/Povazske Chemical Works
67.5
12.7
1400
Hlohovec/Slovakofarma Works
73.3a
17.0a
2342
Senica nad Myjavou/ Slovensky Hodvab Works
56.7
26.0
2450
Dubova/Petrorchema Works
51.2
6.2
858
Smolenice/Chemolak Joint Stock Company
46.2
10.3
866
Nitra/Plasticka Joint Stock Company
42.9
7.2
1945
Slovenska Lupca/Biotika Works
38.0a
10.0a
1936
a Data are for 1991.
16
Estimated Estimated 1990 1992 sales 1992 exports employment ($ millions) ($ millions) (thousands)
JANUARY 4, 1993 C&EN
European industrial exports, which took place during 1990 and 1991, hit Slovakia harder. Loss of guaranteed access to Soviet (mainly Russian) supplies of oil, gas, and other chemical feedstocks also hurt Slovak chemicals more than Czech chemicals because of Slovakia's focus on bulk chemical production. The massive size of Slovak chemical complexes has impeded efforts to reorganize them into more competitive firms in the newly emerging market economy. Moreover, this large size has so far encouraged Western investors to bypass Slovakia and rush instead to invest in Czech facilities. And the Slovak government has chosen to reorganize all industry more slowly than the Czechs have following independence. Slovakia's chemical industry is far more concentrated than its Czech counterpart in a few key producers. Although the Czech Republic has about 50 chemical producers, Slovakia has only about 20. Moreover, 10 of those accounted for 85% of Slovakia's total chemical employment and 83% of total output in 1990, at a time when the comparable shares for the 10 largest producers in the Czech Republic were only 55% and 61%, respectively. The Slovakian chemical industry suffers from serious pollution problems, but they are less serious than those in the Czech Republic. Most chemical facilities in Slovakia are new and are generally not situated so close to heavily populated areas. A notable exception is the city of Bratislava, which contains two huge chemical complexes. The largest chemical producer in Slovakia, the massive Slovnaft refinery and petrochemical complex at Bratislava, employed 8452 people in 1990. The complex resembles Litvinov in the Czech Republic in several ways: Slovnaft is Slovakia's largest refinery, and its output leans heavily toward petrochemicals such as ethylene, polyethylene, propylene, polypropylene, aromatics, cumene, acetone, phenol, ethylbenzene, ethylene glycol, and ethylene oxide. The Istrochem Works—which employed 5663 people in 1990—is also located at Bratislava. Istrochem produces agricultural chemicals, synthetic fibers, lubricant additives, plastics and rubber chemicals, and industrial explosives. Together these two complexes had estimated sales of nearly $750 million in 1992, accounting for about one third of total Slovak chemical output. Western Slovakia, where Bratislava is located, represents the most densely developed region of the republic, with more than half of total Slovak chemical output. In addition to the two Bratislava complexes, other large-scale chemical producers here include the Duslo Chemical Works at Sala, employing 5100 people in 1990 and producing agricultural chemicals, rubber chemicals, and plastics; the Slovensky Hodvab Works at Senica, employing 2450 people and producing viscose and polyester fibers; pharmaceuticals producer Slovakofarma Works at Hlohovec, with 2342 employees; Plasticka Works at Nitra, a plastics processor employing 1945 people; and Chemolak Works at Smolenice, a plastics and paints producer employing 866 people. Central and eastern Slovakia each account for roughly one fifth of total Slovak chemical output. In central Slovakia, the leading chemical producers are Gumarne Barum Works at Puchov (a rubber processor employing 6550 people in 1990), Novaky Chemical Works (employing 3763 people and producing a wide range of products such as chloralkalies, plastics, and various organic intermediates), Slov-
enske Lucobne Works at Hnusta Organic chemicals and plastics account for just over half of (employing 1510 people and producing plastic products, rubber products, major chemical production in both Czech and Slovak regions and organic synthesis chemicals); and Povazske Chemical Works at Zilina (employing 1400 people and producing plastics products and synthetic fibers). Eastern Slovakia has three large chemical complexes, the Humenne Chemlon Works (a synthetic fibers producer that employed 6018 people in 1990), Svit Chemosvit Works (a plastics Paints & processor and synthetic fibers manuSynthetic dyes facturer with nearly 5000 employees), fibers 3% 2% and Strazske Chemko Works (a proSynthetic ducer of agricultural chemicals, rubber Rl 3 % e r Paints & Agricultural fibers chemicals, plastics additives, and adhedyes chemicals sives with 3646 employees). 1990 Slovak output of major 1990 Czech output of major Humenne Chemlon has attracted chemicals = 1.93 million metric tons chemicals = 2.85 million metric tons substantial Western investment. Rhone Poulenc of France signed a letter of intent in May 1992 to acquire a majority stake in Chemlon for an undisclosed sum, with the plan to ducers, since each region is the other's most important cheminvest some $90 million in modernizing and expanding the ical market. Independence will likely cause at least a tempocomplex. In the same month, a joint venture was anrary decline in trade between the two regions, but this decline is not expected to be so sharp as the one that occurred benounced between EniChem of Italy and Novaky and Brattween the former republics of Yugoslavia, for example, thanks islava Slovnaft to produce ethoxylates. Total investment in to the more amiable nature of the Czecho-Slovak split. this venture is expected to be a more modest $15 million. The most notable investment in Slovakia's chemical indusThese short-term disruptions may be mitigated for the try prior to the ones announced last May was a joint venCzech Republic by a number of factors. Its government is unequivocally committed to rapid economic reorganization ture between Henkel of Germany and the Palma Works of and reform, including mass privatization of chemical factoBratislava, a detergents producer, worth a reported $24 milries, and these policies probably will help the chemical seclion. tor to move rapidly out of the current recession. Foreign inNegotiations are taking place with a number of Slovak vestment in Czech chemicals has also been impressive, far chemical producers for possible investment, including some surpassing not only that in Slovakia but also that in every with the republic's largest refinery and petrochemical comother East European country in per capita terms. Almost plex—Slovnaft of Bratislava. C. Itoh of Japan is reported to every major Czech chemical producer is in advanced negobe considering taking a minority stake in Slovnaft but has tiations with prospective Western investors, and more shown some reluctance to invest so far. Chemolak of Smolarge-scale investment agreements are expected to be anlenice, Slovakia's leading paint producer, is in discussions nounced during the next year or so. with Akzo of the Netherlands and Tikkurila of Finland involving joint production of paints. In addition, Czech chemical exports are becoming more oriented toward the West, especially Western Europe, than So far, neither the range nor depth of Western negotiaare Slovak chemical exports. In fact, the Czech chemical intions for chemical facilities in Slovakia matches those in the dustry stands the best chance of all the chemical industries Czech Republic, and Western investment is likely to continof Eastern Europe to become integrated with the industry of ue to lag significantly behind the impressive levels attracted Western Europe. Very few Czech chemical complexes apby Czech chemical producers. Major reasons for this lag inpear headed for complete closure. Rather, individual proclude the greater degree of political and economic uncerduction units that are obsolete or lack a market are likely to tainty in Slovakia following independence, fewer traditionbe decommissioned. This is already happening at a number al ties between Slovak and Western chemical firms, and of locations. In addition, the Czech economy overall is curgeneral perceptions in the West that Slovaks are not so rently in a much better position than the Slovak economy. hard-working and efficient as their Czech counterparts. Unemployment is much lower, production declines have Future of Czech, Slovak chemicals been less severe, and its products generally compete better on world markets. This relative economic strength will no Different fates likely await the Czech and Slovak chemidoubt have a beneficial effect on the chemicals sector, since cal industries following dissolution of the federation that it will help attract Western investment. has joined them for much of this century. Although both republics face certain similar challenges and issues, each is Slovakia, on the other hand, seems headed for serious likely to deal with them differently. economic problems following independence that will affect its chemical industry. First, foreign investment interest, Initial disruptions of economic and trade ties between the which thus far has been only moderate, probably will contwo republics will hurt both Czech and Slovak chemical proJANUARY 4,1993 C&EN
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tinue to lag. Producers of products such as soaps, deter gents, and pharmaceuticals intended for the small domestic Slovak market will not be attractive to Western investors, and investing in production aimed at export will be less at tractive than in the Czech Republic since Slovakia is farther from Western Europe, and lacks close trade ties with the West. Foreign investment in Slovak chemicals aimed at sup plying the huge markets in the former Soviet republics may hold some attraction, but only after the economies of Russia and Ukraine begin to recover from their current recession, which is expected to take at least two or three years. Second, industrial privatization in Slovakia is expected to be less far-reaching than in the Czech Republic and to take much longer. The current Slovak government is very na tionalistic and not likely to relinquish control of its industri al giants to private owners, whether Slovak or foreign. By the end of the decade, Slovakia's economy is not likely to be so closely integrated with the rest of Europe as the Czech economy will be. In fact, by choosing independence, the Slovaks could be excluding themselves from future mem bership (or at least very close association with) the Europe an Community (EC). As part of a Czechoslovak federation, the Slovaks appeared headed for EC membership later in this decade, along with Hungary and Poland. If Slovakia does not pursue rapid and radical economic reform, it may miss this opportunity for integration with the rest of Eu rope, which would have painful consequences for its chem ical industry. Still, Slovakia's economy, though weaker than that of the Czech Republic, is stronger than those of several other East European countries, such as Albania, Bulgaria, Romania, and the former Yugoslav republics. Third, entire chemical complexes may have to be shut down in Slovakia because they have at least temporarily lost their markets in Eastern Europe or the former U.S.S.R. and may find it difficult to capture new ones in the West or elsewhere. This loss would be especially significant, since virtually all of Slovakia's chemical industry dates from the communist era and involves large-scale production of bulk chemicals, which Slovakia does not have adequate feed stocks to support. The Slovak government has not been so forward-looking as its counterpart in the Czech Republic in closing obsolete production units. Such lack of planning could lead to failure of several chemical complexes. The government probably will seek to subsidize unprofitable factories to avoid widescale shutdowns. Such a policy would mean slow progress on reorganizing the economy and a continuing leading role for the state in plant management. This is exactly the pat tern that led to gross inefficiency during the communist era. Unemployment could become a major problem for the remainder of the decade for Slovak chemicals, in particular, as well as for the republic's entire economy. Certain por tions of Slovakia already have unemployment rates of more than 20%; and the average for the republic, 11% last July, was roughly four times the Czech average of 2.7%. Even if the Slovak government tries to subsidize certain factories, a further rise in unemployment seems inevitable. (Unemploy ment in the Czech Republic will rise as well, but it is expect ed to peak at lower than peak rates in Hungary, Poland, or Slovakia.) Rising unemployment, combined with other economic ills, could create political problems for the Slovak govern 18
JANUARY 4, 1993 C&EN
ment. Slovakia's sizable Hungarian ethnic minority has not been very vocal yet, but if the economic situation grows worse, the experience in other countries of the region sug gests this minority may demand some form of autonomy. Such disintegration would be disastrous for Slovakia. If the Slovak chemical industry and other spheres of the economy stand to lose from complete independence, one may ask why the Slovak government, led by Meciar, has pushed so strongly for independence. The answer, although some what complex, essentially boils down to political, rather than economic reasons. Nationalism, not economic concerns, has fueled the Czechoslovak split, at least from the Slovak side. Indeed, both the Czech and Slovak sides stand to lose economically in the short run from the breakup of their fed eration. This may be one reason why the majority of citizens of both republics in popular opinion polls have expressed a desire to retain some form of federation. The decision to dissolve the old federation has been made, however, and, at least for the short term, each republic will go its separate way. But after an initial period of separatism may come a period of reintegration. Such reintegration could occur as a result of both the Czech and Slovak republics becoming members of some larger body, such as the EC. But the two republics might also form a new Czechoslovak federation at some point in the future, albeit structured more loosely than the one that had coupled them together for 74 years. Π
Jay K. Mitchell is manager of the chemical service of PlanEcon Inc., a Washington, D.C.-based eco nomic research firm specializing in countries of Eastern Europe and the former Soviet Union. An economist, Mitchell is interested in the chemical industry of this re gion, particularly the current and future size of chemical markets and the opportunities for Western investment in the regions chemi cal industry. He has traveled in Czechoslovakia a number of times, most recently in November 1991. Mitchell received a bachelor's degree with highest distinction in Slavic languages, with course work in chemistry, from the Uni versity of Virginia in 1984 and a master's degree in international economics and Soviet studies from the Johns Hopkins School of Advanced International Studies in 1986. He worked briefly at the Soviet and East European branch of the Department of Agricul ture's Economic Research Service and at the International Trade Administration of the Commerce Department before joining PlanEcon in 1987.
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