1995 was a very successful year with excellent profit figures for producers of plastic base materials, and in 1996 these businesses had to give evidence of their cost competitiveness and their capability to mobilise all factors of company management in order to realise profits. that is especially valid for those companies, in the field of producing plastics base materials, whose primary product is the PVC resin, as this plastics base material has suffered the largest drop by 28% in contract prices compared to the average contract prices in 1995.

I can report on the fact that our profit as proportion of the sales revenues amounted to 15.9%, which indicates our outstanding profitability whithin our industry which was achieved by having net sales revenues of 37238 HUF million. Our non-consolidated pre-tax profits totalled 6965 HUF million according to Hungarian Accounting Standards, which figure is only 5.4% lower than that of 1995 financial year, which proved to be a top year with good profitability for those in the plastics base material business.

The Company's equity increased from 16222.8 HUF million to 23634.9 HUF million as the result of the capital increase in March 1996 and the profit-oriented management. In course of the year the financial and liquidity position of the Company further improved; the balance of the assets and liabilities is equilized in such way that the value of the liquid, marketable securities amounts to approximately 3 HUF billion within the current assets. This is an obvious proof that BorsodChem RT.'s operative cash flow in 1996 guaranteed the finances needed for the investment and reconstruction projects of 4823 HUF million implemented during the financial year.

The repayment of the debts due as from 1992, which were restructured, was started towards the Taxation and Financial Auditing Office and National Headquarters of the Board of Customs and Excise and the amount of repayments less VAT equalled 615.8 HUF million as most of our long term bank loans was liquidated. BorsodChem Rt.'s balance sheet shows high liquidity which creates an excellent basis for further reasonable growth.

1996 is marked by the privatisation of BorsodChem Rt.

After the thorough preparation Board of the Hungarian Privatisation and State Holding Company, the former owner of BorsodChem Rt. in agreement with the Company's Board decided on BorsodChem Rt.'s privatisation by public offering of the company÷s shares combined with capital increase. In the global offering with capital increase 4450 thousand ordinary shares and 2300 thousand new shares with nominal value of HUF 1000 were offered for sale at the offer price of HUF 1800 per share and 12.45 USD per GDR (Global Depositary Receipt) by flotation to the Budapest Stock Exchange and London Stock Exchange, respectively, into the listed category. 1500 thousand of the new shares was subscribed by European Bank for Reconstruction and Development (EBRD) and thus, after the secondary offering by the state taking place in October 1996 -in which Hungarian Privatisation and State Holding Company sold an additional amount of 1200 thousand BorsodChem Rt. shares - became the major owner of BorsodChem Rt. with its 14.7% stake. After completion of the privatisation procedure the Hungarian Privatisation and State Holding Company holds only 5.4% stake in BorsodChem Rt.

After the closing date of the primary offering BorsodChem Rt.'s employees had the opportunity to become owners of the Company as the result of an Employee Offering by purchasing the 5.8% of the ordinary shares at 50% of the offer price. BorsodChem Rt. is proud of being the first Hungarian corporation whose shares are traded in the listed category of the London Stock Exchange. The success of the primary and secondary offerings is further attested - in addition to reception of the 'the Best Issuer of 1996' title by the adjudgment panel of Budapest Stock Exchange- that BorsodChem Rt.'s shares were traded at the price of 25.15 USD per share, which is more than twice as much as the offer price, on 31 December 1996.

The markets of Central Eastern Europe are determinant

The Hungarian market with its 10 million population has never represented a large absorption capacity for the players of the Hungarian petchem industry and producers of plastic base materials. This statement is especially justified at the moment when the Hungarian economic policy with regard to macroeconomic factors focuses on external equilibrium and disinflatory monetary steps.

The domestic effective demand -in case of construction-building industry - has considerably decreased and due to this fact only 38.7% of the sales -previously being 43% in 1995 - worth 14429 HUF million was realised in the domestic market. The share of export sales exceeds the 61,3% rate which has not affected adversely the profit-earning capabilities of BorsodChem Rt., as most of export sales growth was succesfully marketed in the nearby, in terms of competitiveness neutral markets in the Central Eastern European market. 35% of the exports was distributed in the neighbouring Central Eastern European countries -this index was only 27% a year earlier- thus the share of Hungarian and Central European markets amounted to almost 60% of the company÷s sales revenues.

Our MDI and PVC Business Units are our most export-orientated units. While the annual average price of MDI products was over that of the previous year with a low margin, the average contract price per year of PVC resin was at the level of 1.1 DEM/kg by 0.42 DEM/kg lower than in 1995. At the beginning of 1997, the contract price of PVC resin, BorsodChem Rt.'s primary product had increased by about 10% and the market positions for MDI products seemed stable, indicating adequate customer demands for the following financial year.

The market of PVC compounds was stable with moderate demand, but the Chloralkali Business Unit experienced a slight fall in caustic soda prices in the second half of the year.

In order to enhance its presence in the regional markets BorsodChem Rt. purchased a trade company in Vienna, which started its operations under the name of BorsodChem Handelsgesellschaft m.b.H on 11 November 1996. In addition to selling BorsodChem Rt.'s product range it integrates market activity of several other chemical companies in Austria, south of Germany, Slovenia and Croatia. We wish to step up our activity in the domestic and foreign markets, the level of technical customer services connected to the sales and tightening our good relationship with customers and for this end we are going to reform the former plant centred organisation by integrating the distribution of the products into the plant organisation, thus obtaining a business unit structure.

The largest PVC producer in Central Eastern Europe

In course of the year the Company implemented a capacity expansion of 40000 tons/year in case of PVC resin and that of 7500 tons/year in MDI production. During the fourth quarter the new capacities proved that the capacity expansion investments were expedient and well-substantiated decisions in terms of both quantitative and quality considerations with worth of 2934.1 million. Moreover, the capacity expansion projects create good opportunities that all parameters of our production facilities would be improved in order to meet the up-to-date requirements. As a result of these investment projects:

• At both of the capacity expansions:
  specific material and energy consumption per unit has reduced;
  the plants represent lower environment load;
  level of industrial safety further improved;
  our competitiveness has enhanced.
• We were able to introduce new MDI products with improved properties (lower acidity, increased OP isomer, higher NCO content, lighter colour etc...)

It should be pronounced that research and development work and intellectual property of our engineers is capitalized in the new process control software and increase of output capacity of 1 m³ autoclave from 212 t/year to 312 t/year.

Owing to the implemented capacity expansion BorsodChem Rt. has become the largest PVC producer in the Central Eastern European region. Its production capacity has reached 250000 tons/year.

In 1996 BorsodChem Rt. on the whole had investments with the value of 4823 HUF million, which exceeds those a year earlier by approximately 2000 HUF million. Our achievement of having an accident rate of 8.6/1000 people for 1996, after several years' education and training in industrial safety field and methodical improvement of technical and process conditions, rightly contributes to our good reputation.

Prospects and potential

BorsodChem Rt., a company privatised and owned by international shareholding intends to focus on shareholders' interest in the future, that is all its economic efforts are concentrated on increasing the share price. The capacity expansions implemented in 1996 ensure good potentials for increase of the production output by 20%, thus guaranteeing the maintenance and improvement of the operating profits in real terms. The privatisation programmes under way in Central Eastern European industries still provide golden opportunities for the players of the market to strengthen their competitive position by acquisitions. in accordance with the strategic concepts of BorsodChem Rt., such as alternatives of further improving business activities are necessarily being studied.