labels: petrochemicals
Indian petrochemicals sector todaynews
24 October 2001

General highlights 

  • The petrochemical industry is a capital-intensive and high-volumes industry. The demand elasticity is high in petrochemicals.

  • The raw material cost is the major expense any petrochemical industry has to endure. The raw material cost generally accounts for 50 per cent of the selling price.

  • Consumption in SE Asian countries (Korea, Indonesia and Taiwan) has been severely affected after the global economic slowdown.

  • In a country like India, where the middle-class segment is growing at a rapid space, demand is expected to grow at a high rate.

  • There are only three major players: Reliance Industries, Nocil and IPCL. All the three companies have fully-integrated plants.

  • As the domestic market is closely linked to global events and occurrences, some companies will witness squeezing margins, owing to depressed global petrochemical prices.

 Sector comments:

Till the early nineties, the petrochemical industry was state-controlled and dominated by the state-owned IPCL. The only other integrated player, that too in the private sector, was Nocil with a very small capacity. Most other players had small, uneconomic size plants, which were operated on molasses and alcohol.

With the liberalisation process in the nineties, the gates of the petrochemical sector were opened out to private enterprises for building up new capacities. In the private sector, Reliance Industries was quick enough to take advantage. It started expanding and building up existing and new capacities in a mega way.

In the post-liberalisation era, Reliance Industries and IPCL have started building up world-size, fully-integrated plants. The Indian petrochemical industry, at present, is highly concentrated. There are only three major players: Reliance Industries, Nocil and IPCL. All the three companies have fully-integrated plants.

There has also been a gradual fall in import duties, due to which companies with uneconomic and unintegrated plants have suffered heavily. The significance of these companies in the industry has become nil. In last three years, capacities of polymers have recorded a 26-per cent CAGR. Production of polymers has also recorded more than 18 per cent CAGR in the last three years. With the increase in these capacities, India is expected to have excess production of all the polymers.

Sector specifics:

The minimum economic size of an integrated plant is around 1million tpa of end-product, which entails an investment of Rs 100 billion. The petrochemical industry is a cyclical industry. One boom cycle or recessionary cycle takes around five to seven years. The obsolescence of technology is quite rapid. Plants should have the adaptability to absorb new technology and should be upgraded and/or modernised constantly.

The demand for petrochemicals is directly related with the economic growth of the country. Polymers, which drive 70 per cent of the demand, have grown at 14 per cent in nineties - by two to three times of the GDP. The demand elasticity is high in petrochemicals. With the fall in prices of petrochemicals, the demand increases, and vice-versa. The raw material cost is the major cost for any petrochemical product. The margins of the products keep on changing in cyclical fashion as they reach their peak and bottom at the end of every five to seven year cycle. The raw material cost generally accounts for 50 per cent of the selling price.

Market profile:

Polymers constitute over 70 per cent of petrochemicals produced. The largest end-user of plastics includes packaging industry, PVC pipes and fittings industry and molded luggage industry. In the last five years, these industries have grown at the rate of 16-18 per cent per annum. The domestic plastic processing industry is highly fragmented and scattered. There are more than 15,000 manufacturing units. Most of them are small-scale industries. The medium scale operators produce almost 60 per cent of the total production. The unorganized sector, with the 40 per cent of the balance production, is an important player. The total capacity of the industry to process polymers is estimated at 4.8 million tpa. There are three major types of processes - extrusion molding, injection molding and blow and roto molding. The items manufactured are films and sheets, fibres and filaments, pipes, conduits and profiles. Injection molding process, which accounts for 25 per cent of the plastic demand, manufactures items for household purposes like bath tubs, plastic crates, buckets, chairs, etc. Blow molding is used in the manufacturing of bottles, containers, toys, and housewares. Thus, providing a substitute for metal (steel and tin) and glass. The sector is growing at 12-13 per cent.

Market trends:

Greater urbanisation increases the demand for polymers. In a country like India, where the middle-class segment is growing at a rapid space, demand is expected to grow at a high rate. Application of plastics in a wide number of industries and products fuels the demand. Plastics have penetrated into areas of packaging materials, agriculture, wires and cables, medicare applications and household articles.

Increase in prices of conventional resources due to their limited availability, helps in driving the demand of polymers - a substitution effect. To a certain extent even the limited uses of conventional materials fuel the demand for polymers. In the pre-liberalisation era, consumption of petrochemicals was stunted because of its non-availability and non-affordability. Import duties were high (100 to 200 per cent). In the post-liberalisation era, after the gradual reduction of excise and customs duty, demand for petrochemicals has been growing. This fall in duties, both customs and excise, spurred demand growth in the nineties. Prices of key polymers have been falling and this is one of the reasons for the demand recording a 15-per cent CAGR in the last three years.

Outlook:

The Indian consumption growth rate in the nineties has consistently been on the higher side. The domestic demand for polymers recorded a CAGR of 15 per cent in last three years. The demand growth can sustain high levels for a long period. Indias low per-capita consumption of petrochemicals indicates the tremendous latent demand growth potential. In last three years, the capacities of polymers have recorded a 26-per cent CAGR.

Production of polymers has also recorded more than 18-per cent CAGR in the last three years. With the increase in these capacities, India is expected to have excess production of all the polymers. Sector fortunes are linked to price outlook, which is bearish for the next six months. As the domestic market is closely linked to global events and occurrences, some companies will witness squeezing margins, owing to depressed global petrochemical prices. Given this, margins of all petrochemical companies will witness a squeeze.

Conclusion

As no major demand recovery in the Asian region is in sight, we feel polymer and petrochemical prices will remain soft in the next six to 12 months. In the long run, only integrated and efficient players will survive. Small players will get acquired. Investors should under-weigh this sector till a clear uptrend in prices emerges.

Major players:

also see : Reliance Industries
National Organic Chemical India Ltd.
Indian Petrochemicals Ltd.

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Indian petrochemicals sector today