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Petrochemicals, as the name suggests, are chemicals obtained from the cracking of petroleum feedstock. Petrochemicals are used in many manufacturing fields. The industry is built on small number of basic commodity chemicals, also known as building blocks such as ethylene, propylene, butadiene, benzene, toluene and xylene. Ethylene, propylene and butadiene are commonly referred to as olefins, while benzene, toluene and xylene are known as aromatics. Together, they form the basis of all petrochemical products.
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The broad product segments of the industry include:
Basic petrochemicals: These are the basic building blocks, which are divided into olefins and aromatics. These are used primarily for polymerization. These are mainly used to designate the capacity of industry.
Polymers: These are made from basic petrochemicals by polymerization. Major products include PVC, HDPE, LDPE and PP. These find use primarily in the packaging industry and plastic industry.
Polyesters: These are synthetic fibre used in textiles industry. These include polyester filament yarn (PFY) and polyester staple fibre (PSF).
Fibre Intermediates: These consist of PTA, DMT, MEG, paraxylene, caprolactum, and acronitrile and are mainly used for manufacturing synthetic fibres like PFY and PSF.
Chemicals: These include Linear Alkyl Benzene (LAB), methanol, maleic anhydride, phenols, ethylene oxide, orthoxylene and vinyl acetate monomer. They find use in chemical industry.
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Petrochemicals production process consists of primarily two stages. In the first stage naphtha, produced by refining crude oil, or natural gas is used as a feedstock and is cracked. Cracking (breaking of long chain of hydrocarbon molecule) produces olefins and aromatics. In stage two, these building blocks are polymerized (made to undergo chemical processes) to produce downstream petrochemical products (polymers, polyesters, fibre intermediaries and other industrial chemicals.
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The industry is oligopolistic in nature with four main players dominating the sector noticeably Reliance Industries Ltd (RIL), Indian petrochemicals Corporation Ltd (IPCL), Gas Authority of India Ltd (GAIL) and Haldia Petrochemicals Ltd (HPL). RIL along with IPCL accounts for 70% of the petrochemical capacity in the country. However, the downstream petrochemical sector, especially polyester, is highly fragmented with more than 40 companies. This fragmented structure adversely affects the health of the industry.
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Petrochemical industry is a cyclical industry. Globally the petrochemical industry is characterized by sluggish demand and volatile feedstock prices. In India, consumption of petrochemical products on a per capita basis, is still one of the lowest in the world. For example in case of polyester, India's per capita consumption is 1.4 kg compared to 6.6 kg for China and 3.3 kg for the world. In case of polymers, per capita consumption of India is 4 kg and is about a fifth of the world. Domestic demand for petrochemicals products has grown in double digits for a long period.
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| Supply |
Supply currently outstrips demand and the operating rate of the crackers continues to be high across the globe. On the domestic turf, the situation is similar, however as the refineries are expanding their nameplate capacity, which inturn will lead to increase in production of naphtha. Increased naphtha will most likely be used for the petrochemical projects. Thus, the supply is going to improve in the future.
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| Demand |
Demand of the petrochemicals generate from the downstream industries, which in turn are dependent on the state and growth of the economy. Indian economy is poised to grow at 7%-8% for the next few years. Thus, the demands for the petrochemical products are bound to be on the higher end.
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| Barriers to entry |
The petrochemical industry is capital-intensive by nature. The minimum economic size of an integrated plant is around 1 million tonnes per annum, which inturn call, for huge investments.
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| Bargaining power of suppliers |
Moderate to low, Inspite of the surplus naphtha production in the country, bargaining power of suppliers seems to be moderate. This is due to the fact that the suppliers are concentrated. However, going forward, integration is a ‘mantra’ for the oil refining companies.
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| Bargaining power of customers |
Moderate to low, the downstream user industry is fragmented, which reduces their collective bargaining power. Import duties on the products have declined significantly over the past and with additional capacities coming up in the Middle East the bargaining power of the customers might improve to an extent.
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| Competition |
Competition within the domestic market is limited, as there are only a handful of players with world-class capacities. However, with reduction in duties, there is threat of imports from Middle East and the Asia Pacific region, which is going to increase the competition. Also, the refineries are getting integrated, which will reduce the industry concentration in terms of market share and inturn fuel competition. |
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Global ethylene demand grew by 4.6% in CY07 reaching 114 m tonnes. Global capacity of ethylene during CY07 grew by 4.5% to 132 m tonnes. Consumption of major thermoplastics was at 183 m tonnes globally. In CY07, the global capacity of PP was 49 million tonnes and demand was at 44 million tonnes. Demand for PP grew at a healthy rate of 5.8%. Operating rate was relatively high at 90%.
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Global PE capacity was 78 m tonnes and consumption crossed 68 m tonnes in CY07, registering a growth of 5.1%. Global PVC demand grew in excess of 5% in 2007 to around 35.3 m tonnes. China, with a 10 m tonnes demand in 2007 is the single largest market for PVC both in terms of volume and growth rate.
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Aggregate consumption of PE, PP and PVC in India crossed 5 m tonnes in FY08, registering an impressive growth of 15%. This was achieved despite a high price environment with product pricing in some cases on a 15-year high. The demand growth is attributed mainly to demand in packaging, injection molded components (used in the automotive and appliances sectors), pipes used in agriculture and infrastructure development, flexible packaging as well as bulk packaging. Domestic demand for PP witnessed strong growth of 16% during the year.
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| Current scenario and prospects |
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Global ethylene capacity utilization has remained above 90% since 2004 and is expected to stay high in CY08. Large capacity additions in the Middle East and Asia during CY09 to CY11 may impact operating rates thus marking the potential for a down cycle. The industry is also witnessing a high feedstock cost environment due to strong crude oil and resultant naphtha prices. In next five years, India’s ethylene capacity is expected to increase from current 3.1 m tonnes to 5.8 m tonnes, with a CAGR of nearly 14 %.
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Globally 10% of cracker capacities are less than 5 years of age, whereas 23% cracker capacities are more than 30 years old. These aging facilities are likely to be under pressure from new world scale plants. The older crackers, which are mainly based on liquid feeds and are smaller in size (below 300 KT), are likely to be the most vulnerable during a down cycle due to higher variable costs and feedstock costs.
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PP, HDPE and LLDPE would continue to lead demand growth for polymers in the future. Overall demand growth is expected to be around 5.3 %, marginally behind the capacity growth of 5.4 % during the same period. PE, PP and PVC demand in India is expected to remain firm in the near term.
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Over 4.4 m tonnes of new PP capacity could be added during FY09. Almost 2.85 m tonnes of new capacity is coming up in Middle East alone. The region is also adding bulk of the new capacities in PE.
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