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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. The broad product segments of the industry include basic petrochemicals, polymers, polyesters, fibre intermediaries and chemicals.
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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. India's current per capita consumption of polyester is 1.4 kg, whereas China's and global per capita consumption is five times and three times higher respectively. Similarly, the 5 kg per capita consumption of polymers in India is one-fifths for the entire world. India accounts for 3.1% of the total world polymer consumption of 200 mtpa.
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| Supply |
Supply currently outstrips demand. In India, as refineries are expanding capacity leading to increase in production of naphtha, we believe it's going to increase further.
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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 9.2% 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 in turn calls for huge investments.
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| Bargaining power of suppliers |
Moderate to low, despite 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 in turn fuel competition. |
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In FY 10, global growth recovery stimulated the consumption of Petrochemicals, mainly driven by India and China, with Asian crackers operating in excess of 100% leading to steady margin recovery. The operating rates improved vastly for U.S (92%) with export opportunity in Asia and advantageous gas prices. European crackers operated lower at 83%, witnessing high closures and impact of supply from Middle East. However, the delays in Middle Eastern start ups and robust Asian demand forestalled oversupply issues for polyolefins.
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As per reports released by the Union Finance Ministry's Economic Survey for the fiscal 2009-10, the net industry turnover in petrochemicals stood at Rs 220 billion.
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There was a strong demand growth ranging from 9% for PE to 29% for PVC and Indian market is expected to grow driven by growing consumer market.
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Domestic polyester industry witnessed a growth of 15% YoY in FY 10.Excise duty was increased from 2% to 10% in Budget 2010-11 and interest subsidy has been extended to exporters till March 11. International cotton prices witnessed a steep rise in prices- March ‘10 prices up by 65% Y-o-Y - amidst lesser availability and increased demand. PFY industry witnessed a growth of 14% YoY and a capacity addition of 450 KTA. The operating rates for FY10 were 80%, expected to stabilize in 2011-12. PSF industry witnessed a 12% YoY growth rate and operating rate of 70%
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Current scenario and prospects |
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Government has put in place a national policy on petrochemicals and has initiated steps to create mega integrated complexes called petroleum, chemicals and petrochemicals investment regions (PCPIRs). These PCPIRs will be set up in a 2,000 sq km area with an estimated investment of $280 bn. As 100% FDI is permissible in chemical industry, this should provide a boost to the sector. It is expected that domestic petrochemical sector will double its production capacity in next four five years.
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Currently, R&D expenses of the industry are about Rs 2.2 bn (1% of the overall industry's turnover). With an approximate cost of Rs 4.4-6.6 bn, Government has provided for a policy of generating R&D centres for modernisation of the petrochemical industry. With this format, the government is aiming at a low-priced high-return involvement in the petrochemical segment, via public-private-partnership (PPP), to market the development of new applications of polymers and plastics, by establishing such centres of excellence (CoEs).
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Operating rates are expected to bottom out in 2010. Demand in Asia, especially in India and China is expected to remain high leading to high cotton prices and stable margins from polyester products. This, along with project delays by Middle East could lead to the next super cycle in coming years.
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