The business environment for petrochemical producers, especially downstream synthetic manufacturers, remains challenging. Reliance Industries Ltd. (RIL) recently announced product prices for the month of January '02, which indicated that pricing power in the industry continues to remain weak.
While product prices have been declining through the year, much of the weakness seems to have set-in the third quarter of the current fiscal. The drop in prices, YoY, across the board gives an indication of the vulnerability in product pricing. Month on month (MoM), polyester prices continued to slide but some amount of stability seems to have entered polymer markets. December '01 was the worst month in terms of pricing power with the company slashing prices across the board, which could be to revive demand and respond to competitive pressure.
Jan '02 prices
Business environment remains weak with a marked slowdown in domestic and global economic growth. Cumulative exports for the first six months of the current fiscal have declined in every month. Textiles constitute the third largest share of India's exports basket. Readymade garment exports, a component of textiles, is reportedly most affected. Also, synthetic textile exports, for the first five months of FY02, have reportedly declined by 5% YoY. The weakness in demand and increased competition has put pressure on pricing. Adding to the challenges, is the bumper cotton crop this fiscal. With softer cotton prices, synthetic textiles prices have been kept under check.
While MoM polymer prices have exhibited some stability, realisations YoY have reported a similar performance to polyesters. This could be due to increased competitive pressure in the industry with Haldia Petrochemicals Ltd. commissioning operations over the last 12-18 months and subsequently ramping up operating rates.
That said, petrochemical producers are likely to have experienced some amount of respite in operating margins, as naphtha prices have softened with weakness in the oil markets. But the decline in feedstock and product prices is not commensurate. Also, oil and naphtha prices have started firming up with the Organisation of Petroleum Exporting Countries (OPEC) cutting production by 1.5 m barrels/day (mbd).
At Rs 303.6 the stock trades on a multiple of 12.1x 1HFY02 annualised earnings. As feedstock prices increase, prevention in margin erosion is likely to depend on a turnaround in demand, which could instill pricing power.
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