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Petrochem: Cyclicality blues

Jan 12, 2002

The petrochemical industry, like other commodities, has witnessed heightened volatility in prices. With globalisation and inter-linking of markets, hiccups in one part of the world are likely to be felt across the globe. In 1997, the sector began to show signs of weakness, as the Asian contagion spread across the region. Over a period of two years, downstream polyester & polymer prices fell by an estimated 35% and 20% respectively. Post Asian crisis, the sector never really recovered completely. By mid-1999, oil production cuts affected by the Organisation of Petroleum Exporting Countries (OPEC) had begun to reflect on oil markets. The rally in oil prices reached a crescendo by October '00 with oil ruling at 10-year highs of $35/ barrel. During these years, while demand and product realizations remained healthy, feedstock prices pulled down margins, as naphtha prices reflected the firmness in oil markets.

In FY01, naphtha prices rose by an estimated 15%, which was not followed by a corresponding increase in final product prices. In the current fiscal, while a pressure of firm naphtha prices has subsided to a certain extent, the slowdown in global and domestic economic growth has thrown another spanner into the works. The sluggish business environment has pulled back demand, which is reflected in weaker commodity prices resulting in another cyclical downturn.

During the first half of the current fiscal, polyester demand registered an estimated increase of only 3% while production grew thrice that, by an estimated 9%. The mismatch is one of the reasons for poor polyester realizations. Production of fibre intermediates, over the same period, declined by 1%. The segment experienced increased competition, as Mitsubishi ramped up operating rates at its PTA plant.

Global additional demand supply balance turns favourable
Global Capacity Additions*200120022003Total
Global Demand Growth*    
* Forecasts, Figures in MMT, Source: RIL

Polymer incremental demand to outpace capacity additions
Global Capacity Additions*200120022003Total
Global Demand Growth*    
* Forecasts, Figures in MMT, Source: RIL

Polymers, despite the slowdown, continue to report impressive growth. Following up on an 11% YoY consumption growth in FY01, the segment has registered growth of 15% YoY in the first half of the current fiscal. While demand grows, realizations are under strain with weakness in global markets and increased domestic capacity. The last couple of years have seen new polymer capacity come onstream. IPCL's gas cracker at Gandhar came onstream in FY98 followed by GAIL's 300,000 m tonnes per annum (MTPA) gas cracker at Pata, U.P in FY00. Haldia Petrochemicals Ltd. commissioned its 420,000 MTPA naphtha cracker in FY01. Consequently, any growth in consumption has been matched by fresh capacity, which is excluding expansions at Reliance Industries Ltd.

Another concern is global capacity augmentation, especially, in the Middle East, which could delay a revival / lead to chronic capacity overhang in the industry. The Middle East region controls a significant amount of global oil & gas reserves. Besides a handful of downstream petroleum and petrochemical companies, these countries have largely flourished by simply monetising the natural resource. However, few countries are now planning to better utilize the resource at hand, leading to greater monetisation, through value addition.

Iran is believed to be aggressively planning to establish itself on the global petrochemicals map. Over an estimated period of ten years the country is targeting ethylene capacity of 6 m metric tonnes (MMT). The Indian sub-continent petrochemical industry needs to be wary of Middle East producers due to their inherent advantages of cheaper feedstock. Also, the sub-continent offers a large target market. Further, much of the Middle East production is targeted for exports due to the low local consumption.

Having said that, markets seem to be expecting a revival in petrochemical margins largely by FY04, which seems to be based on an economic recovery in FY03. Concerns remain on a turnaround in the global economy, whether agriculture can provide the much needed impetus to kick start the domestic economy and subsiding of tensions at the border.

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