Petrochem: Will the potential fructify? - Views on News from Equitymaster

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Petrochem: Will the potential fructify?

Jan 24, 2001

Two key players largely dominate the Indian petrochemical sector, Reliance Industries Ltd. (RIL) and Indian Petrochemical Corporation Ltd (IPCL). However, the sector continues to be characterized by multiple players lacking economies of scale. Being a fragmented market with players operating insignificant capacities and high exit barriers have all adversely impacted the industry structure. The pricing and margins of the industry, consequently, have been hampered. With a view to improving the industry structure Reliance has initiated consolidation in the industry. The company acquired polyester capacity of 40,000 tonnes from DCL in the year '00.

In the polyester segment, Polyester Filament Yarn (PFY) production for the first ten months of the calendar year '00 was 669,852 tonnes as compared to 641,819 tonnes in the corresponding period of the previous year, a growth of 4.4%. Polyester Staple Fibre (PSF) production registered a negative growth of 3.3% over the concerned period to 453,523 tonnes. The prices for PSF have improved marginally by 10% as compared to the previous two years.

In polymers the three key downstream products are HDPE (high density poly ethylene), LDPE (low density poly ethylene) and PVC (poly vinly chloride). Production of HDPE was down for the first ten months of the year '00 to 276,244 tonnes a decline of 17.3%. LDPE production reported a growth of 6.9% to 273,668 tonnes while PVC has shown the largest rise growing by 11.4% to 684,271 tonnes over the concerned period. Prices of polymer products have come down by approximately 10%. This could be due to the Haldia Petrochemicals plant coming onstream towards the second half of 2000.

Currently, the domestic producers are protected by relatively high tariff barriers as compared to some of their Asian peers. Import duty on petrochemical end products range between 25% and 45%. These duties, however, are expected to come down with the WTO coming into effect. It is anticipated that import duties on petrochemical products will be brought down to 5% over a 5-year period.

An encouraging feature though is that the per capita consumption rates of petrochemical products continue to be amongst the lowest in the world. The per capita consumption for polyesters is 1.3 Kgs / p.a., which is one third of China's consumption. In polymers, China's per capita consumption is 4 times that of India. These numbers indicate the potential growth opportunities available in the petrochemical sector. This could be one of the reasons for existing players expanding capacities and new players entering the field.

With consolidation prevailing in the sector and all new capacities expected to come onstream by the end of 2001 the petrochemical cycle could witness an upturn in fortunes.

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