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Future imperfect? - Views on News from Equitymaster
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  • Feb 3, 2001

    Future imperfect?

    Three key players, Reliance Industries Ltd. (RIL), Indian Petrochemical Corporation Ltd. (IPCL) and Gas Authority of India (GAIL), largely dominate the polymer industry. The downstream industry, however, is characterized by large number of small players without significant economies of scale, consequently, impacting the industry structure.

    Through the eighties and early nineties polymers was the sunrise industry of the country prior to the emergence of the silicon boom. The nineties witnessed the polymer industry growing at double-digit rates. Leading the pack were high-density polyethylene (HDPE), polypropylene (PP) and polystyrene (PS), which registered growth rates of 19.8 percent, 21.8 percent and 13.9 percent.

    In order to capitalise on the double-digit growth rates companies developed plans to set up plants in the polymer industry. However, with promoters failing to envision the future competitive scenario and these projects being capital intensive in nature the projects set up were of uneconomic size capacities. Consequently, these players ended up being regional players. More importantly as market dynamics changed, capacity became king and these units were relegated to financially troubled class.

    Installed capacity of polymers
    ('000 MT) FY91 FY96 FY00
    LDPE 120 187 200
    LLDPE 0 295 925
    HDPE 50 0 520
    PP 55 115 1160
    PVC 164 483 780
    PS 36 150 252
    ABS 24.7 27.5 42.2
    SBR 45 49 45.4
    PBR 20 20 50
    Total 514.7 1326.5 3974.6

    One such victim has been National Organic Chemicals India Ltd. (NOCIL). A one-time blue chip, the company has consistently seen its profits erode over the last four years. As per latest reports, the promoters (Mafatlals) have sold their stake to the international major, Shell. This could revive the fortunes of the company or those at least are the hopes of the shareholders.

    Therefore, despite the strong growth rates registered by the sector the fortunes have remained subdued as capacity expansions kept pace with demand growth and have resulted in realizations being under pressure.

    Nevertheless, the outlook on demand growth continues to remain bullish inspite of the double-digit growth reported in the previous decade. In fact, the Indian petrochemical sector is the third largest market in the Asian region and has the distinction of registering the fastest growth.

    Consumption of polymers
      FY91 FY96 FY99
    LDPE 201,326 245,668 248,050
    HDPE/LLDPE 194,889 594,260 826,990
    PP 157,066 334,339 762,112
    PS 52,025 114,409 147,696
    PVC 294,637 526,207 737,151
    ABS 11,888 26,091 39,426
    SBR 45,953 50,272 51,377
    BR 21,280 37,239 55,589
    Total 979,064 1,928,485 2,868,391

    Further, other market aspects also work in India's favour. The per capita consumption (PCC) of polymers in India for the financial year 2000 was 3.3 kilograms. This is a fourth of China's consumption while the world average is estimated to be 17 kilograms per annum. The polymer industry has been the beneficiary of the substitution effect, as consumption shifts from steel and wood to a greater use of plastics. The relaxation in the Jute Packaging Material Act (JPMA) has provided another impetus to the industry. Further, the decline in polymer excise duty rates from 24 percent to 16 percent for financial year 2001 has put polymers at par with other competing packaging materials. All these factors could help foster high growth rates in the industry.

    Eyeing the potential, all the Indian majors have undertaken capacity expansions over the last two years. Haldia Petrochemicals, which started operations in mid 2000, is the latest entrant in the industry. The company is situated on the East coast providing it locational advantage of tapping the eastern markets. However, due to project delays and cost overruns the company is steeped in debt adversely impacting its cash flow and operating abilities.

    The supply will continue to exceed demand in the short run as Reliance Industries undertakes de-bottlenecking of its ethylene cracker. However, fortunes are expected to turn for the better as no new capacity is anticipated to be in the pipeline, as new plants require approximately 24 months to go onstream. Therefore, the industry could witness higher utilization rates and improvements in realizations as demand overtakes supply.



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