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Polymers: Is the sun still rising?

Feb 23, 2002

Post independence; the indigenously produced polymer industry was essentially ethanol based. Demand for petrochemicals was met largely through imports with high tariffs, as the industry was perceived to be producing luxury goods. It was in 1960 that the Government appointed a committee to study the prospects of the petrochemical industry. Among the first producers of polymers in India were Imperial Chemical Industries (ICI) and Chemicals & Plastics Ltd., which were in the business of manufacturing LDPE (Low Density Polythylene), and PVC (Polyvinyl Chloride) respectively. Petrochemical production in India began with the commissioning of Union carbide's naphtha cracker in 1961. Next to follow was the Shell, Hoechst and Mafatlal joint venture christened National Organic Chemical Industries Ltd. (Nocil). However, much of the Government's efforts came to naught, as negotiations with international majors broke-down over management control. With capital deficiency in the domestic private sector, the Government, like in many other industries, took the first steps to establish India on the petrochemicals map. Indian Petrochemical Corporation Ltd. (IPCL) was incorporated in 1969 and the first olefins plant was commissioned in 1978.

The setting up of the upstream plant opened the doors to the less capital-intensive, downstream units dominated by the private sector. By the mid-eighties, eyeing the performance of IPCL, the private sector was enticed into the commodity plastics business. The next in line was Reliance Industries (RIL), which grew from strength to strength in the last decade of the license-permit raj era. The ethylene industry today comprises of largely four main players, namely Gas Authority of India Ltd. (Gail), Haldia Petrochemicals Ltd., IPCL and RIL. In fact, much of the capacity has been commissioned in the second half of the nineties. Ethylene capacity in the last five years to 2000 registered a compounded growth (CAGR) of 35.4%. As a result total capacity in the country stands at 2.5 m tonnes per annum (MTPA).

Ethylene capacity outlook
('000 tonnes) 1999 2000 2001 2002E 2003E 2004E
RIL 800 800 800 800 800 1,000
IPCL 530 830 830 830 830 930
GAIL 300 300 300 300 300 300
HPL 430 430 430 430 430 430
Nocil 75 75 75 75 75 75
Total capacity 2,135 2,435 2,435 2,435 2,435 2,735

Haldia Petrochemicals Ltd. has commissioned the latest addition of 430,000 TPA to the ethylene capacity. However, the company is facing cash flow problems due to delay in financial restructuring, high leverage ratio and possibly lower utilization levels. Going forward, Gail and IPCL have indicated plans to augment ethylene capacity depending on demand conditions. Over two phases, Gail and IPCL plan to increase ethylene capacity to 0.5 MTPA and 1.3 MTPA respectively. However, the build up in capacity is likely to put the market in over-supply. Over the next five years, ethylene capacity in the country is likely to grow to 3 MTPA.

Downstream polymer supply -- including polyethylene (PE), polypropylene (PP) and PVC -- however, has grown at a slower pace compared to upstream capacity. Over a five-year period ending FY01, polymer supply has registered a CAGR of 23.6% to 3.2 MTPA with PE and PP recording the fastest growth. On the other hand, consumption of polymers, over the same period, has grown more moderately at 13.1% p.a to 3 MTPA with the faster growing segments being LLDPE and PP. Consequently, fresh capacity is likely to be seen in these segments putting further pressure on demand and supply. The polymer industry, which faced a supply deficit of 500,000 TPA in FY96, now faces a surplus of an estimated 270,000 TPA with maximum oversupply in PP.

With the current slowdown, possible capacity expansions in the Asian region and finance minister talking of bringing down import duties to Asean levels, corporates are likely to be cautious on further downstream expansions. Any enhancement in capacity is likely to depend on further clarity on the above-mentioned factors. In fact, corporates have indicated that expansions will be dependent on market conditions. Among petrochemicals, polymers face a greater risk of a reducing tariff regime, as import duties on polymer & polymer intermediates are at 35%. The polyester chain, on the other hand, attracts duties of 20%. Lower import duties are likely to put realizations under pressure. Further, excess regional capacity could eat into the domestic markets.

That said, growth in polymers is likely to materialise from the high growth user industries like telecom & packaging. With fast moving consumer good (FMCG) MNCs augmenting operations in India, the demand for food & non-food grade plastic packaging is expected to increase. Mineral water is one example. Over the next few years, the Government is likely to further relax the Jute Packaging Material Act (JPMA). Currently, the act states that a minimum of 90% and 10% of food grain & sugar and urea is to be packed in jute bags respectively. The relaxation is likely to open up a new market for polymers and could favourably impact domestic demand.

Based on the above factors, demand for polymers is likely to remain robust, which could boost per capita consumption (PCC). Domestic per capita consumption (PCC) of polymers is 1.8 kgs as compared to an estimated 7 kgs in China and the world average stands at 17 kgs. Will the gap be bridged?

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