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Petrochem: Improving prospects - Views on News from Equitymaster
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  • Apr 19, 2002

    Petrochem: Improving prospects

    Cyclicality in commodity businesses seems to have increased in the last five years. After recovering from the Asian meltdown in FY00, commodities cycle was once again hit by the economic downturn over FY02 triggered by the global stock market crash. As a result, the petrochemical cycle has exhibited similar volatility.

    Over the past two years, the industry has been facing challenging conditions. In FY01, although petrochemical prices were buoyant and expected to rise further, the run in oil prices and consequently naphtha, the chief raw material, led to pressure on operating margins. In FY02, only the dynamics of the difficulty changed. The industry was faced with weakening demand, which affected realizations coupled with volatility in feedstock prices. Domestic producers were further squeezed with increased competition in the sector. Over FY00 & FY01 fresh ethylene capacity from Gas Authority of India Ltd. (Gail) and Haldia Petrochemicals Ltd. came onstream, which has eaten into market share of existing players.

    Having said that, over the past quarter signs of global economic revival have emerged. Corroborating the trend has been movement in domestic petrochemical prices. In the previous month all major players increased polymer prices. For the month of April, Reliance Industries Ltd. (RIL) has augmented prices across the board with a robust double-digit increase in polyesters and polymers. A small concern could be the rise in polyester intermediates outpacing downstream materials, which could soften polyester division margin. This trend could be due a sharper fall in polyester intermediate prices. Mono ethylene glycol (MEG) prices are still 25% below year ago levels. While month-on-month there has been an improvement in realizations, on YoY basis, prices, especially polyesters, are approximately lower by 8%-10%.

    The stock market rally since the lows in October '01 have factored in the upturn in the global economy. There seems to be some uncertainty on slope of the recovery, which has led to flat bourses. Petrochemical prices in domestic markets could exhibit more firmness compared to international prices, as key consuming industries -- telecom -- register high growth rates. On the supply side, Indian Petrochemical Corporation Ltd. (IPCL) is planning on augmenting ethylene capacity by 550,000 tonnes per annum (TPA), which is likely to go onstream in FY04. Also, Gail is contemplating enhancing capacity. These additions along with expansions in neighbouring countries including Middle East and Asia could cap a major recovery in the region. Going into FY03 and FY04 the sector could witness improved prospects but the additional capacity could suppress fortunes after two years.



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