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Too many players spoil the broth - Views on News from Equitymaster
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  • Jun 17, 2000

    Too many players spoil the broth

    The petrochemical process starts with the cracking of naphtha (breaking up of the hydrocarbon molecule) into olefins and aromatics that make up the building blocks. These building blocks are then used to produce downstream petrochemical products namely, polyester, polymers and industrial chemicals.

    The potential demand growth of this sector is very attractive and could be one reason why new players want to enter even when the industry is reeling under over capacity. In fact there is expected to be regional over capacity till second half of 2002 after which demand supply will match. The demand is primarily driven by comparative pricing and alternative uses. A recent development has been the setting up of a chemical portal by some of the industry players to gain from the efficiencies created by the Internet. The E-commerce initiative will add further emphasis on costs; this will create added pressure on the smaller players.

    The polyester industry did not have much to cheer about in FY00. The prices of the products along the petrochemical chain generally move together. With crude oil prices ruling high throughout the year, the prices of naphtha, the key feedstock were pushed up, this should have seen a corresponding increase in polyester prices but with a large number of players the entire costs could not be passed on and consequently, it affected the margins. To improve the industry structure, consolidation will have to take place. The industry still looks attractive if we consider the per capita consumption (PCC) of polyester in India, which is at one third the level of China. One can hope to see volume led growth.

    The polymers market is made up of polyethylene (PE), polypropylene (PP) and poly vinly chloride (PVC); this market had a more buoyant year. The growth was largely driven by substitution of alternate materials and new product applications. FY01 looks even more exciting

    • Budget '01 was favourable for the polymer industry with the excise duty being reduced to 16% from 24%. This for the first time brings the excise rates at comparative levels with that of competing packaging materials e.g. glass and aluminum. One can thus expect to see even more substitution benefits.

    • Another impetus for the industry is the change in the Jute Packaging Material Act (JPMA), 1987. Under this act 100% of the sugar and food grains was to be packed in jute bags, while at least 20% of the urea was to be packed in jute. The new provision states that at least 90% of the sugar and food grains and 15% of the urea is to be packed in jute bags. This relaxation should open new opportunities for the polymer industry.

    Future demand growth as like in polyester looks attractive if we compare per capita figures; India consumes only one fourth of the amount consumed by that of China.

    Another important development is the likely disinvestment of Indian Petrochemicals Corporation Ltd. (IPCL) the second largest player in this segment. The Government has been planning for some time to divest 26% stake in favour of a strategic investor. Due to the long drawn out process, a number of bidders have backed out. The players remaining in the fray are Reliance Industries and the Chatterjee Soros Group, which have also promoted the Haldia petrochemical project on the East Coast.

    Opportunities abound the industry but before we can see the benefits fructify one anticipates the industry to restructure. It will also have to be wary of the threat of increased competition from cheaper imports mainly from the Middle East and the Asia - Pacific region. Integrated players and those higher up the value chain will have a greater chance of surviving.



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