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GAIL: The Petrochemical story
Aug 23, 2007

In this article weíll look into the petrochemical segment of GAIL. In FY07, petrochemicals contributed 12% to the consolidated topline and 29% of the consolidated bottomline.

Infrastructure
The petrochemicals industry is concentrated near Mumbai. GAILís petrochemical complex at Pata is the first facility located outside of the western India belt. It produces polyethylene (low density and high density) and propylene. The polyethylene production capacity of Pata is 410,000 tonnes per annum (TPA). Its polymer capacity is also being increased. GAIL enjoys around 18% of both; the domestic production capacity and market share in polyethylene.

Products
GAIL produces several grades of High Density Polyethylene (HDPE) used by plastic processing units. It includes injection molding, blow molding, raffia, monofilament, pipe, wire, cable and film. GAIL also produces several grades of Low Density Polyethylene (LLDPE), including film, rotomolding, injection molding and pipe and conduits.

Suppliers
The natural gas used at Pata is chiefly supplied by ONGC. The remainder is supplied by OIL and three joint ventures- Ravva joint venture, the Tapti joint venture and the Panna-Mukta joint venture. The gas is supplied through the HVJ Pipeline.

Buyers
GAIL sells to plastics processing units throughout India. Over 10,000 plastics processing units in India consume GAILís products, out of which a significantly smaller number consume the bulk of its products. Most of the latter are located in the northern and western regions of India. The company has entered into MoUs with several large plastic processing units under which it supplies products at prevailing market prices. The company plans to export its products as well.

Competition
Four domestic producers, Reliance, Haldia, IPCL (Reliance acquired control of IPCL during the latterís disinvestment in 2002) and GAIL dominate the Indian petrochemical industry at present. GAIL competes on the basis of price and quality as petrochemicals are commodities and the government does not fix prices.

GAILís competitive advantage rests on two counts. First, it produces imported grades of HDPE, which enables it to charge higher prices at better margins. Second, as the Pata petrochemical complex is the only one in northern India, GAIL has shorter delivery times and lower transportation costs to customers located there.

Over the years, indigenous supply of petrochemical products has been insufficient to meet demand and the shortfall has been met by imports for a number of petrochemical products. In the past, the industry was protected from international competition through high customs duties on petrochemical imports. However, duties have fallen since 1995. GAIL will shortly face heightened competition from international manufacturers. The large multinationals have significantly greater financial resources. Moreover, the industry soon expects to witness an over-supply situation in polymer production capacity in Asia (particularly in the Middle East and China). This will further tighten competitive pressures on domestic petrochemical producers.

Demand drivers
The demand for petrochemicals products in India is driven by three factors- general industrial growth in India; prices of petrochemical feedstock, end-products and competing products; and substitutability of competing materials.

The current demand for petrochemical products in India is due to rapid growth in the Indian economy. This demand is expected to continue for some time to come because the per capita consumption of polymers in India of around 3.8 kilograms is still one of the lowest in the world.

Future plans
The company plans to build a Rs 56 bn 2,80,000 TPA petrochemical complex in Assam and a 62 bn 4,00,000 TPA gas cracker complex plant in Kochi (Kerala). The feedstock for the latter will be imported LNG, which will be regasified at the terminal of Petronet LNG Ltd. at Kochi. This project is likely to be commissioned along with Petronet terminal. GAIL has also signed a Production Development Agreement with the National Petrochemicals Company, Iran, for jointly developing a polyolefin plant with a capacity of 1 MTPA ethylene at an investment of US$ 1.5 billion.

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