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Petrochem: Skids on slowdown - Views on News from Equitymaster
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  • Sep 4, 2001

    Petrochem: Skids on slowdown

    Fortunes of the petrochemical sector seem to be cursed. The sector was severly affected by the Asian meltdown followed by the global financial crisis. Over the past two years, fortunes of the sector were on an uptick till the global and domestic slowdown pounded the revival.

    Production of polyester filament yarn (PFY) has been sliding since start of the calendar year. Over this period production has declined by 6% YoY while in the first two months of the current fiscal, output is down by 5.5%. Month on month (MoM) the drop in production has slowed down from 7.5% in April '01 to 3.5% in May'01, which could be early signs of a bottom. On the other hand, polyester staple fibre (PSF) production has remained stable, barring a few blips. Production for the first two months of the fiscal is higher by 2.8% YoY.

    Prices of polyester oriented yarn (POY), however, have increased YoY. In 2QFY02, prices of POY are higher compared to 2QFY01 by 8%. This could be mainly due to the anti-dumping duty imposed by the commerce ministry on cheaper imports from South Korea and South East Asian nations. PSF realisations, over the same period, have declined by 8.8%. QoQ, though, polyester prices have not weakened. Saving the day for polyester manufacturers is the weakening of polyester intermediate prices, which could help companies maintain operating margins. Over the concerned period purified terephthalic acid (PTA) and mono ethylene glycol (MEG) prices have dropped 8.1% and 9.3% YoY. In fact, MEG prices QoQ have reduced by 2.4%.

    The polymer sector could be facing harder times with fresh capacity coming onstream in the last two years and consumption facing a slow down. This has resulted in an increased competitive environment within the sector, which could be indicated by the prices. Polymer intermediate prices, poly ethylene (PE) and poly propylene (PP), are down by 12.4% and 7.7% YoY. Polyvinly chloride (PVC) is down a sharp 21.5% YoY. In fact, the slide does not seem to have stemmed with PVC price, QoQ, falling by 10.3%.

    With consumption of polyester and polymers remaining sluggish and realisations weakening, turnover growth for petrochemical companies could prove to be challenging in FY02. Nevertheless, a silver lining in the form of weakening feedstock prices is expected to support operating margins but earnings growth is likely to be impacted. Prices of naptha, the key petrochemical input, have reportedly declined by 17.1% in the last two months.



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