|
Petrochemicals, as the name suggests, are chemicals obtained from the cracking of petroleum feedstock. Petrochemicals are used in many manufacturing fields. The industry is built on small number of basic commodity chemicals, also known as building blocks such as ethylene, propylene, butadiene, benzene, toluene and xylene. Ethylene, propylene and butadiene are commonly referred to as olefins, while benzene, toluene and xylene are known as aromatics. Together, they form the basis of all petrochemical products.
|
|
The broad product segments of the industry include:
Basic petrochemicals: These are the basic building blocks, which are divided into olefins and aromatics. These are used primarily for polymerization. These are mainly used to designate the capacity of industry.
Polymers: These are made from basic petrochemicals by polymerization. Major products include PVC, HDPE, LDPE and PP. These find use primarily in the packaging industry and plastic industry.
Polyesters: These are synthetic fibre used in textiles industry. These include polyester filament yarn (PFY) and polyester staple fibre (PSF).
Fibre Intermediates: These consist of PTA, DMT, MEG, paraxylene, caprolactum, and acronitrile and are mainly used for manufacturing synthetic fibres like PFY and PSF.
Chemicals: These include Linear Alkyl Benzene (LAB), methanol, maleic anhydride, phenols, ethylene oxide, orthoxylene and vinyl acetate monomer. They find use in chemical industry.
|
|
Petrochemicals production process consists of primarily two stages. In the first stage naphtha, produced by refining crude oil, or natural gas is used as a feedstock and is cracked. Cracking (breaking of long chain of hydrocarbon molecule) produces olefins and aromatics. In stage two, these building blocks are polymerized (made to undergo chemical processes) to produce downstream petrochemical products (polymers, polyesters, fibre intermediaries and other industrial chemicals.
|
|
The industry is oligopolistic in nature with four main players dominating the sector noticeably Reliance Industries Ltd (RIL), Indian petrochemicals Corporation Ltd (IPCL), Gas Authority of India Ltd (GAIL) and Haldia Petrochemicals Ltd (HPL). RIL along with IPCL accounts for 70% of the petrochemical capacity in the country. However, the downstream petrochemical sector, especially polyester, is highly fragmented with more than 40 companies. This fragmented structure adversely affects the health of the industry.
|
|
Petrochemical industry is a cyclical industry. Globally the petrochemical industry is characterized by sluggish demand and volatile feedstock prices. In India, consumption of petrochemical products on a per capita basis, is still one of the lowest in the world. For example in case of polyester, India's per capita consumption is 1.4 kg compared to 6.6 kg for China and 3.3 kg for the world. In case of polymers, per capita consumption of India is 4 kg and is about a fifth of the world. Domestic demand for petrochemicals products has grown in double digits for a long period.
|
| Supply |
Supply currently outstrips demand and the operating rate of the crackers continues to be high across the globe. On the domestic turf, the situation is similar, however as the refineries are expanding their nameplate capacity, which inturn will lead to increase in production of naphtha. Increased naphtha will most likely be used for the petrochemical projects. Thus, the supply is going to improve in the future.
|
| Demand |
Demand of the petrochemicals generate from the downstream industries, which in turn are dependent on the state and growth of the economy. Indian economy is poised to grow at 7%-8% for the next few years. Thus, the demands for the petrochemical products are bound to be on the higher end.
|
| Barriers to entry |
The petrochemical industry is capital-intensive by nature. The minimum economic size of an integrated plant is around 1 million tonnes per annum, which inturn call, for huge investments.
|
| Bargaining power of suppliers |
Moderate to low, Inspite of the surplus naphtha production in the country, bargaining power of suppliers seems to be moderate. This is due to the fact that the suppliers are concentrated. However, going forward, integration is a ‘mantra’ for the oil refining companies.
|
| Bargaining power of customers |
Moderate to low, the downstream user industry is fragmented, which reduces their collective bargaining power. Import duties on the products have declined significantly over the past and with additional capacities coming up in the Middle East the bargaining power of the customers might improve to an extent.
|
| Competition |
Competition within the domestic market is limited, as there are only a handful of players with world-class capacities. However, with reduction in duties, there is threat of imports from Middle East and the Asia Pacific region, which is going to increase the competition. Also, the refineries are getting integrated, which will reduce the industry concentration in terms of market share and inturn fuel competition. |
|
| TOP |
|
Petrochemicals business (global and domestic) continued to witness an up cycle trend. The domestic per capita consumption continued to show sluggish growth (3% in FY05), however global consumption has grown at a higher rate. Industry reports indicate that both demands are likely to continue in the near future.
| |
The abolition of the quota regime during the start of the calendar year by western countries has been beneficial for countries like India. The demand for polyester during FY05 grew by 5%, going forward the growth is likely to be higher as key players have increased capacity or are making provisions for capacity expansion. Government on its part, during the Union Budget decreased custom duties on polyester and its raw materials. To give a further boost, it decreased duties on selected textile machinery, thus inducing manufacturers to uplift the sagging industry. On the Poly Ethylene Terephthalate (PET) front, the domestic industry witnessed a substantial (21%) growth from 50 KTA (Kilo Tonne) in FY04 to 101 KTA in FY05. This is due to the shift in preferences of consumers from glass bottles to PET ones. This increase in demand is likely to continue (both domestic as well as global) to grow at a faster rate in coming future.
| |
In order to further increase its footprint, (globally and domestically) domestic petrochemical producers are investing in de-bottlenecking their existing capacities or investing in foreign majors. This move will make them more efficient producers of petrochemicals products. Although this industry continues to be cyclical in nature, it is unlikely in the near future there should be a downturn, FY06 continues to witness demand situations.
|
|
| TOP |
| Current scenario and prospects |
|
|
Olefin chain margins during the year were weaker compared to the corresponding previous year as increase in raw material prices was higher compared to the increase in product prices. It needs to be remembered that olefins usually have naphtha as the feedstock. On the product side, international prices of Polyethylene (PE), Polypropylene (PP), Linear Alkyl Benzene (LAB), Poly Butyl Rubber (PBR) and Caustic were higher by 6%, 7%, 27%, 23% and 23% respectively, while prices of Poly Vinyl Chloride (PVC) and Mono Ethylene Glycol (MEG) were lower by 12% and 20% respectively. On the raw-material side, price of naphtha and propane was higher by 27% and 14% respectively.
| |
The domestic demand for both polymer and polyester products remained robust, with polymer demand registering a growth of 17% and polyester 10%, compared to corresponding previous year. Domestic demand for MEG increased by 17% while that of LAB also increased by 17%. Thus, demand was robust on an overall basis on the back of strong economic growth in the country.
| |
Petrochemical business is very complex business profitability largely hingers on the global industry. Also, the domestic factors such as reduction of import duties on petrochemicals (though the possibility of further reduction is remote) along with reduction in cotton duties and higher cotton availability could act as a dampener on the profitability of the polyester segment. However, analyzing the demand-supply factors, demand is bound to outstrip supply in the medium term, on overall basis thus leading to high operating rates in the industry with stable margins outlook.
|
|
| TOP |
