Indian petrochemicals will maintain strong growth through 2010

Feb. 11, 2002
The Indian petrochemical industry has grown substantially over the past decade, with annual average consumption growth greater than 15% in many product segments. Market growth, however, has been surpassed by even more rapid capacity growth, which has led to a supply surplus in a number of key products.

The Indian petrochemical industry has grown substantially over the past decade, with annual average consumption growth greater than 15% in many product segments. Market growth, however, has been surpassed by even more rapid capacity growth, which has led to a supply surplus in a number of key products.

The significant capacity build-up of the late 1990s changed India from a net importer to a net exporter of petrochemicals as well as refined petroleum products. Continuing strong demand growth, however, will cause a supply deficit in a fairly short time.

The macro picture

During the past decade, Indian industry has demonstrated vibrant growth even during the Asian financial crisis. Since the beginning of economic liberalization in 1991, at which time GDP growth was a dismal 0.8%, the Indian economy consistently experienced GDP growth greater than 5%, with a high of 7.5% in 1996.

The chemical industry accounts for 14% of total production in the manufacturing sector and 10% of the country's exports. The chemicals sector has maintained a steady annual growth of around 12%/year, with petrochemical demand growing even faster at 15% to 20%. Key factors behind this demand growth include:

  • The growing middle class, which aspires to a higher standard of living and creates new demand in many sectors of the economy.
  • Increased polymer use in the agricultural and telecommunications sectors.
  • Broadly increased demand from industry.

The emergence of a middle class in India, estimated at more than 300 million people, has contributed strongly to a rise in demand for petrochemical derivatives such as plastics, fibers, and rubbers.

There is significant potential for continued growth, considering such international benchmarks as per-capita consumption.

The Indian government currently estimates that per-capita plastics consumption will reach 7.1 kg in 2006, still below current levels in China. Since the current population of more than 1 billion is increasing by around 2%/year, the demand increase would amount to about 20 world-scale polymer production units.

Chem Systems Inc.'s own analysis of the Indian industry indicates a slower buildup to these levels of consumption but still projects a need for more than 20 world-scale plants by 2010.

The key to this demand increase is India's economic growth, which is significantly influenced by the continued pace of reform.

Capacity buildup

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Since economic liberalization began in 1991, ethylene capacity has increased by 1,895 tonnes to 2,455 tonnes at the beginning of 2001 (Fig. 1). This represents an average capacity increase of 18%/year since 1991, with the bulk coming on stream during the last 3 years.

Each of the investments in crackers has been associated with derivative units, which is indicative of the overall growth in petrochemicals.

The competitive landscape in the Indian petrochemical industry has changed dramatically since the 1980s when Indian Petrochemicals Corp. (IPCL) and National Organic Chemical Industries Ltd. (NOCIL) dominated the scene. In 1997, Reliance Industries LTD started up a 750,000-tpy cracker, which more than doubled Indian capacity.

Since 1997, two other new entrants-Gas Authority of India and Haldia Petrochemicals-have commissioned crackers and IPCL has also added capacity. All new entrants have been domestic-based enterprises; multinationals have not taken a part in this recent major investment activity.

Present and future

In ethylene, Chem Systems expects demand to grow at about 10%/year to 2010, even with expected import growth of many derivatives. This will raise ethylene consumption to around 5 million tpy by 2010.

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The Indian ethylene supply deficit by 2010 (based on forecast demand minus current in-place ethylene capacity) will amount to more than 2.6 million tpy (Fig. 2). This will require three to four world-scale crackers and a doubling of existing capacity to close the gap with domestic production.

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Based on Chem Systems' analysis of petrochemical demand drivers, a pattern of supply deficit dominates the Indian petrochemical scenario (Fig. 3). These supply deficits may not necessarily be filled by investments in India; competitiveness will be key in determining the location of capacity investment.

Competitiveness

Feedstock costs are a significant driver of petrochemical manufacturing costs. Additional logistics and customs tariffs costs are also important when considering cost to the customer.

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Fig. 4 shows the competitive delivered cost position of the leading high-density polyethylene (HDPE) producers capable of serving the Indian market.

Indian competitiveness is protected from Middle East feedstock advantages by tariffs and, to a lesser extent, logistic penalties. With high Indian tariffs, Middle Eastern imports were marginally cheaper than the Indian Laggard in 2000.

At reduced tariff levels-which are increasingly likely, considering World Trade Organization directives-Indian competitiveness against Middle East producers will be eroded.

If the tariffs were less than 20%, Middle Eastern imports would have had delivered at costs less than the Indian Leader in 2000.

Future industry structure; foreign investment

A large and growing market makes capacity investment attractive, although this does not necessarily guarantee capacity investment in India. Any of these could fill the future deficit:

  • Existing domestic players debottlenecking or building new crackers.
  • New investors, either foreign or domestic.
  • Structured imports-investment in Indian marketing infrastructure with capacity investment outside of India.
  • Arms-length opportunistic imports.

Existing players must guard against new entrants and must consider these influences on existing operations and future investments:

  • Small-scale plants will have to close.
  • Existing plants will have to strive for efficiency and effectiveness.
  • A lack of gas will limit the scope for new gas-based crackers; new crackers will be predominantly naphtha-based, therefore.
  • Feasibility will have to be weighed against Middle East competitiveness.

The current positions of existing major petrochemical players in India have been in a state of flux. Since an initiative began in 1999, attempts by the government to divest IPCL have failed.

The lack of progress has stalled investments needed to keep this major player in a competitive position.

NOCIL's plans to realign its businesses have unraveled. After a 3-year effort, first by Shell Chemicals Ltd. then Basell Polyolefins Co. (50-50 joint venture of Shell and BASF AG, to establish a world-scale olefins complex jointly with NOCIL, Basell pulled out of the arrangement in July 2001. This puts increasing pressure on NOCIL's existing small-scale petrochemical operations.

Haldia Petrochemicals has entered the Indian petrochemical business with world-scale operations and technology but at a time of overcapacity. This has put significant pressure on the company's financial structure, which it is now working to resolve.

These problems could provide an opportunity for new players to the Indian petrochemical market, either through new capacity in India or offshore investment with a structured target in India.

These are significant examples of foreign players pursuing major petrochemical investments India:

  • Mitsubishi Chemical's investment in a grassroots 350,000 tpy terephthalic acid manufacturing facility in Haldia (commissioned in 2000).
  • BASF's investments in polystyrene, including its acquisition of Pushpa Polymers Pvt. Ltd. in 2000 (capacity of 60,000 t/y).
  • Schnec ta dy In ter national's acquisition of Her dillia Petrochemicals in 2001 (a major producer of cumene and phenol).

From 1991 to 1999, India achieved an inflow of foreign direct investment (FDI) totaling $14 billion, less than China ($283 billion) and Thailand ($29 billion).

FDI in the Indian chemical industry has amounted to only around 15% of this rather limited total.

India's government is trying to improve on this poor FDI track record, with initiatives centered on incentives and factors influencing ease of entry and business establishment.

An alternative supply-side option is to source petrochemicals from capacity in such feedstock-advantaged locations as the Middle East and invest in structured marketing infrastructure within India.

Such initiatives are currently underway in the fertilizer sector, where a joint venture is in formation between two Indian producers and Oman Oil Co. to form OMIFCO. This joint venture takes advantage of Oman's feedstock position with the marketing skills and infrastructure of the Indian partners to serve the growing Indian market.

Others are likely to follow this example, throughout the broader petrochemical arena as well as in fertilizers.

The author

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John W. King is vice-president of Nexant (Thailand) Ltd., with responsibility for business development and engagement delivery to the energy, petroleum, and chemical industries for Southeast and South Asia. An experienced international project manager, he has completed client engagements on business and manufacturing strategy issues in the US, Europe, Africa, Middle East, South Asia, Australia, and Asia Pacific. He previously worked for Ethyl Corp. as a process and project engineer. King originally joined Chem Systems in 1982. Chem Systems was acquired by IBM in 1998 and subsequently by Nexant in 2001. He received a BS in chemical engineering from the University of Missouri and an MBA from the London Business School.