India's Union Budget proposes to re-impose a 5% import duty on naphtha. This proposal is a step in the wrong direction. It reverses a duty reduction granted two years ago from 5% to zero. Among all the petrochemical players in the country, this proposal will particularly affect Haldia Petrochemicals Ltd. (HPL), as HPL is the only petrochemical unit which needs to necessarily import naphtha. The other petrochemical producers in the country are either gas-based or produce naphtha in their own refinery. Reliance's 8,00,000 ton cracker at Hazira, which uses some imported naphtha, may also be impacted but only marginally as the company is fully integrated and may always use naphtha produced at Jamnagar as feedstock.
The new tariff, which applies only to companies importing naphtha for use in polymer units, comes into immediate effect. HPL currently procures 1.7 mln tons naphtha. HPL, in which the West Bengal State Government is a majority stakeholder, estimates a Rs 300-crore hit to its bottomline - almost half of its projected profit in 2007-08. HPL also claims that imposition of import duty will impact the price of imported naphtha and also domestically procured feedstock. HPL currently procures 20% of its total from the neighbouring Haldia refinery of IndianOil. The balance is either imported or mostly procured from other domestic sources. Domestic producers charge landed price of naphtha inclusive of transportation, port handling charges and others. Considering that the customs duty on polymer remained unchanged at 5%, HPL products will face further price competition in the domestic market.