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Doubts increase over growth potential of India’s petrochemicals industry

Doubts increase over growth potential of India’s petrochemicals industry

29-Jun-13

The Indian petrochemicals industry will experience a surge in capacity in 2013, which will plug the deficits in the market that emerged over the past year as demand outstripped supply. However, the sector is weighed down by a poor business climate that is undermining progress in the investment necessary to put India on par with its main Asian competitor, China. Nevertheless, production indices pointed to a sharp downturn and growth that was well below the 9.5% average petrochemicals demand growth rate targeted by the government. Read more in
Doubts increase over growth potential of India’s petrochemicals industry
The Indian petrochemicals industry will experience a surge in capacity in 2013, which will plug the deficits in the market that emerged over the past year as demand outstripped supply, as per Business Monitor Index (BMI). Polyethylene will make the biggest gains, leading to a slashing of imports. However, the sector is weighed down by a poor business climate that is undermining progress in the investment necessary to put India on par with its main Asian competitor, China. Indian plastics and synthetics rubber production have grown steadily over the last five years, while chemicals output growth has been slower. Both sectors registered a slowdown in growth in 2012, with the chemicals index rising by an average of 1.5%, which is more than the 0.7% forecast by BMI. Meanwhile, the plastics and rubber index rose 2.1% - well above the forecast 1.4%. Nevertheless, production indices pointed to a sharp downturn and growth that was well below the 9.5% average petrochemicals demand growth rate targeted by the government. Doubts are increasing over another great hope for the petrochemicals industry – India. See the above table for forecast Indian demand growth rates for polyolefins, which were made public at the Asia Petrochemical Industry Conference in Taipei.

Indian demand growth rates for polyolefins
(KTA) Actual Projected % change year on year
2011 2012 2013 2014 2012 2013 2014
LDPE+EVA 499 550 623 690 10% 13% 11%
LLDPE 1055 1237 1358 1504 17% 10% 11%
HDPE 1552 1692 1901 2173 9.0% 12% 14%
PP 2682 3072 3304 3717 15% 7.6% 13%
Polyolefins 5788 6551 7185 8083 13% 10% 12%

ICIS blogger Paul Hodges points out, it has always been a fallacy to argue that India will quickly turn into a Western-style middle-class country. Because:
* India remains one of the world’s poorest countries
* Most analysts have wrongly interpreted high levels of income growth to mean India will rapidly become a Western middle class country.
* Most analysts reached this conclusion because India’s average per capita income had been growing fast, in percentage terms, as economic reforms took place. It was up 12% in 2012 after 14% growth in 2011.
* But, and this the crucial issue, average per capita income is still only Rs 57 k/year (US$1040).
What is wrong with India is that far too much wealth is concentrated in the hands of far too few people. Plus, flawed politics make it difficult for India to achieve the social and economic reforms essential to adequately even-out the benefits of growth. A huge issue has for a long time been weak foreign investor confidence. Foreign investment is vital for solving India’s infrastructure impasse. India’s economic weaknesses have been further exposed by the recent acceleration in foreign capital flight. Part of the reason for this increased outflow is indications from Ben Bernanke that the US quantitative easing program could soon be curtailed. There has been a retreat from emerging market equity markets in general. However, many believe that the capital flight has also been driven by “India’s people and policies being at a crossroads. Nobody knows what direction we should take. The overseas investment community had already been scared-off by mindless policy decisions on taxation. Last week, the value of the Rupee fell to an all-time low against the US dollar.
However, as per Business Monitor Index (BMMI), there was upside in many polymer market segments in 2012-13 - with demand for polymers growing at a faster pace than output growth or the broader economy. Polyolefins demand in India has grown strongly and in spite of the slowdown in economic growth, there has been no slowdown in polymers consumption. Growth rates also benefited from poor demand conditions in the previous fiscal year. With output growth constrained by feedstock costs and lack of capacity growth in 2012, rising consumption led directly to a strong rise in imports.
Over the last quarter BMI has revised the following forecasts/views:
• Indian polyvinyl chloride (PVC) demand is expected to increase by 13-14% in FY2012-13 - to around 2.25 mln tons compared with just 3% growth in FY2011-12. Consumption is expected to rise by a further 10% in 2013-14, assisted by growth in construction activity and agriculture as well as lower PVC product prices. As there was no domestic capacity expansion in FY2012-13, PVC imports rose by around a third to 1 mln tons. With Reliance Industries (RIL) bringing onstream a 100,000 tpa PVC plant in Dahej, Gujarat, in 2013, and two other producers - DCW and Chemplast - planning expansions, growth will be met by local capacity in 2013-14.
• BMI forecasts 15% growth in polypropylene (PP), 10% growth in high density polyethylene (HDPE) and 20% growth in LDPE in 2012-13. In the polyethylene (PE) market, LDPE has benefited from the narrowing price differential with linear low density polyethylene (LLDPE). Imports have also been rising because of lower production at RIL, the country's only LDPE manufacturer. HDPE was affected by a ban imposed on plastic bags in New Delhi at the end of October, which significantly curtailed demand for HDPE film. PE and PP will continue to register growth in the coming year at around 10%, but much of it will be served by growing domestic capacities. A 50% leap in PE capacity is anticipated. Around 60% of the 1.88 mln tpa rise in PE capacity will come from LLDPE. At the same time, PP capacity is set to increase by a quarter to 4.72 mln tpa.
• BMI forecasts that by 2017, ethylene capacity will be 10.41 mln tpa, PE will be 5.67 mln tpa and PP will be 5.06 mln tpa. Growth will be led by RIL's projects at Jamnagar and Dahej. By the end of the forecast period, together these will add capacities of at least 1.3 mln tpa paraxylene (PX), 2.3 mln tpa purified terephthalic acid (PTA), 540,000 tpa polyethylene terephthalate (PET), 400,000 tpa ethylene and 360,000 tpa LDPE. It is also building several synthetic rubber manufacturing complexes with a total of over 210,000 tpa of rubber capacity due onstream by mid-2014. Its investment in polyesters and rubbers rides on the back of broad consumption trends.

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