Strong growth in India’s petrochemicals demand likely to subside

Strong growth in domestic petrochemicals demand in H1-10 is likely to abate, owing to a cooling in economic activity, but the Indian market is strong enough to justify the planned rapid increase in capacities, according to BMI’s latest report. In 2010 and going into 2011, there are signs are that we will see a cooling in activity due to a peaking of industrial activity, less accommodative global conditions and the winding down of the government’s economic stimulus. But industry expansion is proceeding, albeit with delays, with projects that were postponed during the global economic downturn now being revived. During Q2-10, domestic demand for polyester products increased 10%, owing to increased non-apparel applications like home furnishing and technical textiles. Within the polyester segment, demand for polyethylene terephthalate (PET) increased 38% thanks to increased demand for beverages and bottled water. Polymer products demand remained stable during the quarter. Within the polymer segment, demand for polypropylene (PP) increased by 6% due to strong growth in the automobile sector, cement packaging and other industrial applications. Demand for PE and PP is forecast to grow in double digits in 2010 and 2011, with some grades, such as biaxially-oriented polypropylene (BOPP) film for packaging, non-woven PP and pipe grade polyethylene (PE) expected to grow by more than 20%. In 2010, strong demand for low density PE (LDPE) and linear low density PE (LLDPE) film will suck in imports, while the country will remain self-sufficient in high density PE (HDPE) over the short term due to plentiful capacity and relatively poor demand. However, the PP sector in general is in danger of overcapacity. India was a significant PP exporter in 2009, but moderation in growth in global demand at a time of rising capacity will dampen prospects on external markets. Yet, domestic demand has yet to catch up with growing output volumes. As a result, the pressure to differentiate will increase, as competition in the Indian market heats up. R&D and the introduction of higher grades of polymer products are therefore essential to add value. The main engine of the economy – domestic demand – will be fuelled by rising private consumption and fixed investment levels, as well as the need to rebuild inventories. This has renewed confidence in the petrochemicals industry. BMI estimates Indian consumption of plastics will grow from 8 mln tons in 2009 to 16 mln tons by 2016 and 25 mln tons by 2020, with a lower rate of growth than the 15-16% seen in recent years. Nevertheless, this should prompt growth in the industry of 9-10% pa. Estimates for the investment needed to cater for the increase in demand for plastics in 2010-2016 has been put at US$10 bln. Even when bearing in mind the delays and cancellations, India will host a rapidly expanding petrochemical industry. The Indian government forecasts domestic polymer demand reaching 11 mln tons in 2015, up from 5.8 mln tons in 2008. This implies that India will remain a net polymer exporter. However, BMI is doubtful India will come close to increasing the value of its production from the current US$15-18 bln to US$30-35 bln by 2012-2014, a level that the Tata Strategic Management Group (TSM) says is necessary to cover the rate of domestic demand growth. By 2014, BMI estimates that per capita polymer consumption will reach 14 kg. While relatively modest by international levels, it will be far higher than 4.7 kg in 2007, which represented 20% of the global average. Moreover, it will make India the world’s third largest plastics consumer after the US and China. India is ninth on Asia Petrochemicals Business Environment Ratings, with 61.8 points, putting it 16.3 points ahead of Indonesia and 1.6 points behind Australia. India’s score has recovered in recent months as a result of the continued expansion of the sector as well as a reduction in negative risks associated with the economic downturn and international financial crisis.