Petrochemicals

Background

The domestic petrochemical industry has been growing at the rate of 14-15%, which is more than double the growth rate of GDP. Despite very high growth in demand of petrochemicals, the per capita consumption is still much below the world average. The demand for most petrochemicals has increased at double digit growth rate during the last decade.

After significant period of slow and subdued demand, the domestic demand and production of petrochemicals has increased during FY2007. During 9MFY2007, domestic demand for polymers increased 7% (yoy) because of high growth in GDP, and strong growth in cement, bulk packaging, flexible packaging, and automotives. However, despite the high growth potential, the domestic demand for polymers has shown slow growth in the recent past. Exports of certain polymers and fibre intermediates (most important petrochemicals) have picked up in the recent past though they account for only a small share.

Many of the downstream industries, namely plastic products and manmade fibre based textiles, depend significantly on development of the petrochemicals industry. These downstream sectors provide large-scale employment. The downstream industry consumes recycled plastic, which constitutes about 30 % of total consumption.

Size

• The Indian petrochemicals accounts for 3% of Indian GDP while value added by petrochemicals alone accounts for around 1% of GDP. The asset size of the industry is high and is estimated to be more than Rs 350 billion.
• Presently there are five naphtha and three gas crackers in operation with combined ethylene capacity of about 2.6 million tonnes per annum. In addition, there are four aromatic complexes namely, Bongaigaon Refinery and Petrochemicals Ltd., IPCL and RIL (two complexes) in operation with a combined Xylene capacity of about 2.1 million tonnes.
• Polymers are the largest segment of the Indian petrochemicals industry, accounting for around 64% of India’s aggregate production of major petrochemicals, followed by synthetic fibres (26%).
• The current domestic capacity of polymers is 4.7 million tones and production is about 4.8 million tones with a capacity utilization of about 101%.
• The annual per capita consumption of polymers is 4.2 kg which is much lower than the world average of about 24 kgs. At present about 10% of domestic production is exported. There is a large potential for increasing consumption of polymers.
• While total commodity polymer capacity as of July 2007 is 4968 kilo tonnes per annum, total Synthetic Fibres capacity is 3168 kilo tonnes per annum total Elastomers capacity is 1,45,000 tonnes per annum, and total Surfactants capacity is 4,09,000 tonnes per annum. The total synthetic rubber capacity as of July 2007 is 112 kilo tonnes.
• The downstream petrochemical processing sector primarily comprises of plastic processing industry. The Plastic processing industry is highly fragmented and consists of tiny, small, medium and large scale units spread throughout the country.
• There are about 55,000 plastic processing units both in organized and unorganized sector, which consumed 4.8 million tones of virgin commodity polymers in 2005--2006. The industry also consumes recycled plastic, which constitutes about 30% of total consumption.
• About 75% of the plastic processing units are in small scale sector, which account for about 25% of the total polymer consumption.
• There are about 2000 fibre processors among downstream processing sector, of which 80% are in SSI sector. Total consumption is 1.90 million tones of fibre/yarn in 2005-06
• There are also about 1000 Surfactant processors, majority of which (90%) are operating in SSI sector. However, SSI Sector accounts for only 10% of total consumption. The estimated consumption of surfactants is about 453 kilo tones in 2005-06.

The production performance of major petrochemicals during 2001-02 to 2005-06 is as follows:

                                                                                              Units in Kilo Tons            

Structural Characterstics

       Product Groups

a) Manufacturing of Building Blocks

         Naphtha/Gas cracker with down streams processing to produce Ethylene; Propylene, Butadiene, etc.

          Aromatic complexes to produce: Benzene, Toluene and Xylene.    

b) Building Blocks to

      Polymers (LDPE, LLDPE, HDPE, PP, PVC, Polystyrene, ABS, Engineering Polymers, Performance Polymers etc.) And Intermediates (EDC/VCM, Styrene, etc.)

      Synthetic Fibre Intermediate (ACN, DMT, PTA, Caprolactum, MEG)

      Elastomers (SBR, PBR, NBR, Butyl rubber etc.)

      Surfactant intermediates. (LAB, EO etc.)

     Other petrochemicals (solvents, basic as well as intermediate chemicals)

c) Fibre intermediate to Synthetic Fibres (PSF, PFY, NFY, NIY, AF etc.)

d) Polymers to Plastic processed articles.

       The capacity additions taken place during the IXth five year plan (1996-97 to 2001-02) has reduced import dependency of petrochemicals considerably and at present there is a exportable surplus in Polyethylene and Polystrene.

        The degree of fragmentation is low in comparison to other industries and players compete on the basis of quality of products offered and price. However, the downstream processing sector of petrochemical industry is somewhat fragmented as 70-80% of the plastic processing industry comprises tiny, small, and medium units spread throughout the country. These account for about 20-25 % of the total polymer in small scale sector and about 20-25 % of total consumption.

        The capacity utilisation of the plastic processing sector is about 60%.

        About 80% of the fibre processors and a majority of the surfactant processors (90%) in the downstream segment are in SSI sector. However, SSI Sector accounts for only 10% of its total consumption.

        The petrochemical industry is highly capital intensive with an economically sized petrochemical cracker complex of ethylene capacity greater than 500,000 tpa costing higher than Rs 50 billion at current prices.

        Globally (to which Indian industry is linked very strongly), the petrochemical industry exhibits significant cyclicality. This is caused by economic cycles and the tendency to attract over-investment during the high profitability scenario which, coupled with the high gestation period and capacity additions in lumps, creates an oversupply position, causing margins to decline significantly.

        Petrochemical plants have a gestation period of two to three years, and by the time these capacities are ready, the economy turns into a slowdown and consequently the capacity additions prove to be in excess of growing demand. this phenomenon is witnessed more in the case of higher growth polymers (like LLDPE/HDPE and PP in the current scenario).

        High level of recycling of plastics characterises the plastics market in India. In India, nearly 40% of the plastic consumed is recycled plastic. The cost of recycled plastic being not related to crude oil prices (being derived from plastic waste collected by rag pickers), the recycled plastic use increases significantly during the high crude price scenarios which results in low growth in demand for virgin polymers which are the products that are sold by the polymer producers.

        Domestic production and demand for polymers has increased slowly during the recent past mainly on account of high level of recycling of plastics, downgauging by the plastic processors and the poor competitiveness of Indian plastic processing which has not only slowed down the export of plastic products but also increased imports of plastic products from China.

        While India is not competitive in ethylene based petrochemicals, it is cost competitive in other petrochemicals. 

Policy

       For the Petrochemicals sector, the Government regulations are restricted to meeting environmental norms.

        The duty protection has declined significantly in the recent past with customs duty on polymers (most important finished petrochemicals) now at 5%. The Kelkar committee had recommended customs duty at 10%. However, with global petrochemical margins ruling high the Government has preponed the recommendation.

        Due to proximity to markets, global supplies are not expected to pose a major threat to the locally-consumed petrochemical production over the medium term.

For following petrochemicals, industrial license is required:  

i)                 281119.01 Hydro cyanic acid and its derivatives. {This includes Arcylonitrile (ACN), Methyl Metha Acrylate (MMA) and Poly Methyl Metha Acrylate (PMMA) etc.}.

ii)               281210.01 Phosgene and its derivatives. (This includes Polycarbonate)

iii)              292910.09 Isocynate and di-isocyanates of hydrocarbon not elsewhere specified (example Methyl isocyanate)  

Outlook

        The anticipated demand of Petrochemicals for 2010-11 by working Group constituted by Dept. of Chemicals & Petrochemicals for PE is 4823000 tonnes, PP 4493000 tonnes, PVC 2450 000 tonnes and PS 655000 tonnes.

        The low per capita consumption of polymers (most important segment of petrochemicals) and increasing per capita incomes in India, indicates a potential for further strong demand growth in the future.

        Also per capita polymer consumption as a percentage of per capita incomes in India is lower than most other countries which implies a potential for a faster rise in per capita polymer consumption than the growth rate in per capita incomes.

        High petrochemical margins are likely to continue in short to medium term

        The high margins are likely to propel further announcement and set up of more projects especially in feedstock advantaged and high demand regions. The continuation of high petrochemical margins in the global market in short to medium term would also result in continuation of high profitability for the Indian petrochemical companies. 

References : http://chemicals.gov.in/, Economic Survey, ICRA reports

http://chemicals.nic.in/petro1.htm