Petrochem Waits For Duty Cuts

The size of the Indian petrochemicals industry -- based on the turnover of major companies--is estimated at around Rs 15,000 crore. While the demand for commodity polymers, the most important group of finished petrochemicals, has increased at around 15 per cent per annum over the past decade, the demand for fibre intermediates grew in excess of 10 per cent. Thus, the demand for basic petrochemicals -- based on derivative demand growth -- has been growing at above 10 per cent.

Reliance Industries, with the largest naphtha-based cracker, and Indian Petrochemicals Corporation, with three small- to medium-sized crackers, dominate the Indian petrochemical crackers with shares of 31 per cent and 34 per cent, respectively. Haldia Petrochemicals and Gas Authority of India are the other players in the industry.

With various players setting up large capacities, the production of petrochemicals has shown a sharp increase over the past 10 years. The production of commodity polymers -- polyethylene, polypropylene, polyvinyl chloride and polystyrene -- has grown at over 20 per cent between 1993-94 and 2000-01, and has nearly quadrupled from the 850,000 tonnes in 1993-94.

However, high indigenous production has led to a slowdown in demand because the local supply constraining factors of the past have been removed.

Key Issues: The Indian petrochemicals industry is characterised by overcapacity. As against the ethylene demand of 2.0 mmt in 2000-01, the capacity was 2.4 mmt. In propylene, while the demand was 1.25 mmt, the capacity was higher at around 1.4 mmt. Paraxylene also faces a significant overcapacity.

In polymers, the situation is no better. In polystryene, the domestic demand is only half the total capacity. However, the polymer demand increased at a healthy 13 per cent growth rate in the first nine months of 2001-02, thereby improving capacity utilisation. In fibre intermediates, the demand has slowed because polyester production is not increasing fast.

Gross and net margins in the Indian petrochemicals industry fluctuate in line with the global petrochemical cycle. On account of significant increases in the low-cost gas-based capacity in the Middle East, coupled with a slowdown, the global petrochemicals industry, facing significant overcapacity, witnessed a downtrend during 2001 over already low margins.

This has resulted in a decline in the financial performance of Indian petrochemical companies as well. However, with the global demand for most petrochemicals increasing faster than supply over the medium to long term, global profitability levels are expected to improve from the current levels and peak in 2005. This is expected to improve the profitability of the Indian players as well.

Factors that can be addressed in the budget: India has one of the highest Customs rates in the world. The tariffs are not only much higher compared to East Asian countries but also when compared to India's neighbours in South Asia, which are less developed.

This results in imports to the neighbouring countries and their re-routing to India -- these are covered under free trade agreements -- to evade the high Indian Customs duty. With the government planning to slash the peak Customs duty from 35 per cent to 20 per cent in phases, the duty on petrochemical products is expected to come down from 35 per cent to 20 per cent, possibly even lower.

The reduction in tariffs is expected to negatively impact the margins of domestic players.