ICRA revises outlook for petrochemicals to negative profitability concerns

Rating agency Icra has revised the outlook on the petrochemicals and basic chemicals industries to negative from stable due to weak demand and global supply glut.

Outlook on specialty chemicals remains stable, with profitability expected to moderate in FY2024, but not trigger an outlook change at this stage, it said, adding that the petrochemical and basic chemicals industries are likely to face pressure on operating rates and profitability.

"The petrochemicals and basic chemicals industries have been facing headwinds on account of weak demand amid a global supply glut, owing to capacity expansions in several chemicals.

"This is likely to exert pressure on the operating rates as well as profitability of the petrochemical and basic chemical players," Icra said in a statement.

As for the specialty chemicals segment, while profitability is expected to moderate in FY2024, the extent is expected to be mild enough to not trigger an outlook change at this stage.

According to Prashant Vasisht, senior vice president and co-group head of corporate ratings, Icra Ltd, "Tepid global growth and inflationary pressures in major chemical-consuming nations are exerting pressure on the global demand of a host of chemicals and thus, volume growth for these chemicals is expected to slow down in the near term."

Moreover, sizable capacity expansions over 2022 to 2024, are expected to weigh on the operating rates and would result in a supply overhang, which is likely to keep the spreads and margins under pressure in the next 2-3 years. While domestic demand is likely to remain healthy, dumping of excess output by large overseas producers is likely to keep profitability under pressure, he said.

For commodity polymers, the global demand is expected to remain muted. While the European economy has witnessed weak growth and inflationary pressures, the recovery of the Chinese economy has been sluggish despite opening up.

Simultaneously, several capacities have already been added and further expansion is underway, especially in China, the US and the Middle East, which will keep the operating rates as well as margins under check

For polypropylene, China is adding around 5.5 million tonnes of capacity, the majority of which will come online in 2023.

Globally, polyethylene capacity is forecast to grow by almost 6 per cent year-on-year in 2023, even as demand is projected to grow by only 1 per cent.

The global supply overhang is expected through 2025, Icra said, adding that for Poly-Vinyl Chloride (PVC), the global capacity addition is again led by China, which is expected to add around 5 million tonnes of capacity by 2026, along with India, where capacity addition is expected to be around 4 million tonnes by 2026.

"The domestic demand on the other hand remains healthy with growth of around 5-8 per cent expected over the near to medium term for PE, PP and PVC, driven by health, packaging, automotive, consumer durables and housing sectors. Despite this, manufacturers are facing headwinds owing to dumping by overseas manufacturers due to lacklustre demand in other markets," the statement said.