With the olefins cycle likely to decline further, domestic petrochemical producers are expected to face tough times going forward which in turn is bound to lead to subdued returns.
Investment information and rating agency ICRA says most petrochemical players have enjoyed robust cash earnings over the past several years and their net debt levels have been relatively low. But the good times are set to change and certainly not for the better.
"Changing industry dynamics both globally and domestically besides emergence of new industry influencing determinants will have a bearing on the petrochemical sector," said K Ravichandran, Senior Vice-President and Group Head of Corporate Ratings at ICRA.
Significant among the influencing factor is the evolving demand-supply scenario. On the demand and consumption side, governments and brand owners are responding to a rising tide of negative public perception against single-use plastics leading to on-going efforts to reduce, reuse, recycle plastic materials extending to even banning of some uses of plastic materials.
Accordingly, companies across the globe are investing in new ethylene capacities besides which, existing oil refineries are either reconfiguring or adding units to maximise the production of chemicals and petrochemicals.
As for the supply side, with shale gas boom in the United States, prices of natural gas and ethane fell in 2009 and barring seasonal short-term surges, have remained low since then.
The US market invested in ethane based capacities which are now coming online, besides which many projects are still under construction, owing to the large cash cost advantage of ethane cracking over naphtha cracking for ethylene production.
A number of new projects are also planned or set up in even distant regions such as India and China, relying on ethane shipped from the United States. Besides the United States, China is on a massive wave of steam cracker investment, driven by the ethylene industry's healthy margins and high import dependency.
According to ICRA, electric vehicles (EVs) worldwide are now being considered an important component for meeting goals on climate change in line with the Paris Agreement's targets.
Besides, several refiners globally are working on plans to maximise conversion to chemicals using various cracking technologies that would convert heavier cuts of crude oil (such as gas oils) to lighter streams to enable conversion to chemicals leading to increasing supplies.
Going forward, said Prashant Vasisht, Vice President and Co-Head of Corporate Ratings at ICRA, the impact of an evolving scenario will result in subdued returns for petrochemical producers.
"From a credit point of view, the tolling margins for all types of crackers (naphtha, gas, ethane and multi-feed) are expected to remain subdued and below their last ten-year averages over the medium term owing to a supply overhang, demand slowdown and more intense competition," he said in a statement.
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