The petrochemical industry has been through challenging times. Growth in demand for polymers fell to 6.2% last year- about half that in the previous year- pulled down by dismal economic growth and a sharp depreciation of the rupee that made imports more expensive.
According to a report by the Chemicals and Petrochemicals Manufacturers Association, the short-term outlook is better, with Indian polymer demand growing 7.8% this year and 9.2% in the next. But this is contingent on an overall improvement in the economy, higher government spending on infrastructure, reduced inflationary pressure and a uptick in sectors such as automotive that have taken a beating in the last two years.
Early trends bear out the optimism, but healthy growth cannot be taken for granted. It can falter for a number of reasons- not all of which is in the control of industry or government. For the petrochemical industry, a recovery is vital considering severe Greenfield projects are expected see completion in the next two years.
Olefin and polyolefin projects
The most significant will be OPal, which is setting up a multi-feed cracker at Dahej (Gujarat) to produce 1.1-mtpa of ethylene, O.4-mtpa of propylene and polyolefins. Production is expected to begin next fiscal- after delays and cost escalations. Significantly, the project has a sizeable export commitment (by virtue of being in a Special Economic Zone), and this will be challenging.
The worldwide competitive position of polyethylene production, in particular, has undergone a sea change with the emergence of low cost ethane (from shale gas) as a cheap feedstock in the US. Add to this output from the Middle East leveraging cheap gas. Nearly all of the additional polyethylene output- upward of 10-mt over next five years or so, providing for likely delays in project execution - is with an eye on the Chinese market and a slowdown there will take a heavy toll on margins and operating rates.
Producers who will still make a buck will be the ones with the lowest cost position, and Indian producers, especially those cracking liquid feedstock, will be at the wrong end of the price curve. While the domestic market opportunity may still be available (due duty protection and logistical advantages), exports will at best be at marginal costing. OPal is rightly eyeing bringing in an international partner to ameliorate some of these risks, but none has yet been finalised.
A smaller project - Brahmaputra Cracker & Polymer ltd. (BCPL), better known as the Assam Gas Cracker - is also likely to start up this year. The project, conceived in the 1980s, has seen many twists and turns: ownership has changed, as has size, subsidy, feedstock allocation & pricing. Even at this advanced stage, there is wrangling over the price at which gas needs to be supplied to make the project viable, and the Cabinet is expected to take up this issue as the concessions sought contravene the prevalent gas allocation policy. Yet there are doubts whether this project will ever earn a return above its cost of capital, given the absence of a substantial plastics processing industry nearby.