Indian polymer industry outlook

The polymer consumption in India stood at approximately 12.5 MMT in 2011-12 which is roughly 4% of the global consumption. Indian polymer industry is characterized by the presence of large number of players in the end user applications consisting of over 26000 small, medium and large manufacturers along with 16 major raw material or feedstock producers. The major players in the feedstock sections being RIL, GAIL and OICL. The per capita consumption of polymers in India at about 6 kg is far below the global average of 29 kg and below that of China at 24 kg and of Asia at 22 kg. The domestic per capita consumption as well as the absolute consumption of commodity polymers is expected to grow because of various economic and demographic factors. Some of these factors are increase in urban population and shift of population from rural to urban areas; rise in per capita income; growth of middle class; growth in infrastructure including national highways; growth in housing sector; increasing penetration of synthetic bags in food grain packaging; changing lifestyle with increase in demand for FMCG products and cosmetics; change in food habits; and steadily rising application of polymers in the agriculture sector.

3

0.9

0.2

0.7

0.10.5

6.2

2.5

10.8

0.2

1.9

0

1

2

3

4

5

6

7

Packaging Infrastructure Agriculture Consumer Healthcare Others

2007

2012

Key growth areas(MMTPA)

With these factors at play, demand for commodity polymers grew by 19% in 2009-10 over the previous fiscal. Due to widely fragmented market, supplier power is low in Indian plastics industry because of the presence of many suppliers relative to the overall size of the industry segment that leads to high levels of competition tend to keep average profit margins at a modest single digit level except for those firms that specialized in custom products

Polymer product value chain Commodity polymers, including polyethylene (PE), polypropylene (PP) and polyvinyl chloride (PVC) enjoy 85 per cent market share of total Indian polymer market, thanks to their low cost, high performance, industries acceptability, and

Naptha/Gas

Ethylene

PE

hdpe Woven sacks, containers, household appliances, wires pipes and cables

ldpePackaging, plasticulture, masterbatch

es, roto moulding

PVCPipes, fittings, profiles, calendaring,

wires and cables

PolypropylenePP

Woven sacks, films, automobile, furniture, h

ousehold applications

Butadiene PBRTire, flooring, conveyor

belts, footwear

SBRAutomobiles,home

appliances, novelties,luggage, bus bodiesBenzene

Styrene PS Packaging, electronic and electrical appliances, household applications

Toluene

easy formability. Polyolefins (PP & PE) account for about 61 per cent of the total plastics consumption, followed by PVC at around 24 per cent and others by 15 per cent like engineering plastics, specialty plastics, and thermoset. Some of the polymers are imported from abroad because of the local capacity constraints and increasing demand and some are exported also

Capacity Production Import Export Demand

All PE 2845 2687 333 125 2879

PP 3575 2900 245 779 2462 The Indian plastics market is characterized by regional players and also large

number of local suppliers. There is also a sort of polarization between small,

medium, and big sized companies as large organization is in highly specialized

end-use products while the smaller ones is in the commodity products. As much

as 75 per cent of the market is in the unorganized sector and is highly

competitive. There are some excellent polymer producers in India having

sophisticated and modern automated plant. A good amount is also exported

outside.

However, there is absence of sufficient supply of specialty polymer and it is

imported. Among the Indian polymer suppliers, Reliance Industries Ltd (RIL) has

largest market share of more than 70 per cent

The consumption of plastics will increase about 2.5 fold from 2010 to 2016. The

commodity polymers will have the largest share at 88 per cent while polyolefins

will remain at about 61 per cent market share of total Indian plastics

consumption. In India, extrusion-based methods account for 62 per cent of the

total amount of plastics processed, followed by the injection molding at 27 per

cent. For the plastics business perspective Gujarat and Maharashtra appear

attractive based on availability of raw materials, conductive environment, and

policy support for investments

Polyethylene The Indian per capita consumption of PE at about 2 kg is only about a fifth of the global average, which stands at about 10 kg. The underpenetrated Indian PE market reported a compounded annual growth rate (CAGR) of about 12% from 2003-04 to 2009-10, although there were large year on year fluctuations. Around 30% of the domestic demand of PE is met by imports, which have also been growing at robust rates because of domestic supply constraints and rising demand. To meet import competition, some domestic petrochemical producers are developing speciality, niche and value-added grades of PE that fetch higher margins and are less prone to competitive pricing pressures from imports. Sector wise percentage usage of polyethylene:-

Given the spread of modern retail formats, increasing consumer spending, housing sector growth and rising disposable incomes, almost all grades of PE are expected to report high growth rates over the medium to long term. On a consolidated basis, the demand for PE in the domestic market is expected to grow at CAGR of 8-10% over the long term. Polypropylene

57%

13%

5%

19%

6%

High density Polyethylene

Packaging

Infrastucture

Agriculture

Consumer goods

Others

62%7%

5%

15%

11%

Low desity Polyethylene

Packaging

Infrastructure

Agriculture

Consumer goods

Others

The Indian per capita consumption of PP at 2 kg is only about a fourth of the global average of 7 kg. PP demand in India reported a CAGR of about 13% from 2004-05 to 2009-10. India remains a net exporter of PP with about a quarter of the total production being exported. The country also imports PP, the volume of which was about 15% of the domestic production in 2009-10, given that the landed cost of imports at certain coastal locations is low and that there is a requirement for some specialized grades not manufactured in the country. What provides additional impetus to PP consumption is the increasing replacement of metal parts by PP in automotives and appliances mainly because of the advantages of lower weight and corrosion resistance that PP offers. Further, increasing relaxation of compulsory jute packaging regulations to allow use of PP woven bags for the packaging of food grains, sugar, etc. would also drive consumption of the largest PP grade by volume, Raffia. The jute bags are now compulsorily used for sugar and food grain packaging not for fertilizers and other products. Usage of Polypropylene in percentage terms:-

36%

14%16%

10%

10%

6%

5% 3%

Consumption of PP 2009-10

Yarn

Impact co polymer

Injection Moulding

Bi axially oriented PP

Tubular Quenched

Fibre & Filaments

Extrusion

Random co polymer

Demand for PP in the domestic market to report a CAGR of 8-10% over the long term. However, the prospects do not appear bright for certain export-oriented downstream polymer processors, such as jumbo bag and carry bag manufacturers, considering the fact that the manufacturing and retail sectors in developed economies continue to exhibit weakness. Additionally, India would remain a net exporter of PP in the medium term although the volume of exports as a percentage of domestic production would shrink progressively as domestic demand grows. Polyvinyl Chloride The Indian per capita consumption of PVC at 1.5 kg is only about a third of the global average of 5 kg. PVC demand in India reported a CAGR of about 11% from 2005-06 to 2009-10. India is a net importer of PVC, with imports meeting around 40% of the total domestic demand. Moreover, the country’s dependence on PP imports has been rising because of increasing demand, lower prices of imports vis-à-vis domestic produce, and lack of commensurate growth in domestic capacity.

30%

16%19%

11%

8%

7%6%

3%

Consumption of PP expected in 2014-15Yarn

Impact co polymer

Injection Moulding

Bi axially oriented PP

Tubular Quenched

Fibre & Filaments

Extrusion

Random co polymer

The agriculture sector is the major consumer of PVC in India, accounting for about 60% of the total consumption. The prospects for PVC consumption by the agriculture sector appear bright at present, given that the use of PVC pipes for irrigation is expected to increase with both the Central and State Governments focusing on bringing a larger area under irrigation as well as conserving water through various schemes (e.g. micro-irrigation and water harvesting). Agriculture apart, the higher outlay being made for infrastructure development through plans such as Bharat Nirman (rural infrastructure) and the National Highways Development Programme (NHDP) are also expected to drive growth in PVC demand. While the overall PVC market has exhibited healthy growth rates during the last decade, there have been certain pockets where demand growth has either been negative or muted. In recent years, environmental and safety issues as well as substitution by PE have impacted PVC consumption negatively in certain segments. However, the cost competitiveness of PVC in the construction sector, a key consumer, besides expanding applications (in window and door frames, for instance), is expected to sustain its overall growth. Domestic PVC demand is expected to grow at a CAGR of 8-10% over the long term. India also set to witness significant capacity additions, but persisting deficit in PE and PVC and growing market should partly address supply concerns; producer margins expected to remain subdued over the medium term in line with global trends

6020

14

6

Sector wise consumption of PVC 2008-09

Agriculture

Housing and Construction

Infrastructure

Others

The Indian market has also been witnessing capacity additions both by incumbents and new entrants. Indian Oil Corporation (IOC) commissioned a 650 kilo tonne per annum (KTA) PE capacity and a 600 KTA PP capacity at its Panipat refinery complex, in February 2010, while Haldia Petrochemicals Limited (HPL) commissioned a 150 KTA expansion project in February 2010. Another 1.64 MTA of PE capacity is proposed to be added in India till 2015-16. These additions should not materially impact the operating rates of the domestic players, as they would replace imports (PE at about 970 KTA), although the PP market should continue to be in a state of surplus, necessitating continuance of exports In the case of PVC, domestic capacity has been lagging demand since 2003 and the country has been relying increasingly on PVC imports to meets its growing requirement of the polymer. The lone capacity addition in the recent past has been the one by Chemplast Sanmar, which commissioned its greenfield PVC project, in September 2009. The plant has an annual capacity of 1.7 lakh tonnes. India should remain a net importer of PVC over the medium to long term, given the absence of any other capacity expansions in the pipeline and the small size of the debottlenecking projects that have been announced by companies in the industry. As for producer margins, the tolling margins for naphtha and gas crackers have improved since the lows reached in the fourth quarter (Q4) of 2008-09. The improvement has been enabled largely by the pick-up in polymer prices, aided by a demand revival, besides the levy of anti-dumping duties on certain global exporters. Nonetheless, the current margins remain below the long-term average, and this is expected to persist over the medium term, given the anticipated demand-supply dynamics in the global market. The tolling margins in PVC could however fluctuate, depending on the spreads between PVC and its intermediates (ethylene, ethylene dichloride, or EDC, and Vinyl Chloride Monomer, or VCM), but are likely to remain below the long-term average, given that new PVC capacities are expected globally over the medium term. The domestic polymer resin manufacturers could also be impacted negatively by increased imports if India were to sign Free Trade Agreements (FTAs) with countries belonging to the Gulf Cooperation Council (GCC), as significant petrochemical capacity with feedstock advantages exists in that region. The

domestic industry has recently been feeling the impact of India’s FTA with Singapore in terms of increased supplies, and more FTAs with GCC members could have an adverse impact on the prospects of domestic petrochemicals manufacturers. Additionally, the ASEAN -India FTA has come into effect since January 1, 2010, and the impact of this agreement on domestic petrochemical manufacturers would be felt as tariffs are gradually reduced in phases till 2016. Further, the industry’s margin could also be affected adversely if the Indian rupee were to appreciate against the US dollar from the current levels. Conclusion Notwithstanding the sizeable capacity additions anticipated in India over the next three to four years, the domestic demand-supply balance should remain favorable for PE and PVC resin producers, even as the PP resin market should remain in surplus. It is however not the demand-supply dynamics but increasing import competition from West Asian manufacturers that makes for a pressing concern, given that such competition could translate into subdued tolling margins for incumbents and new entrants over the medium term. Domestic manufacturers who have a moderate to high share of speciality/niche grades that are not produced by West Asian manufacturers could however partly avoid the pressures exerted by larger imports. Import competition apart, the other near-term concerns relate to the ability of domestic manufacturers to pass on increases in feedstock prices in a scenario of rising crude oil prices to consumers and to manage any slowdown in short-term demand against the possible backdrop of rising resin prices. The key sensitivity would be the ability of downstream polymer players to pass on increases in resin prices to consumers and their ability to manage project risks.