the sales potential and earnings growth of the petrochemical industries in india

8/4/2019 The Sales Potential and Earnings Growth of the Petrochemical Industries in India

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THE INDIAN PETROCHEMICAL INDUSTRY

THE SALES POTENTIAL AND EARNINGS GROWTH OF THE PETROCHEMICAL INDUSTRIES IN

INDIA

Market size - US$700 millionGrowth Rare -15 percent

y According to a research conducted by Tata Strategic Management Group the

petrochemicals sector in India is expected to grow at the rate of 12 to 15 percent in the

next five to seven years.

y The biggest reason for this growth was the high demand for petrochemicals in India,

which grew at an annual rate of 13 to 14% since the late 90s.y It also called for rapid expansion of capacity. The BMI forecast of average annual growth

in India from 2007-2011 is 14 to 16 percent. However, the industry suffered setbacks

during 2008 due to surge in the price of crude oil.

y This industry is a derived industry of the petroleum industry and this sector consumes

5% of the consumption of oil and natural gas production in India.

y This industry is strongly influenced by the domestic consumer market for products using

these and also the feedstock price is influenced by the main raw material naphtha fromcrude oil which has a volatile price.

y Operating rates are expected to bottom out in 2010. Demand in Asia, especially in India

and China is expected to remain high.

y As per reports released by the Union Finance Ministrys Economic Survey for the fiscal

2009-10, the net industry turnover in petrochemicals stood at Rs 220 billion. But this

turnover is strongly influenced by the feedstock price and the domestic demand which

is high at present is affected by consumer demand which depends on number of factors

like buying capacity, consumer buying behavior etc which are not very optimistic in the

current year. There is already Surplus Supply in this market and this surplus is exported

so there is good growth prospective for the earnings of these companies if they find a

balance and cater to both the domestic and global market.


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Sub-group 2001-02 2002-03 2003-04 2004-05 2005-06

Annualized

GrowthRates(%)

Synthetic Fiber 1667 1755 1868 1875 1906 3.4

Polymers 3974 4175 4499 4776 4768 4.7

Elastomers 79 81 87 97 110 8.63

Synthetic

Detergent

Intermediates

425 447 453 488 556 7.0

Performance

Plastics90 95 99 113 127 9.0

Total 6235 6553 7007 7349 7467 4.61

Average growth rate of industry is = 6.233 %

COMPETITIVE ENVIRONMENT

y The industry is oligopolistic in nature with four main players dominating the sector

noticeably Reliance Industries Ltd (RIL), Indian petrochemicals Corporation Ltd (IPCL),

Gas Authority of India Ltd (GAIL) and Haldia Petrochemicals Ltd (HPL). RIL, along with

IPCL, accounts for 70% of the petrochemical capacity in the country. However, the

downstream petrochemical sector, especially polyester, is highly fragmented with more

than 40 companies. This fragmented structure adversely affects the health of the

industry.

y The petrochemical industry is capital-intensive by nature. The minimum economic size

of an integrated plant is around 1 million tonnes per annum, which in turn calls for huge

investments.

y Bargaining power of customers in scaled as Moderate to low, since the downstream

user industry is fragmented, which reduces their collective bargaining power. Import


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duties on the products have declined significantly over the past and with additional

capacities coming up in the Middle East the bargaining power of the customers might

improve to an extent

y Competition within the domestic market is limited, as there are only a handful of players

with world-class capacities. However, with reduction in duties, there is threat of imports

from Middle East and the Asia Pacific region, which is going to increase the competition.

Also, the refineries are getting integrated, which will reduce the industry concentration

in terms of market share and in turn fuel competition.

y Economies of scale are a very important factor to be taken care of for surviving in the

industry.

GOVERNMENT POLICY AND RECENT CHANGES

y Domestic polyester industry witnessed a growth of 15% YoY in FY 10.Excise duty was

increased from 2% to 10% in Budget 2010-11 and interest subsidy has been extended to

exporters till March 11.

y Government has put in place a national policy on petrochemicals and has initiated steps

to create mega integrated complexes called petroleum, chemicals and petrochemicals

investment regions (PCPIRs). These PCPIRs will be set up in a 2,000 sq km area with an

estimated investment of $280 bn. As 100% FDI is permissible in chemical industry, this

should provide a boost to the sector. It is expected that domestic petrochemical sector

will double its production capacity in next four five years.

y Currently, R&D expenses of the industry are about Rs 2.2 bn (1% of the overall industrys

turnover). With an approximate cost of Rs 4.4-6.6 bn, Government has provided for a

policy of generating R&D centres for modernisation of the petrochemical industry. With

this format, the government is aiming at a low-priced high-return involvement in thepetrochemical segment, via public-private-partnership (PPP), to market the

development of new applications of polymers and plastics, by establishing such centres

of excellence (CoEs).


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LABOUR CONDITONS

This industry has a organized labor market for professionals and technicians which cater

to the white collared jobs within the industry where as the blue collared jobs in this

industry i.e the plant workers are from the unorganized labor market of daily wage

employees and their safety concerns are not effectively handled with control measures

by the government.

PERMANENCE

STOCK MARKET REACTIONS AND CONDITIONS

The stock prices of any petrochemical company are influenced bynumber of market factors like demand, supply of feed stock, price etc.

The above graph shows the market price trend of reliance

petrochemicals over the three years as we can see there was a drop in

price during recession due to high crude oil prices and the price

0

500

1000

1500

2000

2500

3000

3-Mar-08 3-Mar-09 3-Mar-10 3-Mar-11

Close Price

Close Price


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remained in low end due to sluggish domestic consumption and then

started rising as the demand was increasing.

THE INDIAN SHIPPING INDUSTRY

Market Capitalization -14115.24 crores

Percentage of GDP :around 1%

Shipping is a global industry and its prospects are closely tied to the level of economic activity in

the world. A higher level of economic growth would generally lead to higher demand for

industrial raw materials, which in turn will boost imports and exports. The shipping market is

cyclical in nature and freight rates generally tend to be volatile. Freight rates and earnings of

the shipping companies are primarily a function of demand and supply in the markets. While

demand drivers are a function of trade growth and geographical balance of trade (which

determines the length of haul required), the supply drivers are a function of new ship building

orders as well as scrapping of existing tonnage. The global shipping industry can be broadly

classified into wet bulk (like crude and petroleum products), dry bulk (like iron ore and coal)

and liners. Under liners, it has containers, MPP and Ro-Ros types of vessels. There are various

benchmarks that determine freight rates for these segments. The prominent amongst them are

Baltic Freight Index, Baltic Handymax Index (for dry bulk segment) and World Scale (for

tankers).

Recent happenings in the industry

y The effects of the downturn in the aftermath of the financial crisis continued to be felt by the shippingindustry in FY10. This was both in the dry bulk and crude carrier segments. Freight rates remained underpressure as demand took a hit. On an average, while crude tanker rates declined by 15% by the end ofFY10, dry bulk freight rates were almost flat.

y The crude and product tanker market experienced its worst period during the first quarter of FY10 (Julyto August 2009). On the other hand, the dry bulk segment recovered somewhat during this period. Thiswas mainly on the back of high unforeseen demand for stockpiling of dry bulk commodities (like food-

grains and metals) from China.

Prospects of the industry

yWhile the European crisis is challenging the sustainability of the global economic recovery, thereby

regenerating demand side concerns, these are overshadowed by a bigger threat of oversupply for the

shipping industry. This looms large in the near future. Out of the existing order books in all the three


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segments of dry bulk, crude, and product tankers, most of the vessels are due for delivery in 2010 and

2011. This will add to the pressure on freight rates, and would thus impact the profitability of shipping

companies.

Apart from the Euro zone crisis, another concern for the shipping industry the cooling down of the

Chinese economy, which can regenerate demand-side concerns. This combined with the supply-side

pressures, may just worsen the outlook for the sector.

The increase in Indias refining capacity and a pick-up in oil exploration activity globally will benefit the

offshore shipping lines as demand for their services picks up. As a result of the commissioning of large

domestic refining capacities, the import of crude is expected to jump in the future. This would benefit

shipping majors.

Under investment in earlier years, surge in Chinese growth and scrapping of vessels built in 1970s have

all created conditions for a strong market for tankers, barring the periods of crises. Further, the gap in

charter rates between single hull and double hull vessels is widening as more charterers prefer double

hull tonnage and many states impose restrictions on single hull tonnage. In the coming years as singlehull will be mandatorily required to be phased out, the demand for double bull tonnage will be strong.

the sales potential and earnings growth of the petrochemical industries in india

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