Organic chemicals industry is poised for a boom

Raju Bhinge/Vineet Sharma

During the early years of this decade, the chemical industry in India was in a state of near stagnation. Capacity additions had virtually stopped. Tariff protection, which had been 35-50% till 2000, was being planned to be scaled down to 7.5%-10% by 2007-08.

New global scale capacities were being proposed close to cheap raw material sources (e.g. Middle East) or close to big demand centers (e.g. China).

Indian capacities designed to cater to the protected domestic market were sub-scale by new global standards of economic sized capacities, and were based on technology licensing from existing global chemical majors.

Doubts were being raised whether India’s chemical industry would be able to withstand the onslaught of global competition.

However, in contrast, the petroleum ministry expects India’s refining capacity to increase from 135 million tonnes per year in 2006-07 to 210-225 million tonnes by 2011-12. That would translate into an exportable surplus of 78-93 million tonnes by 2011-12.

During April-October 2006, the refinery sector has emerged as India’s top merchandise exporter with exports worth $11.3 billion.

What has brought about this sea change?

This growth in refining capacity is led by Reliance, which, on the completion of its second refinery in 2008-09 would have added 62 million tonnes of capacity in a decade, comparable to the entire capacity of the regional refining hub, Singapore (refining capacity: 67 million tonnes).

Since inception, Reliance’s first refinery has consistently had a $2-$3 per barrel better refining margin than the Singapore complex, proving its global competitiveness.

In addition to Reliance’s second refinery (29 million tonnes), Essar is also commissioning a new refinery, (10.5 million tonnes), apart from capacity additions and greenfield projects by the public sector undertakings with 35-50 million tonnes.

This roughly 60% increase in refining capacity would lead to availability of additional 8-10 million tonnes per annum of naphtha by 2011-12.

The reduction in usage of naphtha in power and fertilisers by 2.5 million tonnes per annum by 2011-12 is expected to increase availability of naphtha in India by 10.5-12.5 million tonnes.

This has already prompted petrochemical majors (Reliance, IOC, ONGC, HPCL, MRPL) to announce major downstream expansions in naphtha crackers.

The olefinic base chemical capacity is expected to increase from about 4.5 milllion tonnes per annum to 8-10 million tonnes, while aromatic base chemical capacity is expected to increase from 3.2 million tonnes per annum to 5-6 million tonnes over the next 5-6 years.

Vertical integration of these base chemical capacities would lead to near doubling of capacity in fibre intermediates, and basic petrochemical end-products. This is expected to be completed in the next phase of investments by 2010-12.

The petrochemical capacity growth rates, which have been 3-4% p.a. over the last 5 years, are expected to increase 4 times to 12-15% p.a. over the next 5-7 years.

At current prices, the downstream petrochemical industry production is expected to increase from $15-$18 billion currently to $30-35 billion over the next 5-7 years.

Considering the asset-intensive nature of the chemical industry, this would translate into investments of $12-15 billion (conservatively assuming ab asset turnover of 1.2-1.5) during this period.

Hence, in the next 5-6 years, India’s petrochemical industry is expected to revive to become a regional production hub.

This would translate into availability of base petrochemical products for further processing for numerous customer applications; and availability of building blocks (olefins and aromatics) for other organic chemicals, at globally competitive costs. India’s GDP is expected to grow at 8-9%, and real per capita income is expected to grow at 7% over the next 5-6 years.

This is driving the growth in key end use sectors for chemicals such as textiles (fibres), auto (plastic parts, accessories), personal/lifestyle products and retail (packaging).

Areas of specialised end-use applications for chemicals such as pharma and fine chemicals are also expected to grow significantly based on significant cost advantages in labour costs and process innovation.

This will create a host of emerging opportunities for different players depending on their competencies:

• Development of organic chemical plants at a global scale which can feed into the domestic or international markets.
• Numerous petrochemical formulations including customized innovations that feed the specialty chemicals industry.
• Port upgradation, chemical terminals, single point mooring terminals etc, for handling the scale of imports and exports competitively
• Domestic chemical trading and logistics ventures to export or feed the chemicals to various units within the country in a cost effective manner
• Engineering and construction projects (EPC contracts etc) to the tune of $12-$15 billion over the next 5-7 years

Each company operating in the chemical industry needs to recognize the imminent metamorphosis of India’s chemical industry, and find a unique position for itself in the future landscape.

Bhinge is the chief executive and Sharma an Associate at Tata Strategic Management Group