Keeping up with demand

03 February 1997 00:00  [Source: ACN]

India needs an investment of US$22-25bn in the next ten years, a predicts government group working on the Ninth Five-Year Plan

By Naresh Minocha

INDIA faces a mounting supply deficit for key petrochemicals as domestic investment fails to keep pace with burgeoning demand into the next century.

The gap equates to the construction of three worldscale polymer plants each year to 200-607, one synthetic fibre plant every year after 2001, 15 new plants for fibre intermediates by 2006-07, and one new plant every alternate year for elastomers.

This would require a US$22.2-25bn investment to 2006-07, based on current prices and at an exchange rate of US$1 to Rs36, according to the sub-group for demand projections constituted by the Planning Commission's Working Group on Petrochemicals. The group strongly recommended that the Indian government encourage the growth of the industry through expansion as well as the setting up of new worldscale plants.

Infrastructural constraints and other high-cost factors notwithstanding, the emerging demand would also require construction of ten olefin complexes and five aromatic complexes by 2006-07.

The predictions were prepared for India's Ninth Five-Year Plan which starts in the fiscal year of 1997-98. They also pave the way for development into the Tenth Five-Year Plan, which will continue to 2006-07.

Barring fibres, fibre intermediates and thermosets, demand for all other petrochemicals is expected to register a 'healthy double-digit growth'.

Consumption of polymers is likely to increase from 1.9 kg per capita to 4.2 kg in 2001. However, even the 7.1 kg per capita consumption estimated for 2006 will still lag the Chinese 1995 per capita consumption of 7.19 kg.

The group worked out the demand estimates for the next ten years after detailed examination of the end-use ofpetrochemicals, growth performance during the Eighth Five-Year Plan and estimates provided by the 1986 DV Kapoor Committee and the 1993 Rakesh Mohan Committee on petrochemicals. It also took into account other factors, such as the life cycle of end-use products and overall economic activity in the country.

It derived the demand for raw materials and intermediates on the basis of demand projections for end-use petrochemicals.

The group said that assuming all announced investments in cracker and aromatic complexes materialise by 2001-02 or 2006-07, ethylene capacity will increase from the present 1.6m tonne/year to 4.5m tonne/year. Similarly, xylenes capacity will increase from 532 000 tonne/year to 3.71m tonne/year.

Petrochemical demand ('000 tonne)
Product	1994-95 demand	2001-02 demand	CARG* (%)	2006-07 (%)	CARG* (%)
Polymers	1563	4237	15	7800	13
Fibres	737	1645	12	2262	7
Fibre intermediates	972	2310	13	3374	8
Elastomers	120	443	21	790	12
Engineering plastics	82	346	23	775	18
Thermosets	130	309	13	463	8
Source: Working Group on Petrochemicals			*CARG = compound annual rate of growth

The group warned, however, that achieving this rapid expansion will need some inspired initiatives.

'The domestic industry is at a crossroads today. Having negotiated so far through the initial years of reforms, the government and the industry now need to examine the various options available in the more liberalised environment that would exist in the near-to-medium term,' it said.

Most of the approved projects are still in the planning and evaluation stage due to an uncertain business environment, and are uncompetitive as a result of factors such as high interest rates, insufficient port capacity, power shortages and the cascading effect of local levies, it said.

This concern is reflected by the recommendations of a second sub-group constituted by the Working Group on Petrochemicals. The sub-group for investment climate has called for key policy initiatives to create the appropriate business environment for healthy growth of the Indian petrochemical industry.

Its recommendations include advising financial institutions to:

• sanction loans to petrochemical units for an longer period of 12-14 years
• accept flexible debt repayment to take account of the cyclical nature of the industry and high capital costs of projects.

Financial institutions currently have rigid structures and practices for term lending.

The second group also supports the industry's demand for duty-free import of capital goods. It recommends single-window clearance for environment, location, and investment approvals for petrochemical units to reduce the time involved in completing preliminary project-related activities.

Demand-supply gap ('000 tonne)
Product	Capacity by March 1997	Gap in 2001-02	Gap in 2006-07
Commodity plastics	2540	(1936)	(5499)
Fibres	1947	6	(612)
Fibre intermediates	1480	(953)	(2017)
Elastomers	193	(268)	(614)
Ethylene	1516	(2064)	(4604)
Paraxylene/orthoxylene	292	(665)	(1212)
Source: Working Group on Petrochemicals

Demand-supply scenario ('000 tonne)
End-use sector	1994-95	2001-02	2006-07
LdPE/lldPE	316	805	1426
HdPE	423	1114	2062
Monoethylene glycol	155	380	552
Ethylene oxide	32	68	109
Ethyl vinyl acetate	3	10	22
Styrene	38	122	236
EPDM	1	8	13
Vinyl acetate monomer	10	19	31
Ethylene dichloride	290	829	1404
Butene-1	19	62	112
Total	1287	3417	5967
Supply	457	1364	1364
Deficit	(830)	(2053)	(4603)
Source: Working Group on Petrochemicals

'There is a need to establish a price relationship between gas, ethylene/propylene and naphtha to ensure that both gas-based and naphtha-based crackers remain competitive,' the group also said.

In addition, the cost of project funding should be reduced to a reasonable limit of 3-4% of the inflation rate, it said.

This recommendation implies interest subsidy, a practice which was withdrawn for term lending as part of financial sector reforms which denied financial institutions access to low-cost resources while asking them to lend at market rates.

Pointing out that neither the financial institutions nor the depressed Indian capital market can meet the estimated US$19.3bn requirement of the petrochemical industry over the next five years, the sub-group on investment climate concluded that 'foreign investment, therefore, has to play a crucial role in the aforesaid circumstances'.

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