A knotty poser

26 August 2002 00:00  [Source: ACN]

A healthy demand growth for most polymers is expected to push Indian markets into deficit in the next three years. But for Indian companies, decisions on new projects are not easy, discover Malini Hariharan and John Richardson

Reliance Industries has three options for expanding PVC, one of which is to build a new PVC plant at its Jamnagar complex

To build or not to build is one of the questions confronting Indian petrochemical companies, along with the other perennial dilemmas - where should capacity be built and when should it be brought onstream.

First though, does India need new capacity?

The country has for the last few years been a net exporter of most polymers. It is estimated that the country will need to export 400-500 000 tonne each of PE and PP this year. The reason is that domestic consumption of each of the polymers is likely to be only 1m tonne against an installed capacity of approximately 1.3m tonne/year for each of the polymers.

Growth rates for PE and PP are exceptionally healthy - 12-15%/year, according to an Indian industry source. Given these healthy growth rates, the Indian PE and PP markets are expected to return to balance only in 2005.

But in the case of PE, this is an oversimplification. The surplus is entirely down to too much lldPE and hdPE capacity, whereas ldPE is already in balance.

As for another key polymer - PVC - India is already in deficit, thanks to an unexpectedly high 16% growth in demand last year. Consumption last year was an estimated 825000 tonne against a domestic capacity of 788 000 tonne/year.

And although industry players expect demand growth to slow down to 8-10% this year, India will be a net importer of this polymer. Imports in the first six months of 2002 were approximately 60-70 000 tonne and are expected to hit 150 000 tonne in 2003.

New capacity is needed. As for the timing of new projects, now is perhaps a good time to start planning given the the large scale capa-city additions under way in the Middle East.

While China will be the biggest market for the Middle Eastern capacities, India is also expected to be a major target for exports from this region. And with import duties in India expected to decline in the coming years, competition is set to increase.

What options then do the Indian players have?

Indian Oil Corp (IOC), the state-owned refinery major, has for the last few years been aggressively pursuing its ambition to enter the petrochemical industry through acquisitions and new projects.

So far, the company has only been successful in pushing some of its projects forward. Work has started on a paraxylene (350 000 tonne/year) and purified terephthalic acid (525 000 tonne/year) project downstream of its refinery at Panipat, Haryana. IOC is considering integrating the complex to produce 165-198 000 tonne/year of PET. A linear alkyl benzene project in Baroda, Gujarat, has yet to take off.

On the acquisition front, the company earlier this year failed in its bid to secure the Indian government's 26% stake in Indian Petrochemicals Corp Ltd (IPCL). It lost out to Reliance Industries Ltd (RIL), which further enhanced its dominant position in the Indian industry.

As for IOC's efforts to secure a 26% stake and management control in Haldia Petro-chemicals Ltd (HPL), progress has been slow. IOC has stipulated a number of conditions for a strategic investment in the debt-laden HPL, which The Chatterjee Group (TCG), one of the chief promoters of HPL, is unwilling to accept. Despite these hurdles, IOC has not abandoned its plans for HPL.

In the meantime, IOC has started a feasibility study on a 800 000-1m tonne/year cracker and derivatives project, which it plans to commission in 2006-07. Capacities of the downstream plants, which would include PE, PP and styrene, have yet to be determined. IOC has started talks with potential technology licensors for the project.

And while a location has yet to be identified, there is a strong possibility that the project will be located at Baroda adjacent to the company's refinery. Another possible location is Panipat.

Another state-owned player, the Gas Authority of India Ltd (Gail), has seen its expansion plans move forward this year.

It has secured an informal government approval for expanding its 300 000 tonne/year cracker to 500 000 tonne/year. An informal approval has also been obtained for raising the capacity of its 160 000 tonne/year swing lldPE/hdPE plant by 290 000 tonne/year. Both plants are located at Auraiya, Uttar Pradesh.

Gail is also optimistic that an early conclusion of talks between the Indian and Bangladeshi government will help it take forward its plans for a worldscale cracker on the east coast of India. A swing hdPE/lldPE plant could be built downstream of the cracker, which it hopes to bring onstream in 2007.

However, Gail recently dropped plans for a propane dehydrogenation-PP facility at Vijaipur, Madhya Pradesh, due to poor economics.

RIL has not announced plans for new petrochemical facilities. While Indian industry players are discussing various possibilities, the company would only say: 'We do not comment on speculation. No decision have been taken yet.'

For RIL, the largest petrochemical player in India, the options have multiplied after it bought a stake in IPCL at end-May. It is perhaps a harder task now for the top management of RIL to decide where and what to build.

RIL has become an ldPE producer through its acquisition of IPCL's 80 000 tonne/year plant at Baroda, and another 80 000 tonne/year unit at Nagothane, Maharashtra. Given the projected shortfall in ldPE, industry observers believe RIL may be looking to increase the capacity sooner rather than later.

RIL now has three PVC expansion options. The first is to build a new PVC plant at Jamnagar.

RIL had in 2000, filed an application with the Indian government for a 1m tonne/year PVC plant at this site. It had also planned a chloralkali facility at Jamnagar. Neither project has moved forward.

The other options are to either raise the capacity at RIL's Hazira plant or raise the capacity of IPCL's facility at Gandhar.

Industry sources believe that the IPCL option is likely to be pursued in the short term. The 350 000 tonne/year plant at Gandhar is fully integrated, as a chloralkali facility is also located at the same site. Sources close to IPCL say RIL is also looking to expand the chloralkali facility.

And then there is styrene. On three occasions, feasibility studies have been prepared by RIL for the construction of what would be India's first styrene plant.

However, despite the clear need to replace imports and the availability of just about sufficient ethylene and benzene feedstock, board approval has yet to be granted for a plant. The latest feasibility study was into a 500000 tonne/year facility.

But RIL is unlikely to go downstream into PS because of relatively poor demand growth for the polymer, but would instead supply the domestic PS players - Supreme Petrochem, Pushpa Polymers and LG Polymers.

And there is another contender for investment - monoethylene glycol. RIL has the option of increasing the capacity of IPCL's 100000 tonne/year plant, which is located at Gandhar, Gujarat.

As for additional ethylene capacity, there are a number of possibilities.

RIL could expand IPCL's crackers but this would necessitate an investment for distribution of C2s between the RIL and IPCL sites.

An industry source says a 60 km pipeline is to be laid between the IPCL site at Baroda and RIL's site at Hazira at a cost of US$10-20m.

IPCL already has three pipelines linking its Baroda and Gandhar sites. One pipeline is used for transporting naphtha from IPCL's jetty at Gandhar. The other two are used for moving ethylene and propylene.

A pipeline linking RIL's Hazira site with IPCL's Gandhar site would give the company the flexibility of balancing ethylene requirements at Hazira, Gandhar and Baroda.

But IPCL's third cracker at Nagothane is not linked by pipeline to any of the other sites.

IPCL's Nagothane cracker has room for expansion but feedstock availability is a question

An option for providing more ethylene, which is reportedly under consideration by RIL, is to raise the capacity of IPCL's 300 000 tonne/year gas cracker at Gandhar.

Prior to its acquisition by RIL, IPCL had drawn up plans to expand the Gandhar cracker by 200-300 000 tonne/year, and its Nagothane cracker by 140 000 tonne/year to 540 000 tonne/year.

However, feedstock availability could limit the extent to which RIL can expand the Gandhar and Nagothane crackers. Supplies from Gail and the Oil and Natural Gas Corp are barely sufficient to meet current requirements. IPCL currently has to import propane for Nagothane and any future expansions at Gandhar or Nagothane would have to rely on imported propane. But this raises questions on the economic viability of the crackers.

The other alternative is to convert the crackers to crack multi-feeds. Immediately after the IPCL acquisition, RIL's executive director Nikhil Meswani had said this option was under consideration.

Another option is to build a new cracker, with a question hanging over what kind of cracker should be constructed.

If Gail doesn't have enough gas for relatively modest capacity increases, an ethane cracker is only going to be viable if more gas can be found. RIL's exploration division is said to have found reserves off the east coast of India, in the wrong place as all RIL's and IPCL's assets are on the west coast.

RIL could also import liquefied natural gas (LNG), which would mean that methane would first have to be extracted from LNG. Three LNG ports are being constructed on the west coast of India.

The methane could then be used for more electricity generation by RIL. What complicates this is that Gujarat has yet to privatise its power industry, and so, at present, RIL would be unable to sell its power to the state, say industry observers.

Yet another option would be to crack gas oil from the refinery at Jamnagar. The trouble is that gas oil carries a 20% import duty in India, which gives it a huge alternative value to RIL.

Examination of all these alternatives for a new cracker are driven by the shaky economics of basing another greenfield cracker on imported naphtha.

RIL has long had plans for a greenfield cracker at Jamnagar. Land is also available for a new cracker at IPCL's site at Gandhar.

Moving to PP, the issue is not just when to expand, but also, again, where the feedstock will come from.

Current propylene available from RIL's fluid catalytic cracker (FCC) at Jamnagar is 600 000 tonne/year with PP capacity at the site also at 600 000 tonne/year.

According to an industry source, propylene capacity could be doubled by changing the catalyst and hardware investment at the FCC. However, this would require a shutdown of the refinery for 1-2 months which would be very costly.

A more viable alternative could be to build a metathesis unit which would use C4s from the FCC as feedstock.

There is sufficient land at Jamnagar for a further 600 000 tonne/year of PP, plus utilities.

For any petrochemical investment, RIL has speed on its side. A source close to the company estimates that it would take only 18 months for RIL to add, say, a 200000 tonne/ year PP line against the industry average of two-and-a-half years.

The reason for the rapidity is that RIL can duplicate the design of its current PP facility. Also, the experience of RIL staff in building petrochemical plants contributes to speed.

RIL's incredibly rapid expansion and diversification in the last ten years could affect petrochemical investments, say some observers. RIL, which started life as a tiny polyester producer is now forward-integrated all the way to oil and gas exploration.

Plus RIL has expanded into telecommunications and life sciences, and, although it has missed out on the privatisation of the former state-owned refinery products distributor IBP, it still wants to get into the sector.

The effect of this rapid expansion is that there are now many more business divisions with many more projects contending for investment funds. Even a relatively successful company such as RIL could find it difficult to take all of these projects proposed by its different divisions to the financial markets for funding at the same time.

And in the case of telecommunications (life sciences is very much a nascent business for RIL - it is in the early stages of development), diversification into this sector has meant that its funding has taken priority over just about everything else. In India, unlike the West, the sector still offers high margins and is still booming.

RIL recently completed laying most of the hdPE pipelines for fibre optic cables that will link together 115 Indian cities. The next step is to install the hardware for Internet, voice box and data transmission along these lines, plus connecting the infrastructure to the rest of the world.

The company is already receiving some money from telecommunications through its mobile phone investments, but the revenues are not expected to start significantly ramping up until early next year.

And what about competing priorities beyond next year?

RIL recently revealed that plans are being prepared to transform the company into a global force. Acquiring low-cost assets, building new capacities and increasing sales in fast-growing overseas markets such as China and Vietnam are being targeted.

However, most of these objectives are likely to be achieved only after April 2004. This suggests that in the medium term, RIL's global ambitions might not get in the way of domestic petrochemical capacity additions.

But then again, behind these longer-term global objectives is RIL's commitment to its shareholders to deliver a net profit growth of 20-25% over the next few years.

This will be difficult to achieve if the company relies solely on the domestic market, a second source close to the company concedes.

Maybe, therefore, because of what could be limited returns from the domestic market, some petrochemical expansions in India could fail to win board approval in the medium term.

On the other hand, one industry analyst argues that now could be the right time for the company to focus on the petrochemical sector because of the poor state of the global telecommunication and information technology sectors. Petrochemical expansions and buying new assets could be a safe bet, especially if the assets are acquired below replacement costs, he adds.

But given the frequently crazily fluctuating and miserable margins for most petrochemicals since the last boom in 1995, the sector might still face an uphill battle to win funding.

With the IPCL acquisition only three months old, RIL will certainly need time to assess all its options to make sure it makes the right decisions.

As mentioned earlier, RIL has not decided on new petrochemical facilities or expansions.

Sources believe that the biggest single reason why RIL, or for that matter any other Indian company, is in no hurry to add petrochemicals is the current oversupply in certain polymers and the persistently poor margins over the last few years.

But with markets for all polymers expected to run in to deficit in the next three years, Indian companies may have to race against time to introduce additional volumes in the market, especially if they wish to maintain or increase their market share vis-a-vis their overseas competitors.

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