InterviewHigh energy among challenges - RIL

03 March 2008 15:42  [Source: ICIS news]

By Divya Chowdhury

MUMBAI (ICIS news)--The petrochemicals industry faces several new challenges in the next decade including very high energy prices, the end of the cheaper feedstock and a talent shortage, said a senior executive from India’s Reliance Industries (RIL) said.

These issues were forcing players to think differently and come up with sustainable growth models to avoid cyclicality, RIL executive director Nikhil Meswani said late on Saturday.

A decade ago, crude oil prices was trading around $10/bbl, he said.

“Never before have we seen such a fluctuation in a single decade. We believe that the world has changed to a new oil price regime, as nearly all forecasts are now based on $80-$85/bbl,” he added.

"The feedstock issue is going to promote the integration model with crackers located close to where ethane is available or next to a refinery,” Meswani said.

However, locations where ethane is available such as Central and Latin America and west Asia pose logistical challenges in accessing the feedstock and moving the final product to other parts of the world, he added.

"There are geopolitical tensions, but the primary problem is how to lift the product from those locations," he added.

Despite high prices, the world is getting used to consuming 3m-5m tonnes of new ethylene supply every year, Meswani said.

"That would be the effective growth rate for the industry, and the demand-supply gap facing the industry year after year. The challenge is how to keep this going.”

Additionally, the industry will also have to deal with obsolete crackers and how to keep them running, he added.

Many of the new crackers are starting up in the Middle East, however, which is one of the most expensive places in the world to build infrastructure, with construction costs 1.5-2 times that of the US Gulf coast.

Meswani said the industry was heading for a cyclical downturn between 2009-2011, though its length was open to question.

Meswani did not forsee a problem in 2008. However, he said that the industry will surely see some pressure by early-to-mid 2009 with the start-up of new crackers.

“My view is that it [downcycle] will be different than the ones seen before. Previous downcycles were driven by changes in demand and not just in supply,” he said.

“We are effectively looking at an oversupply for about five quarters. This cycle may have a different margin curve,” he added.

The huge new opportunity in this downcycle would be in logistics, which is outside the core petrochemicals space, Meswani said. All the capacities are going to come up in one region, which would then have to be supplied all over the world.

"However, RIL is not looking to enter that space at the moment," he said.

On the demand front, Meswani was optimistic about the Indian and Chinese economies continuing to remain robust in the coming years.

He believed that an 8% GDP growth in India was sustainable over the next decade supported by rising purchasing power among the rural population.

The agriculture, infrastructure and lifestyle segments would be the major drivers for petrochemical demand, he said.

“India has to increase agricultural production and to increase yield the country will need drip irrigation and mulching,” he pointed out.

Reliance estimates that the agricultural sector currently consumes about 200,000 tonnes of polymers and this is likely to grow to 1m tonnes in 2011, with polyethylene (PE) accounting for about 60% of this volume.

Another major challenge is the ongoing talent war between industries with increasing competition from the energy world, Meswani said.

"India is the largest talent of young people and RIL in terms of engineering. So Reliance’s main leg over other players is that we are talent-advantaged," he added.

Bookmark Malini's Hariharan's blog for more on India's burgeoning chemical industry

By: Divya Chowdhury
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