FocusIndia's petchem plans face rocky road

28 April 2008 14:40  [Source: ICIS news]

By Isha Jha

MUMBAI (ICIS news)--Rising feedstock prices and lower product margins in India are likely to hit domestic petrochemicals projects in the form of increased costs, project delays and could even scupper some plans completely, analysts and producers said on Monday.

“Seeing the present scenario, if the lending rate of interest goes up by as much as 2% then some petchem projects may become completely unviable,” a producer said.

Previosuly, oil companies would self-finance their projects and now it was becoming increasingly difficult for the companies to get loans at competitive rates, which would seriously affect project funding, the producer added.

“We can see the impact of rising feedstock prices in [the] form of limited credit availability, as lending is increasingly becoming tighter and the cost of borrowing is escalating, which is impacting the overall funding,” an analyst said.

There had been a clear shift towards the Middle East anyway, in terms of petrochemicals projects because of feedstock availability and an abundance of cash, said an analyst.

Projects would be under pressure not only due to the rise in commodity prices but also due to limited resources in the form of manpower and engineering delays, he said.

Seeing the state of US banks and inflationary pressures in India some financial institutions might even deny lending to projects, he said. 

“Most of the production in the coming years would be shifted close to the feedstock in the Gulf area,” a producer added.

Most of the expansion planned by the likes of Indian Oil Corp (IOC), Bharat Petroleum Corp Limited (BPCL) and Hindustan Petroleum Corp Limited (HPCL) is being funded more through debt than by internal cash reserves.

“The cost of running a refinery has also increased and any intention of adding capacity would require huge investment, at least 35-50% more than what it would have been a year ago,” another producer added.

Under the current circumstances, which had seen a rise in the cost of production and reduced profitability, Indian companies would find it very difficult to escape the wrath of the global credit crunch, another analyst said.

The firms could not raise product prices as they had to remain competitive internationally, which meant they had to bear the brunt of the rising costs, he added.

“The economic scenario is not as rosy as it was about a year ago and not every petchem project that was announced would go up, although the demand for petchem products would increase,” he added.

“If the period of project implementation is long, like Reliance Industries Limited's (RIL) Jamnagar unit in Gujarat, which is expected to be commissioned in 2011, then the project cost may not severely be impacted,” another analyst said.

“The long time factor can dilute the impact of any momentary credit crunch,” he added.

“Some petchem companies could even delay their projects expecting a correction in the market,” one of the analysts said.

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By: Isha Jha
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