INSIGHT: India optimism returns on price turnaround

10 February 2009 15:29  [Source: ICIS news]

By Malini Hariharan

MUMBAI (ICIS news)--Does it take a just a few hundred dollars to ease the pain of last year’s price crash and profitability squeeze?

India polymer prices have smartly rebounded in recent weeks and with it sentiment, too, has improved. This was clearly visible at the recent PlastIndia 2009 exhibition in New Delhi, where the talk was mainly about a very tight supply situation and the high prices that buyers are willing to pay.

Concerns about the global economy, fundamental demand recovery and the impending onslaught of new capacities from the Middle East have not disappeared, but there appears to be greater confidence in the resilience of the Indian market to weather another storm.

India last week, puzzlingly, emerged as one of the highest priced polyolefin markets in the world with buyers willing to shell out $1000/tonne (€770/tonne) or more for hard-to-find product.

Domestic prices were raised by 6% in early February and were well over $1000/tonne as producers cashed in on restricted availability and the return of buyers. This is the fourth time that domestic polyolefin prices have been hiked since December 2008.

“I can sell at $1200/tonne today if I can get material. Product is flowing from even the US and Europe into India,” said a bullish trader.

Another trader explained that the tightness was not restricted to Indian producers. “Even my Korean suppliers have placed me on allocation as they are busy meeting Chinese demand.”

“Indian processors are holding very little material. They had diluted stocks when prices crashed last year, so they have to rebuild,” he said.

Some market players, however, found it difficult to digest the rapid rise in prices and producers’ claims of holding very low stocks.

Conspiracy theories abounded, with some attributing the recent price hikes to a bigger game plan by local producers to encourage imports and ask for duty protection at a later date. Another theory was that the shortage was artificially created.

“Local producers would like to create an environment of tight supply. So if a buyer comes with a request for 100 tonnes, they will only offer 50 tonnes even if they have product,” said one market player.

Additionally, in such a scenario, the same buyer would float its enquiry with all producers and its requirement gets multiplied, creating a picture of strong demand, said the market player.

But producers insisted that reduced operating rates in the last quarter and plant problems were responsible for the current market situation.

At the height of the crisis last year, Reliance Industries, the country’s largest polymer producer, had shut its 1m tonne/year polypropylene (PP) plant at Jamnagar for about four weeks.

Reliance had also faced production issues at its polyethylene (PE) and PP plants at its other production sites in January.

In addition, Haldia Petrochemicals Ltd (HPL), the other big polyolefins producer, had cut operating rates at its cracker and at PE and PP plants in November last year.

And the supply situation was further aggravated by a strike by state-owned oil companies and truckers in January.

“Orders piled up because of the truckers' strike. And now we are not able to service all, as there is a limit to how many trucks we can move out in a day,” said one producer.

He also highlighted the aggressive production cuts that were implemented across Asia last year, which have left the market short of product at a time when buyers have started replenishing stocks.

“This was unprecedented,” he said, referring to the deep cuts in production at Chinese and South Korean plants last year.

While the recent upturn in pricing was attributed largely to restocking by processors, producers were optimistic that Indian polymer demand would show healthy growth in 2009-2010.

This was despite a slowdown seen last year. Linear low density PE (LLDPE) demand was estimated to have grown by 3-4% during April-December 2008, while high density PE (HDPE) demand was flat. PP demand-growth estimates ranged from 3-7%.

But producers said their optimism was based on the expectation that India's GDP would grow by 6-7%/year, which is slower than previous years but far better than most developed economies.

Unlike China, India is a small player in processed plastic exports and would not be heavily burdened by the recession in the US and Europe, they said.

Additionally, Indian demand from the packaging, agriculture and infrastructure sectors continues to grow, they said.

The next few quarters should show whether this optimism is misplaced. Until then, producers are clearly making hay while the sun shines.

($1 = €0.77)

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By: Malini Hariharan
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