FocusFalling rupee stalls India’s petrochemical imports

28 May 2012 06:09  [Source: ICIS news]

By Pearl Bantillo

Indian rupeesSINGAPORE (ICIS)--India’s importers of petrochemicals are wary of taking in shipments as the plunge of rupee against the US dollar translates into much higher prices of cargoes, industry sources said on Monday.

While a boon for exports, a much weaker rupee is detrimental to Indian manufacturers that rely on imported raw material for production.

The Indian currency is being battered in the foreign exchange markets, sliding to an all-time low of 56.40 to the US dollar last week, on concerns that the country’s economy – Asia’s third biggest – is significantly slowing down.

The rupee has shed about 14% of its value from early February this year. This meant that more rupees will have to be shelled out for an imported cargo that is usually priced in US dollars.

“The rupee has depreciated, so imports are not viable,” an India-based polyols importer said.

While offers for flexible slabstock have actually gone down last week to $2,050/tonne (€1,640/tonne) CFR (cost and freight) India for May shipment, importers were hesitating to buy as they risk paying more, because of the exchange rate volatility.

“We will wait and see,” the importer said.

This uncertainty is also plaguing the polymers market, where import activities came to a standstill in the middle of last week, when the rupee hit a record low of above Rs56 to the US dollar.

Market players estimated that polyethylene (PE) and polypropylene (PP) cargoes arriving this month would cost around 3-5% more than when they were purchased in March, when the exchange rate was at about Rs53 to $1.

Local distributors and traders are hard pressed to clear their inventories, while local converters are refraining from beefing up stocks – keeping just enough material to cover their requirements, market sources said.

India’s PE demand for the fiscal year ended March 2012 stood at around 3m tonnes, with imports accounting for about a third of the total, industry sources said.

In the fertilizer market, Indian producers are seeking discounts of up between $25- $40/tonne with suppliers, in light of the sharp depreciation of the rupee, citing their inability to pass on the high cost of urea, phosphate and potash to farmers.

The country imports about a third of its 30m-tonne annual urea requirement, and also procure raw materials potash and phosphates – raw materials for fertilizer production – from abroad.

If the rupee continued on a free fall, India’s industrial output runs the risk of slowing down further if its import-reliant manufacturers failed to procure enough raw materials for production.

India has been incurring huge trade account deficits as its economy is skewed more towards imports than exports.

In April to December 2011 – the first nine months of its 2011-2012 fiscal year – India’s trade deficit stood at $133.3bn, up 38.6% year on year.

Its total imports grew by 30.4% to $269.2bn, while exports were up 25.8% to $217.7bn, data from the country’s Ministry of Finance showed.

The country’s fiscal fourth-quarter GDP (January-March 2012) data is expected to be released later in the week on Thursday.

Its economic expansion has steadily decelerated in the first three quarters of its fiscal year ending March 2012, with the full-year number expected at 6.9%, down 1.5 percentage points from the previous year’s actual growth, official statistics showed.

“The downside risks to growth are high because of the risks to global growth from the precarious situation in Europe,” the global financial stability watchdog – the International Monetary Fund – said in its country report on India dated March 2012.

Europe, which is currently wallowing in a sovereign debt crisis, is India’s biggest export market with an overall share of 11%, based on official data in the six months of 2011, the IMF said.

While a country’s exports generally benefit from a weaker currency, weak external demand will likely cap India’s shipments.

“Trend GDP growth [in India] has slowed to well below 8% for a few years now but this has not been apparent due to government spending and policies that artificially lifted household incomes and demand,” DBS Bank Research said in a note to clients on Monday.

“As fiscal expansion is pared back, the underlying slower trend rate of growth will be visible. This will be the story in the year ahead,” DBS Bank said.

International investment banks such as Goldman Sachs, Bank of America-Merrill Lynch and Morgan Stanley have pared down their GDP forecast for India this year to between 6.5-6.6%, according to media reports.

Additional reporting by Ong Sheau Ling, Ajoy K Das and Helen Lee

($1 = €0.80 / $1 = Rs55.31)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

By: Pearl Bantillo
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