25 January 2013 10:40 [Source: ICB]
Indian polyvinyl chloride (PVC) demand is expected to increase by 13-14% in the financial year ending March 2013 compared with just 3% growth in 2011-2012. This is further evidence that, just perhaps, the decline in the country's overall macroeconomic environment has bottomed out.
Sustainable Sanitation Alliance
PVC pipe sales to the agriculture sector drives demand
He attributed the rebound in growth during 2012-2013 to a slight improvement in business confidence over the last few months of the calendar year as the overall economy showed signs of picking up.
Another more important factor behind the rebound was heavier than usual monsoon rains in 2011-2012.
This shaved some 100,000 tonnes off demand because of lower agricultural production, the source added. Seventy percent of Indian PVC demand is derived from pipe sales into the agricultural sector.
Last year's monsoon, however, although it began very badly due to lack of rainfall, was good overall. The monsoon season occurs between June and September.
A further reason behind the rebound was improved affordability. In 2011-2012, end-users struggled to afford PVC, priced in rupees, because of the decline in the value of the local currency versus the US dollar.
"This resulted in more fillers being mixed with virgin resin," the source added.
PVC imports are likely to reach 950,000-1m tonnes in 2012-2013 compared with 750,000 tonnes in 2011-2012, he said.
"There were no domestic capacity expansions during 2012-2013 and so extra demand was largely met by greater imports," he continued.
But by the end of 2013, India-based Reliance Industries will bring on-stream an additional 100,000 tonnes/year of capacity at Dahej, in the state of Gujarat.
DCW and Chemplast, two other Indian PVC producers, are also planning expansions during 2013.
"This should mean that incremental demand growth in 2013-2014 will be met by local capacity rather than by imports," said the source.
GDP is expected to expand by only 5.5% in 2012-2013, well below the government's target of growth of 8% plus.
And what might bode well for all petrochemical and polymer demand in India during 2013-2014 is an expected recovery in GDP growth. For instance, the median of 30 estimates in a Bloomberg News survey is for 6.5% growth during the next financial year.
"As I said, there has been a modest improvement in business sentiment, but the long-term problems are still there," added the source with the PVC producer.
"Until our infrastructure improves, inflationary pressures will always remain a threat to growth. The economy has hit a kind of speed limit because of inadequate ports, road and electricity supply, etc," he added.
While inflation fell to a three-year low in December 2012 at 7.18%, this was still the highest among all the big emerging economies.
And so if GDP growth does pick up, the concern is that inflation will also rise again, forcing the Reserve Bank of India to increase interest rates.
But earlier this month, Indian stocks hit a two-year high on greater confidence that the central government will press ahead with reforms.
Since last September, Prime Minister Manmohan Singh has set up a panel to speed-up infrastructure spending; delayed tax increases that threatened to slow foreign direct investment; and opened up industries such as aviation to greater overseas investment.
"We think that India is going to be a success story this year. The government means business on reforms on this occasion and so we think that growth will surprise on the upside," said a Bangkok-based chemicals analyst.
The government has also introduced a cash transfer system in an effort to raise the incomes of India's poor.
The system involves depositing pension and scholarship payments directly into the bank accounts of about 245,000 people in 20 districts in India, with plans for a huge expansion of the scheme, according to a 5 January New York Times (NYT) article.
Worries remain, though, that India's political system will once again derail efforts to liberalise foreign investment and boost infrastructure spend.
And the key to the success of the cash transfer initiative will be whether it can be extended to India's subsidy system, the NYT article added.
India spends an estimated an estimated $14bn per year on a food and fuel subsidy system that is widely viewed as being poorly managed.
For instance, grains pass through numerous middle-men who divert supplies for their own profit and substitute good for poor quality grains before the food reaches the people who need it, said the NYT article.
The pressure is on for a more equitable distribution of Indian growth, as 68.7% of Indians live on less than $2 a day, according to the World Bank.
Unlocking some of this potential might help India draw closer to China in terms of polymers consumption.
At the moment, the gap is huge. In the case of PVC, again, for example, the 2.25m tonnes of Indian consumption estimated for 2012-1013 compares with an ICIS Consulting figure of 13.6m tonnes for China in 2011.
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