INSIGHT: India eyes strong PVC growth in first half of fiscal 2013-14

13 March 2013 17:22  [Source: ICIS news]

By Veena Pathare

India PVC may gain on better agricultural demand for pipesSINGAPORE (ICIS)--Polyvinyl chloride (PVC) resin demand in India is expected to grow strongly in the first half of the 2013-14 fiscal year.

Demand from agriculture will grow even if infrastructure spending stalls in the run up to central government elections sometimes in the second half of this year.

Present weaker than usual demand for the polymer is temporary, hampered more at the micro level by resistance to higher resin prices that stemmed from the steep increase in feedstock vinyl chloride monomer (VCM) prices.

The supply of VCM in Asia has been critically tight from early in 2013 following the decommissioning of the PETRONAS-owned 400,000 tonne/year production unit located in Kertih, Malaysia. The company had made the decision to exit the vinyls industry.

And since the closure on 1 January,  Asia VCM prices have pushed higher, exerting upward pressure on downstream PVC prices.

But buyer resistance notwithstanding, the sheer potential that India holds for PVC is sufficient to drive demand in the first half of the year.

The present gap in per capita PVC consumption between India and the developed economies is huge, with India at 1.5-1.7kg per person, just a fraction of the US rate of 13.4kg and Germany’s 16.4kg.

The difference between China and India too, is significant. While India’s consumption for 2012-13 is estimated at close to 2.27m tonnes, the ICIS figure for China’s PVC consumption in 2011 is 13.6m tonnes.

India’s PVC consumption in the current fiscal year, which ends on 31 March, will be up by about 15% from 1.98m tonnes in 2011-12.

With India's PVC resin market dependent on agriculture for the major chunk of resin use, the sector is expected to be given a significant boost from increased demand for PVC pipes in the first half of 2013-14. The government’s continued investments in agriculture are also expected to uphold the demand increase.

The Indian PVC market sees about 70% of its total resin sales to the agriculture sector, where PVC is widely used in the manufacture of underground irrigation pipe systems. The rest is used to manufacture pipes, sheets and films for the construction sector.

“We are already close to a 15% growth this year, which is a good growth figure compared to just 3% in 2011-12, and we are likely to see the [PVC] demand grow by at least 10-11% from the present year, if not more,” a source from PVC resins and pipes producer Finolex Industries said.

Several short turnarounds undertaken at almost all of the regional PVC production facilities in March 2013 owing to the shortage in VCM supply, are forecast to give a push to the current weaker than usual buying sentiment.

India has a supply base of about 1.25m tonnes/year of PVC, comprising Reliance Industries’ facilities in Hazira, Dahej and Vadodara in Gujarat with a combined PVC manufacturing capacity of 660,000 tonnes/year.

Additionally, Finolex operates two similar-sized units of total capacity 260,000 tonnes/year in Ratnagiri, Maharashtra, while Chemplast Sanmar’s 221,000 tonnes/year facility at Cuddalore and DCW’s 90,000 tonne/year facility at Sahupuram, both in Tamil Nadu, make up the rest.

Imports from Taiwan and South Korea form the bulk of imports into the country.

India’s budget for 2013-14, revealed by finance minister P Chidambaram on 28 February, maintains the present duty and sales tax structure. The direct impact of the new budget on the PVC industry is, consequently, unchanged from the present.

However, infrastructure spending is likely to be cut back as India goes to the polls for 2013-14. This could bring about a major impact on the PVC market as government purchasing for construction projects are likely to be delayed or cut because of the central government elections.

The market’s response to the impact of elections on PVC demand is largely mixed. While some expect a slowdown in PVC sourcing, others anticipate demand to be more or less unchanged.

They explain that most construction initiatives are undertaken by governments at the state level, and their (governments’) thrust on infrastructure projects will continue as long as the state government stays in power.

Drought in parts of western India, however, also hang over the strong demand growth outlook for PVC.

Parts of western Maharashtra, reeling under the most severe drought in the past four decades, have, since February 2012, seen a ten-fold increase in the number of tankers supplying drinking water to more than 11,800 villages.

Addressing a joint session of the Maharashtra assembly on the first day of the budget session, the state governor highlighted that the failure of the monsoon for the second consecutive year had more than 7,000 villages depending on water tankers for survival. 

Demand for PVC pipes is likely to be restrained by this, as Maharashtra represents one of the largest markets for PVC pipes. Faced with a shortage of money, the farmer’s focus will be on basic sustenance rather than an increase in household spending on pipes. 

A lack of efficient roads, ports congestion problems and poor electricity supply continue to plague the Indian PVC industry, and the Indian economy as a whole. A bigger allocation to infrastructure in the budget, is therefore a critical need.

This is probably one of the main reasons why India is not witnessing a major increase in its domestic PVC production.

A source at Chemplast Sanmar which operates two PVC plants points out that although multiple expansions are lined up in the latter half of 2013, most of the capacity additions except Reliance’s 100,000 tonne/year upcoming PVC facility at Dahej, are all debottlenecking activities.

They will not add more than 150,000 tonnes/year to domestic production, while a second proposed 220,000 tonne/year PVC manufacturing facility in the state of Rajasthan, that was scheduled for completion in 2012, is still on paper and yet to take off.

The proposed capacity expansion in 2013 is thus viewed as a small increase in comparison to total Indian demand and importantly, imports, which for 2012-13, stand at 1m tonnes. PVC flows into India continue to face foreign exchange exposure because of a volatile Indian rupee versus the US dollar.

And upstream cost pressures add to the woes of producers. Often, a mandated increase in selling prices brought on by higher manufacturing costs faces stiff resistance from converters, who are not able to pass on the increase to end users. Producers then have to announce cuts in their offered prices to encourage buying.

The source at Chemplast Sanmar was concerned that this often repeated cycle: of higher feedstock prices, the resultant market resistance to higher PVC prices and the ensuing adjustment in pricing to gain market acceptance, if not altered could well produce more PETRONAS-like cases.

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By: Veena Pathare
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