Market outlook: India seeks opportunities in an evolving global petrochemical market

18 October 2013 09:49  [Source: ICB]

The shift in the global petrochemical industry driven by US shale gas will open up opportunities downstream of refineries and naphtha crackers in India

The global petrochemical industry is changing with the shale gas discovery in the US, anemic growth in developed economies and the emergence of Asia as a major consumption hub.

This creates both challenges and opportunities for India. Competitive imports from North America in basic olefins are a challenge for the industry.

With the presence of a large number of refineries in India, opportunities exist to make competitive products such as aromatics and propylene derivatives, as the government promotes domestic manufacturing to substitute large-scale imports.

US LOOKS EAST FOR MARKETS
The global economy is on a narrow path of slow and fragile recovery. Asia has been the major growth driver of the global economy in the past two decades and is expected to remain so going ahead.

Chemical sales in Asia have increased to $1.1 trillion in 2012 from $880bn in 2007, constituting nearly 33% of the global market. Asian demand has been met primarily through domestic production and imports from the Middle East.

However, the future could be very different on account of large shale gas discoveries in the US and planned investments that utilise this low-cost gas. Competitive North American producers will be able to tap into the growing demand of the Asian market.

This may create further challenges for the domestic industry in Asia, which is currently based on naphtha as feedstock.

The following four trends are likely to play a key role in the evolving global dynamics in the chemical industry:

■ US to become a major manufacturing and processing hub

■ Western companies looking to expand their presence in Asia

■ Asian producers exploring different 
product slates from naphtha feedstock to remain competitive

■ Increased use of alternate sources of feedstock (e.g., coal-to-olefins in China)

INDIA OPPORTUNITY
India has been a major growth market for petrochemicals. In the past decade it has grown at an impressive 12% per year. Domestic production growth has lagged consumption, opening up a major market for imports.

To reduce the high current account deficit, the Indian government intends to increase the share of manufacturing to 25% of GDP by 2022, from the current 16%.

Domestic manufacturing is being promoted through formulation of a new policy for setting up National Manufacturing Investment Zones. The Indian government has also recently increased the import duty on polymers from 5% to 7.5% to encourage domestic production.

Emphasising a cluster-based approach for manufacturing sites, the government is also setting up Petroleum, Chemicals and Petrochemical Investment Regions (PCPIRs). However, progress has been slow. Multinational companies looking to serve the Indian market for the long term need to explore setting up a manufacturing unit in India.

India is short in natural gas but at the same time many refineries in India offer attractive downstream manufacturing opportunities. These include paraxylene-purified terephthalic acid (PX-PTA) complexes downstream from refineries, propylene derivatives and pygas derivatives.

These can be globally competitive and provide the right entry options for multinationals. The right location and a local partner can help new entrants overcome challenges related to infrastructure and the complex regulatory approval process in India.

AROMATIC COMPLEX FOR PX-PTA
Ethane-based crackers cannot produce aromatics. India is a large market for polyester and hence for PTA. Growth in the synthetic textiles industry is a key demand driver for polyester.

Raw material for PX-PTA units is available from either a naphtha cracker or a refinery. Three PX-PTA units have been set up in India downstream from refineries. Mitsubishi PTA has set up a large-scale PTA plant in Haldia using imported PX.

Based on announced capacity addition plans, India is still expected to have a supply shortfall of around 2m tonnes/year of PTA by fiscal 2021. This is an opportunity that large multinational corporations (MNCs) can address through a partnership with a refinery in India for naphtha. There are medium- and large-scale refineries in India that are willing to explore such partnerships.

JBF has secured a licence for BP’s latest-generation technology to set up a 1.25m tonne/year PTA plant in Mangalore. This plant is backward integrated to the MRPL refinery. Similar arrangements can be made to utilise India’s advantage as a naphtha surplus country.

PROPYLENE DERIVATIVES
Upcoming crackers globally are mainly based on natural gas (ethane), and the propylene yield from natural gas cracking is low.

Fluid Catalytic Cracking (FCC) units of refineries are a good source for propylene. Propylene output from a High Severity FCC (HS-FCC) is higher (propylene yield of around 20%) than from a normal FCC.

Two refineries in India already have HS-FCC units and there is potential for such units in other refineries as well. Propylene from these units can be used to make propylene derivatives other than polypropylene (PP).

With growing captive consumption, the Indian market has reached critical size in many C3 derivatives and some are expected to reach inflection points in the next five years. However, production in India is either minimal or nonexistent.

This is an opportunity companies with interest in downstream petrochemicals can address. BPCL is in talks with the global technology providers to make some of the specialty propylene derivatives by setting up an HS-FCC unit in Kochi refinery. IOCL is setting up an HS-FCC unit at its Paradip refinery. Similar units can be set up through a joint venture between a technology provider and a refinery in India.

VALUE POTENTIAL FROM PYGAS
Naphtha crackers in India will have to look at optimising their product mix to remain competitive. In basic polymers such as PE, naphtha crackers will find it difficult to compete with the gas crackers in North America and the Middle East.

There is an opportunity to explore products that can be made only from a naphtha cracker, such as C5 to C12 derivatives. The pygas stream accounts for 19% of total output from a naphtha cracker. Various value-added products can be extracted from pygas.

OTHER OPPORTUNITIES
Other specific opportunities include the use of alternate feedstock and setting up research and development (R&D) centres in India. Off-gas from large-scale refineries in India could be a competitive feedstock.

Reliance is already exploring setting up a cracker from off-gas in Jamnagar. India is also one of the largest producers of certain bio-based feedstocks such as castor oil. Polyamide, an engineering plastic, can be made from castor oil. On the research side, India has a vast pool of scientists that can be leveraged to set up R&D centres.

hMajor specialty chemical companies including BASF, DuPont, DSM and Dow Chemical have already set up R&D or technology centres in India.

India’s R&D capability was one critical success factor for the development of the active pharmaceutical ingredients (API) industry in India. The same strengths can be leveraged to replicate the API success story in specialty chemicals and downstream ­petrochemicals.

LOOKING AHEAD
The evolving global petrochemical outlook has opened up specific opportunities in India. With support from the government, which is encouraging domestic production, the Indian industry can certainly look to explore these options.

These opportunities also provide attractive entry options for petrochemical multinationals. Partnership opportunities with refineries/naphtha crackers also can be explored to establish a presence in India.


Siddharth Paradkar (top) is the principal for chemical and logistics at TATA Strategic Management Group and can be reached at siddharth.paradkar@tsmg.com.

Binay Agrawal (below) is a project leader for chemical and energy at TATA Strategic Management Group and can be reached at binay.agrawal@tsmg.com. Tata Strategic Management Group is the largest Indian-owned management consulting firm.


Author: Manish Panchal, Siddharth Paradkar and Binay Agarwal



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