Polymers buck global trends in India

Demand for polymers is strong, the supply is tight, and the outlook is good

THERE ARE few bright spots in the global polymer market, but India appears to be one of them.

At a time when the most of the world is worrying about recession and falling demand, Indian polymer producers and processors are confident about the short and long-term demand prospects, especially for polyolefins. And this is despite constant downward revisions to the country’s GDP growth forecasts for 2009-2010.

Optimism has returned after last year’s polymer price meltdown, as warehouses are no longer overflowing with material.

Polyolefin producers claim they are facing no problems in placing product in the local market, while processors complain that their key concern today is finding sufficient volumes and managing price volatility.

TIGHT SUPPLIES
Imports have been rising and one producer estimates that nearly 70,000 tonnes/month of polyolefins will enter the country during March and April, compared with an average of 50,000 tonnes/month in 2008. Local prices are well over international levels, resulting in some unusual trade flows, such as drawing polyethylene (PE) and polypropylene (PP) from South Africa and even South America.

Processors complaining about the dearth of local product are also unhappy with the government’s recent move to start antidumping investigations on PP imports from Saudi Arabia, Singapore and Oman based on a petition by Reliance Industries. The Indian energy and materials company holds nearly 90% of India’s PP capacity. Haldia Petrochemicals, India’s only other PP producer, has also supported the petition.

A major trader asks: “If the dominant supplier refuses to provide material, what choice do processors have but to import product?” The government should instead look at safeguarding the interests of processors, he adds.

India’s demand recovery started in November 2008, progressed swiftly as processors sensed that prices had bottomed out and it was time to refill a depleted inventory chain.

“We had issues a few months back when prices were falling. Some of our buyers were cautious, as they wanted to clear stocks. But things are back to normal now and in fact slightly better than before,” says Dharmesh Zavery, general manager, sales and marketing, at Paharpur 3P, a manufacturer of flexible packaging.

Packaging is expected to be one of the key segments driving current, as well as future growth.

Food consumption is not expected to fall during the economic slowdown, and there has been no let-up in orders for packaging of products ranging from chocolates to cooking oil, say processors.

“India’s packaging segment has been doing well for the last two to three years. We expect huge growth in India and also the Middle East until 2015,” says Indrajit Ghosh, deputy general manager for domestic and international marketing at Uflex, which manufactures polyester film and biaxially oriented PP (BOPP) film in India and Dubai, the United Arab Emirates (UAE).

Uflex is due to start up a BOPP film plant in Egypt and a polyester film plant in Mexico by the end of this year. Plans for 2010 include a BOPP film line in Mexico, a polyester film line in Egypt and new lines for polyester and BOPP film in India.

Among other expansions in the country, Jindal Poly Films, India’s largest BOPP film producer and the fifth-largest in the world, added two BOPP lines in the last quarter of 2008 to raise its total capacity to 180,000 tonnes/year.

This year, Jindal will be expanding polyester film capacity by 25,000 tonnes/year to 85,000 tonnes/year. A new 65,000 tonne/year BOPP line is scheduled to be added in the second quarter of 2010, after which Jindal will become the second-largest BOPP film producer globally, says a company source.

ROOM TO GROW
When compared with developed countries, penetration of flexible packaging is still at a low level in India, which makes it an attractive market. Not only is the number of food and nonfood products packed in plastic increasing, but new manufacturers are entering the fast-moving consumer goods (FMCG) segment.

“Price point packs are also on the growth path as these are convenient to sell and buy,” points out Zavery, referring to products packed in small sachets and sold at very low prices. For instance, a small sachet of coffee or cough syrup is sold at only 2 US cents (1.5 euro cents), while a sachet of shampoo or detergent costs 10-20 cents. These small pack sizes have proved to be popular, especially in India’s vast rural market. And with growth in disposable incomes slowing, these packs are attracting consumers even in urban India.

Global market research firm AC Nielsen estimates that sachets accounted for 74.5% of the Indian shampoo market of 104,000 kiloliters in 2008, up from 71% in 2006 and 73% in 2007. FMCG companies have introduced a variety of products in small pack sizes to promote brands and lure cost-conscious buyers. This is despite the higher packaging costs.

“Normally, cost of flexible packaging is 3-7% of the selling price. But with small packs the percentage goes up to 13-15%,” points out Zavery.

Within the broad packaging sector, retort packaging, laminates and bulk packaging are seeing good growth, says an applications development manager at one polyolefins manufacturer.

Indian processors have also successfully penetrated the export market for BOPP film and flexible intermediate bulk containers (FIBCs), also know as jumbo bags.

Exports of BOPP film are rising, says the Jindal source. He points out that the economic crisis has resulted in some European and US processors cutting production, forcing buyers to increase their purchases from Indian and Chinese BOPP film producers.

In FIBC, India has emerged as a major sourcing hub, and the segment has seen a compound average growth of 28% from 2001/02 to 2007/08, estimates Haldia Petrochemicals. However, the strong growth prospects for packaging film have created problems of excessive competition, as barriers to entry are quite low.

“It is not very capital-intensive; you only need about Indian rupees 50m [$987,000]. So when people are seeing demand [growing] they are adding capacity. But the additional capacity cuts into prices and starts a vicious circle. This is the devil in most industries,” says Zavery. Growth estimates for the packaging industry vary, with some expecting the sector to deliver 15-20%/year growth, while others see growth of only 6-7%/year for commodity films.

KNOCK-ON GROWTH
Another sector attracting attention these days is agriculture, which is supporting demand for high density polyethylene (HDPE) and polyvinyl chloride (PVC) pipes.

Growth in agriculture, which accounts for 18.5% of India’s GDP, is faltering this year, but it performed strongly in 2007/08, leaving farmers relatively flush with money.

Farmers are also receiving support from state governments, which have been implementing agricultural irrigation programs.

One of the largest pipe producers in India says that he saw demand grow by 30% last year. And he expects the growth to continue, buoyed by lower polymer prices and a recent reduction in excise duty. The government cut excise duty on polymers and plastics from 10% to 8% in February.

Hopes are being pinned on implementation of various government schemes related to irrigation and infrastructure over the next few years. For instance, the Andhra Pradesh state government said in February that it would offer a 90% subsidy to large farmers adopting drip irrigation systems.

The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) is important as it will, among other things, invest in new water and sanitation pipes in 67 cities, points out the applications development manager. JNNRUM is a seven-year national program launched in 2005/06.

“Work has already started in four or five cities. We estimate that new pipes in each city would result in 4,000-5,000 tonnes of new polymer demand,” he adds.

He also sees a positive shift in quality standards and greater interest in HDPE pipes.

Government support is emerging in another sector, as well. Bulk packaging of food grains in India has for long been dominated by jute. The Jute Packaging Materials Act (JPMA) was passed in 1987 to preserve the interests of jute farmers and restrict the use of PP or HDPE raffia bags.

But the act is slowly being relaxed. The government has placed orders for 140m bags so far this year, which would absorb around 19,000 tonnes of PP and HDPE, says a source at a local polymer producer. And more orders are expected in the coming months.

The raffia sector is also benefiting from strong cement production. The Centre for Monitoring Indian Economy has forecast a 8.1% hike in cement output in 2009/10. Demand remains strong for infrastructure projects although the economic slowdown has seen some slackening from the real estate sector, especially in the cities.

The slowdown’s impact is more visible in the auto components sector.

“We saw orders fall by 75% in the last quarter of 2008; we had never expected this,” says a major supplier of plastic components.

And though he saw an improvement in orders in February, he is not sure how long it will last. “We will know only after the election. The new government will need to take concrete steps to improve the health of the auto industry,” he stresses.

The general election, starting in April, is on the minds of other industry players, as political stability will be crucial to maintaining an environment conducive to growth.

Polymer producers also worry that the processing industry is still burdened by some age-old problems. The industry, which has over 22,000 converters, is widely fragmented, with many small processors using old machines. Productivity is low, diminishing India’s competitiveness in the export market. And the government continues to reserve investments in certain plastic end- use segments for small-scale players.

So while local producers are relieved that the Indian polyolefins market is holding up relatively well during this crisis, they are not too ambitious in their growth projections. They expect demand to rise by 3-4% during 2008/09, although other market participants are projecting slightly higher growth numbers at 5-6%. The projections are disappointing when compared with the 16% growth of 2007-2008. But in tough times such as these, any growth is welcome.

Read Malini Hariharan’s India Chemicals blog