India chemical makers turn to exports amid domestic cash crunch

SINGAPORE (ICIS)–India’s chemical and polymer producers are under pressure to tap the export markets as domestic buyers are grappling with a cash crunch that hit the country in early November, consultancy firm Wood Mackenzie said on Thursday.

“Producers are under immense pressure and are finding new ways to move excess inventories … India’s export volume is likely to increase multi-fold from November 2016 to January 2017,” Wood Mackenzie senior research analyst Ashish Chitalia said in a note.

India’s domestic trades of petrochemicals has markedly slowed down following the government’s decision to demonetize high-denomination rupee (Rp) notes effective 9 November.

The move was meant to crack down on black money, or illegally derived income.

But removing the Rs500 and Rs1,000 notes – which account for more than 80% of India’s money in circulation – caused chaos across markets in the cash-driven economy.

“Several producers are exporting chemicals due to lack of domestic demand, and running out of storage/warehouses space.”

Polymers such as polyethylene (PE), polypropylene (PP) and polyvinyl chloride (PVC) – which are used in fast-moving consumer goods sector (FMCGs) – “are likely to be impacted hardest at the onset but will find normalcy soon, as cash required for related transactions are relatively small,” according to Wood Mackenzie.

“A sudden increase in exports of Indian polyethylene into Chinese, Vietnamese and other South Asian markets is underway,” Chitalia said.

Wood Mackenzie cited that Indian linear low density PE (LLDPE) and high density PE (HDPE) were being offered at “attractive prices” compared with products from other Asian countries.

“Our polyethylene supply demand balance calls for additional excess production in India once RIL [Reliance Industries Ltd] and OPAL [ONGC Petro additions Ltd) start up their cracker investments in Q1 2017,” the analyst said.

The cash crunch would hit India’s automotive and real estate markets hard, according to Wood Mackenzie.

“Even if everything goes according to plan and there is sufficient cash available by the end of 2016, we expect impact of demonetisation to be a slowdown for a few quarters, at least,” Chitalia said.

“Our expectations of the speed of return to normalcy are highly dependent upon the release of more cash into the market. As a solution to the crisis, more cash will be speedier than waiting for conversion of business-to-business processes to digital transactions,” the Wood Mackenzie analyst said.