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India’s petchem projects dilemma

Business, Company Strategy, India, Projects
By John Richardson on 19-Mar-2010

By Malini Hariharan

I have been doing my annual exercise of compiling major petrochemicals projects in India and as usual there not too many.

Making a case for investing in a cracker in India has never been easy and the task continues to be difficult despite the demand growth experienced in the last few years.

Lack of competitive feedstocks remains a main issue. Building a naphtha cracker based on imported raw material makes little sense and will not be viable till the government continues with the current import duty of 5%. And the country does not have gas to develop a gas-based project.

Refiners are looking at integrating with petrochemicals to add value to the naphtha that they are currently exporting. Naphtha surplus has been increasing because the power and fertiliser sectors are switching to gas.

Indian Oil Corp’s naphtha cracker at Panipat, which is currently under commissioning, is one example.

Economics of projects such as this one, which is located in a landlocked part of the country, are favourable as the domestic market is the primary target for end products.

“But if you are investing for exports there are better places than India. Besides lack of raw materials poor infrastructure is a major problem,” points out one industry player.

And with the fall in import duties and the numerous free trade agreements a company can even invest in places like Singapore and bring in product to service the domestic market although there is a risk of anti-dumping duties.

There are many products where Indian imports are steadily rising. PVC imports are expected to cross 600,000 tonnes in 2009-10 which translates to two world scale plants.

Imports account for over 50% of Indian methanol demand of around 1.15m tonnes. Demand is growing by 10-11%/year and the share of imports is projected to rise as there are no new projects in the pipeline.

“There is a fear factor,” explains one Indian methanol producer. “Indian gas prices are increasing and we will be hit if we invest. We would rather have a relationship with a Middle East producer and bring in product,” he adds.

In the case of PVC, high power costs is a deterrent for some companies while others face problems in tying up ethylene and chlorine.

Will the projects scenario change?

There is a possibility, says a second industry source. India will see more projects if it delivers the kind of demand growth seen in 2009 for a few more years, says another source.

Then proximity to the market rather than feedstocks would be a key factor.