India rupee slump fuels spike in domestic petrochemical prices

SINGAPORE (ICIS)–Petrochemical players in India are wary of the rupee’s sharp depreciation, which is fueling price spikes in the domestic market, but a seasonally strong demand, as well as absence of domestic capacities for some products, ensures continued growth in import volumes for the time being.

The rupee (Rs) fell to a 15-month low on 7 May to breach Rs67 levels to the US dollar, and may weaken further due to spikes in crude oil prices amid fears that the US will re-impose sanctions on Iran. India, which is a major crude importer, is vulnerable to surging oil prices.

The plunge in the rupee’s value since April was reminiscent of the slump in November 2016 following the surprise demonetization of high-value rupee notes.

The rupee has been under downward pressure since mid-2017, which intensified in April following the US Treasury report placing India “under the monitoring list of countries possibly tempering their currency exchange rates”, along with China, Japan, Korea, Germany and Switzerland, investment bank ING said in a research note dated 25 April.

Based on the US Treasury report, India’s bilateral trade surplus with the US was at least $20bn and there was a persistent one-sided intervention with net foreign exchange purchases of at least 2% of GDP.

“Moreover, we have also entered a seasonally weak period (April-June) for the currency, the period when the typical surge in demand for gold demand for the wedding season contributes to INR [rupee] weakness,” ING said.

The spike in oil prices is doubling the pressure on the rupee as oil “accounts for almost half of India’s trade deficit, which surged 44% [year on year] to $157bn, $70bn was oil-related”, it said.

On Tuesday, crude futures were trading close to their highest levels since late 2014, with Brent crude at above $75/bbl and US crude just a shade below $70/bbl.

“Both gold and oil prices have been on an upward trend and, based on ING’s house view of a weak USD for the rest of the year, the trend will persist,” according to ING.

The investment bank now forecasts the rupee to end the year at Rs68.3 to $1, up from its previous forecast of Rs66.6.

“We believe its troubles are far from over, as several external and internal factors will continue to expose it to considerable weakness in 2018 and beyond,” ING said, adding that the depreciation could prod the Reserve Bank of India (RBI) to hike interest rates in June.

A weaker currency makes US dollar-denominated imports more expensive, but any actual impact on petrochemical demand may be delayed.

Indian importers of petrochemicals were mostly out in search of spot cargoes, shrugging off the rupee’s weakness, underscoring the need to secure supply ahead of the country’s monsoon period in June, consequently pushing import prices higher.

“End-users are willing to pay more in terms of domestic currency to secure cargoes especially since seasonal demand is at a peak now,” an Indian phenol importer said.

On 4 May, deals for Thai phenol cargoes for May loading were done at $1,530-1,540/tonne CFR (cost & freight) India, up by $60/tonne from the previous week’s ICIS-assessed prices.

Phenol prices in the domestic market also increased by Rs110-114/kg over the same period to Rs99-100/kg, with demand being driven by the pharmaceutical and construction industries, whose activities go into full swing ahead of the monsoon season in June.

Domestic prices of major petrochemical products in the country have been rising in tandem with with import prices, partly due to higher distribution cost, which is stemming from the rupee weakness.

In the case of linear alkylbenzene (LAB), buyers were preferring to source locally because of higher import prices. The decline in imports were recorded as early as February.

The strong demand is also pushing up domestic LAB prices, which were hiked last week by Rs3/kg DEL (delivered) to around Rs107-109/kg.

In the methanol market, domestic sellers and distributors are being forced to sell ex-tank products at higher prices to recover their import cost following the rupee’s fall.

But actual import volumes have not been dented so far, market players said.

For natural 100 high density polyethylene (HDPE) pipe grades, domestic producers increased their offers on tight supply due to scheduled plant turnarounds in May, and possibly, as a reaction to the rupee depreciation.

“The rupee has depreciated even more, so much so that domestic producers increased their natural PE pipe prices this week,” a converter from India said.

The import parity of domestic offers for natural PE pipe were at $1,550/tonne CFR India, narrowing the gap with Middle East-origin cargoes, which were available at $1,560-1,590 CFR India.

Local PE producers increased prices across all PE grades for May-loading cargoes on weaker rupee although there was no visible pick-up on the demand side.

“So far, there is no effect from the recent cash shortage seen in the market.  In fact, import PE market might be slightly revived as local PE manufacturers have increased their offers for May,” said a distributor.

There’s a high chance that the main supplier for C6 MLLDPE (metallocene linear low density polyethylene) will want to raise its offers should domestic PE prices increase, a converter said. “But buyers might be unable to accept the price hike,” the converter added.

In the case of polyvinyl chloride (PVC), India is simply too reliant on imports and cannot afford to postpone purchases for long.

“The depreciation of the rupee is unlikely to greatly impact the demand for imported PVC, as India heavily relies on imports for the PVC market,” a producer said.

Local PVC major Reliance Industries has raised its domestic offers by an average of Rs1.0-3.0/kg, due to the weakened rupee and expectations of a stronger demand.

Current local PVC prices have an import parity of about $972/tonne CFR India.

India is the second-biggest emerging market economy in Asia, after China.

Spain-based FocusEconomics noted that rising global oil prices will weigh on India’s balance of trade this year and lead to a widening of its current account deficit.

In March, India’s trade deficit widened to $13.7bn from $12bn in the previous month, as exports recorded a 0.7% contraction, for the first time in five months.

“The external sector is unlikely to fully recover any time soon as exporters remain pressured by delayed GST [goods and services tax] refunds and the RBI moves to tighten trade credit norms,” FocusEconomics said.

“The recent China-US trade spat also bodes poorly for the external side of the economy, as the US is India’s largest export market and China is India’s largest import market,” it added.

Focus article by Pearl Bantillo

($1 = R67.26)

Additional reporting by Helen Yan, Kite Chong, Yuanlin Koh, Felita Widjaja, Danielle Goh and Yaw Min Jie