Petrochemical has become a crucial part of a wide range of manufacturing and consuming sectors today and the Indian Petrochemical industry is growing leaps and bounds to be at par with the global industry. However, is the industry’s single track focus missing out on the burgeoning sector of petrochemical intermediates?
By Debarati Das
Paint, plastic, rubber, detergents, dyes, fertilisers, textiles, solvents… these are just some industries where petrochemicals have become an integral part of the manufacturing process. However, the global petrochemical business is seeing a shift from West to East to keep up with the unprecedented growth of the region. According to a recent study by Aruvian Research, while the Middle East is emerging as a global production hub due to its natural advantages of low-cost feedstock, major consumption centres are shifting to Asia due to rapid growth in demand in China on account of chemical intensive and export driven industry & India emerging as global consumption centres.
In order to make the most of the business boom and be closer to the growing consumption centres, several western players of the petroleum industry are realigning their business strategy and are looking for opportunities for partnership and alliance to have a presence in the East.
The Indian petrochemical sector
The growth of the Indian petrochemical industry is at its all time best. A recent study by apex industry body, the Associated Chambers of Commerce and Industry of India (ASSOCHAM), suggests that the current $40 billion petrochemical industry of India is growing at a CAGR of 14 percent and is likely to reach $100 billion by 2020.
The study, Indian Petrochemical Industry: An overview, noted, “Petrochemicals sector is one of the fastest growing segments with a growth rate of 13 percent which is more than twice of growth of India’s gross domestic product (GDP) and also the global growth rate in petrochemical space which is stagnant at 6 percent.”
The industry has also witnessed steadfast investments lately. The government initiatives like the “Make in India” campaign has given an additional mileage to the industry. Increasing domestic demand, rising middle class and growing focus on strengthening the infrastructure is also adding to strengths of the petrochemical sector. Burgeoning industries such as the automobile, plastics, pharmaceuticals, textile, paints and coatings, packaging, white goods and building & construction etc have further increased the domestic demand for petrochemicals.
Compared to US and China, India’s per-capita consumption of polymers (PO + PVC) is still in nascent stage with a huge opportunity to grow. “Polymers, which is the dominant part of Indian petrochemical industry is growing at a superb pace, with the middle-class household boosting the consumption and also annually contributes over Rs 8,000 crore by way of taxes and duties to the national exchequer,” said DS Rawat, secretary general, ASSOCHAM.
With this pace of growth, India is at the right juncture to capitalise on the global petrochem industry’s Eastward journey. However, amidst the growth wave in some sectors, few potential sectors are being left out.
Accelerating the growth pace
The rising domestic demand for petrochemicals has shot up the country’s imports. However, is meeting the demand the only way to grow? Over the years, India’s upstream business has strengthened itself, even though a lot more needs to be done. On the other hand, the downstream businesses have flourished exponentially. However, an area whose potential has still not been explored fully is the petrochemical intermediates.
According to a McKinsey & Company report, a constrained development of the petrochemical intermediates industry could compromise a growth opportunity of Rs 400,000 to 600,000 crore ($65–100 billion) in the speciality chemical industry by 2025, by depriving it of some key chemicals especially those that are logistically complex to import. There is a dire need to create a synergy between the upstream and downstream business and jointly concentrate on growing the petrochemical intermediates industry in the country.
The demand for petrochemical intermediates, such as acrylic acid, acetic acid, and propylene oxide, is likely to grow with the growth of the Indian economy. However, if necessary steps are not taken immediately then, according to McKinsey analysis, a shortfall of over 25 million tonne a year could emerge by 2025.
Today, the country’s petroleum intermediates demands are majorly met by the international companies. For India to become self-sufficient in this area, the country’s downstream chemical industry has to work on the ways in can meet this demand while the upstream petrochemical companies will have to broaden its horizons and move into this market and work collectively.
According to reports, India currently imports 45 percent (around five million tonne a year) of its petrochemical intermediates requirements which are around 11 million tonne a year. With the pace of growth of the India’s economy, the demand for petrochemical intermediates will expand to between 33 million and 38 million tonne a year by 2025. Despite the current capacity expansion plans announced by the government, such as ethylene oxide and ethylene glycol, there will still be an import dependency of 75 to 80 percent, according to McKinsey report.
Joining the broken links
The Indian chemical industry is the third largest in Asia and twelfth in the world, contributes 5 percent of national GDP, 13 percent of total exports and 8 percent of total imports. The petrochemical intermediates sector is a very small segment, almost nascent, in this enormous chemical industry. Hence, drawing attention towards its future growth prospect has been a major challenge. Plus, with the exponential growth in the polymers industry, most building-block chemicals in India are consumed in the production of basic polymers such as polyethylene and polypropylene. This has further constrained the expansion in petrochemical intermediates.
Further, compared to countries such as the United States, Europe, Japan and China, India has been a late entrant in building up its supply of olefin and aromatic building-block chemicals that is needed for the production of petrochemical intermediates. Due to these factors, infrastructure growth in petrochemicals is also in the nascent stages.
The industry has been growing around a limited number of oil refineries with a single stand-alone ethylene cracker. The industry is in a dire need of a dynamic change, which will boost the sector’s production to meet the future demand. Few steps which need to be taken are:
Cluster growth: Instead of a sporadic growth, the petrochemical intermediates industry needs to grow as a whole with a clustered structure equipped with multiple crackers and facilities, which will boost production. The government has taken steps for the development of large production centres anchored by an ethylene cracker by promoting a number of Petroleum, Chemicals, Petrochemicals Investment Regions (PCPIRs) across the country.
However, the development of these PCPIRs has witnessed quite a delay in project execution. The government can instead seek for PPP models for building the required infrastructure to support such clusters and help in the smoother and timely completion of projects.
Technological development: The petrochemical industry is functioning under the oligopoly of few major payers. Further, the domestic demands of petrochemical intermediates are met by a group of international chemical companies who closely hold the most advanced process technology required to make petrochemical intermediates. The Indian industry too needs to upgrade its technological requirements with the latest equipment and processes to break this monopoly of foreign imports and be self-sufficient to meet its requirements.
Ease in doing business: Most foreign players find themselves tangled in various approvals and obstacles before they can get the project on the floor. This had led to various foreign players to reroute their businesses other regions like China and the Middle East where the mode of doing business is easier. India too should formulate a hassle free route for foreign players to carry out their business investments. Also, encouraging joint ventures between local and foreign players can be beneficial for the industry in the long run.
Lately, not many JVs have materialised due to lack of cost advantage and Indian players seeking majority control of the ventures with the right to control the technology after a finite number of years. Due to these unattractive negotiations, international producers of petrochemical intermediates prefer to continue shipping products to India to cover its demand. A change in negotiation tactics can facilitate the creation of domestic capacity for petrochemical intermediates.
Local diversification: Indian upstream petrochemical companies themselves have to acknowledge the importance of the petrochemical intermediates sector in the longer run and have to diversify their investments towards long-term businesses in this sector. Other Asian petrochemical intermediates markets too have matured in a similar fashion. This move by upstream companies will also be lucrative for downstream development.
Changing policies: The lack of a local supply of petrochemical intermediates could constrain India’s economic development. Acknowledging this fact, the government is taking a number of initiatives like modifying import tariff structure which currently favors imports of petrochemical intermediates over building-block petrochemicals which are discouraging local production; ways to streamline permissions for petrochemical-intermediates projects; investment in infrastructure (such as pipelines around big olefins plants) to facilitate the production of petrochemical intermediates; addressing the issue of unavailability of ethylene, propylene, and other building-block chemicals required to produce petrochemical intermediates etc. However, all these measures need to be put into practice soon.
Just like a scientist needs the right ingredients at the right proportion for a chemical formula to work successfully, the industry and the government too has many options for the change. However, the right solutions at the right time are needed to bring in a revolution in the petrochemicals intermediate industry in the country.
Read More: Petrochemical intermediates –building blocks for future growth
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