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Petrochemical Industry in India: Review of 2017-18 & Outlook for 2018-19

Following is a brief excerpt of the Indian petrochemical industry review of 2017-18 and outlook for 2018-19 based on the India Paper presented at the Asia Petrochemical Industry Conference (APIC)-2018 held in August 2018 in Malaysia.

China and India continue to grow their market shares for both capacity and consumption. Any significant change to their GDP forecasts will have global ramifications. In fact, 50% of global growth over the five-year forecast period is assigned to China alone.

The recent performance of other large emerging markets has been decidedly mixed. India remains a bright spot. Real GDP growth strengthened to 7.2% year on year (y/y) in the October-December quarter, from 6.5% in the July- September quarter and 5.7% in the April-June quarter. IHS Markit predicts growth to accelerate to 7.3% in fiscal year 2018 and then to 7.6% in fiscal years 2019 and 2020.

The long term Dated Brent crude price forecast has been pegged at $70/Bbl (real) with a slower price recovery from now to 2030. Our view is that rapidly rising US crude oil production will contribute to global supply exceeding global demand this year. As a result, IHS Markit projects that Dated Brent will average $63/barrel in 2018 and $57/barrel in 2019. Historically chemicals demand growth has average around 4%, IHS Markit expects chemicals demand to grow at multiple of GDP growth rate during the forecast period. Demand growth focused on the broader Asia Pacific with the lion's share for China of global demand during next five year forecast period. Rest of the demand growth is split roughly evenly between the Middle East, N. America and others. West Europe is forecast to grow only mildly as the structural issues impact chemical demand. Consumer demand growth remains robust in India.

Feedstock advantage and domestic demand are key drivers for new investment preferences. Competitive landscape shifted recently due to major developments in North American shale gas and coal to chemicals industry emergence in China. Future investments will be dominated by China and North America, followed by Asia Less China (including India) and Middle East. Industry is at the end of a fairly stable ten-year period of investment, both in terms of total capital deployed and the share of global capacity that the capital represents.

Political and policy uncertainties remain the biggest threats to markets and economies -and while market anxiety has risen, economic fundamentals are still solid. According to HIS, the global economic outlook continues to brighten a little, notwithstanding still-elevated levels of policy and political uncertainties. It is expected United States and commodity exporting regions to drive a modest acceleration in world economic growth. World real GDP growth is projected to pick up from 3.2% in 2016 to 3.7% in 2017 and 3.9% in 2018 and 2019. (WEO-Jan'18).

Petrochemical markets ended 2017 on a firm note with prices of most products moving up during the year. The ICIS petrochemical index (IPEX) was on average 17% higher in 2017 than in 2016. The IPEX values represent the movement in monthly prices for 12 commodity petrochemicals and polyolefins.

Among the petrochemical building blocks, Asian spot ethylene prices rose by 15% during 2017 with markets running at a two-year high towards the end of the year marking a sharp recovery from the lows seen at mid-year. Markets had come under selling pressure in the first half due to plentiful supply from both Asian and non-Asian sellers. Spot Propylene was up 11% on improvement in fundamentals. However, butadiene eased from a high of US$2930 seen February 2017 when prices had spiralled on the back of supply issues, firm demand and speculative activity. Asian methanol prices were volatile falling in the first half and then staging a sharp recovery to end the year at around US$400/tonne cfr China driven by supply tightness and demand from new methanol-to-olefin plants in China. In the aromatics value chain, benzene prices at end- December were 6% below that of January. But Asian benzene prices had started to increase in July 2017 and only began flattening off towards the year end. The price run-up in October and November was driven by supply tightness in the US because of Hurricane Harvey.

Prices shot up by close to $260/tonne from mid-October to mid-November as refinery run rates collapsed, and toluene conversion rates fell as more toluene was directed towards the gasoline pool. The lack of availability sucked more benzene in from Europe and imports from Asia with a knock on price impact in these regional markets.

Asian spot Paraxylene (PX) prices were up 3% even as the polyester chain experienced strong double-digit demand growth in the key China market. Looking ahead, Asia's ethylene supply-demand balance is expected to be snug in 2018 due to strong downstream capacity growth and planned reductions in exports from key suppliers in Japan and South Korea, on the back of a heavy cracker turnaround schedule.

The tight supply conditions could ease in the second half of the year, helped by new ethylene capacity in South Korea and a possible decline in integrated polyethylene (PE) plant operations in Asia, should exports from the new shale-gas based US plants outpace demand growth in the key China market. Dow, DuPont, Chevron Phillips Chemical (CP Chem) and ExxonMobil all announced start-ups of their integrated cracker and derivatives complex in the fourth quarter of 2017 in the US. More than 2m tonnes of PE capacity started up in the fourth quarter of last year and a further 1.4m tonnes is due to come on-line this year.

The US has traditionally directed the bulk of its PE exports to Latin America. While US producers are expected to aggressively pursue additional market share in Latin America, exporters will also be directing much of their attention to Asia, particularly China, as Latin American markets are not large enough to absorb the incremental additions in US capacity. In propylene, significant investments are being made in China with around 1.2m tonnes of new, on-purpose, production capacity expected on-stream this year.

The PX market is expected to be robust on the back of higher run rates at Purified Terephthalic acid (PTA) plants, at least in the first half of this year, as some idled plants in China were restarted in the second half of 2017. But the market will also see the addition of two new capacities - a 680,000 tonne/year plant by Nghi Son Refinery & Petrochemical and a 1.25m tonne/year plant by Petro Rabigh. Market participants are cautiously bullish on prospects for polyester which should provide support across the value chain. - ICIS.

The petrochemical industry has been riding a wave of largely higher prices, driven by higher crude oil prices and stronger markets in the US, northwest Europe and Asia. Stronger market fundamentals, underpinned by economic growth in the US and in Western Europe, have benefitted sector players. ABS (Acrylonitrile butadiene styrene) prices appreciated last quarter on account of higher oil prices, elevated prices for acrylonitrile and higher end market demand. On year-to-date terms, Asian ABS prices have risen about 40%. One of the key factors driving this trend has been the higher Chinese demand for ABS required for automobile interiors. Further, raw materials - particularly acrylonitrile - needed for the production of ABS have also risen which, in turn, has led ABS resin producers to hike the prices. Higher acrylonitrile prices have been guided by plant shutdowns in China along with Hurricane Harvey disruption in the United States.

In terms of Outlook - Asian PVC market would likely remain firm in H1 2018, mainly due to Indian demand and tighter supply amid lower operations of Chinese carbide-based PVC plants on stricter environmental regulations. India's appetite would remain strong next year with PVC deficit forecast at around 1.5 million mt/year.

As India has no plan to expand its PVC capacity in 2018, end-users will have to continue to rely on imports. While Indian imports in 2017 had been interrupted by taxation changes, an Asian PVC producer said that demand was expected to rebound in 2018. Supply in Asia's propylene market is likely to tighten in the first half of 2018 as naphtha-fed steam crackers with at least 2.2 million mt/year of combined capacity are scheduled to shut for maintenance in the region

Asian butadiene markets are expected to be soft to stable in the first six months of 2018 amid new production capacity in China, downstream derivative plant start-ups and a move to support natural rubber prices. Incremental supply from up to 3 million mt/year of new polyethylene capacity amid poor macroeconomics is likely to weaken the Asian market and redraw trade flows in 2018. China alone will see the start-up of 1 million mt/year of new capacity in just the first quarter of 2018. This is on top of a few greenfield plants in Asia and the US which started up in late 2017 that will push additional capacity to up to 3 million mt/year in 2018. However, the new units are unlikely to run at full capacity in their first year of operations, according to industry observers.

As for India, demand will be strong, and will primarily come from the automobile and construction sectors. PE consumption from packaging may be weak as converters said their margins were squeezed by low end use prices and high PE resin costs. India's exports to China will rise with the ramping up of Reliance Industries Limited's new PE complex as the country will become self-sufficient.

India's exports to China will likely continue to fall in 2018 as it focuses on its burgeoning domestic PP demand, which is forecast to rise 9.3% year on year in 2018, according to Platt's Analytics. India's demand has been growing in excess of 9%/year for several years, while exports have declined more than 40%/ year over the same period, turning it from a net exporting country to a self-sufficient one. Environmental concerns may also drive India's ethylene demand, as PVC producers are likely to gear towards ethylene-based production as most calcium carbide furnaces are deemed to be not environmentally friendly, amid an expected PVC supply shortfall of 1.5 MMT in 2018.

In fact, Indian economy has turned the cornerstone and it's once again on the growth path. Globally India is being looked at as the bright spot in the global economy. Consumer sentiments are high and growth expectations are reasonable well, which augers well with the petrochemical industry whose growth has a direct relation with the economic growth. For the Indian petrochemical industry in 2017-18- the key application industries like packaging, construction, and automobiles actually helped pull up the demand and declining prices resulted in higher offtake by downstream converters for virtually all polymers. India has become the 4th largest auto market in the world- piped Germany again in February 2018. With booming automobile industry and rising sales, demand for plastics is set to zoom further up.

Government of India's initiatives like Digital India, Swachh Bharat, Start-up India and Skill development program etc. have started and will eventually have a widespread multiplier effect. One can expect them to fuel petrochemical demand in India in the years to come. Success of 'Make in India' programme will be a game changer and a big boost to manufacturing in the country. Increased focus on agriculture and irrigation will boost the demand for plastics along with GOI's thrust on infrastructure followed by a good monsoon forecast in 2018 by IMD. A few of the many such initiatives that are likely to result in new opportunity for industries and positively push the demand for petrochemicals are: Rapid expansion of Metro Rail Projects across the country and electrification of existing & addition of new railway lines. From a humble beginning of just 8 km in 2002, 425 km of metro lines are operational as of now in 10 different cities across the country. In the next few years, the network length is expected to cross 700 km.

The Budget presented in the month of February last proposed huge emphasize on infrastructure and rural and social development. Budget proposed to complete 1,00,00,000 houses by 2019 for houseless and infra status for affordable housing projects. Rural housing schemes saw stepped up allocation to USD 3.59 billion. The total capital outlay for the infrastructure sector has been budgeted to increase by 20.8% to USD 93.28 billion in FY 2019.

Apart from the core Railways and Roads, the special focus of this Budget has been on rural infrastructure through development of rural roads, houses, sanitation, irrigation and water supply which will provide a significant boost to the rural economy. To meet the Government's target of 'Housing for All' by 2022, construction of additional 51 lakh houses will be made in the rural areas. Similarly, the capital outlay under PMAY (urban) has been increased sharply, which includes assistance for constructing 37 lakh homes in urban areas.

The Budget emphasized on the completion of on-going high priority irrigation projects and increased allocation under the PMKSY-AIBP. The Budget also provided direction on the long-term projects being undertaken under the Smart Cities Mission and the AMRUT programme. So far out of 100 cities planned for upgradation under the Smart Cities Mission, 99 cities have been selected and this programme will involve a capital outlay of Rs 2.04 lakh crore. Under the AMRUT programme state-level plans for providing water supply to 500 cities. Around 18000 km of line doubling and transformation of entire network to broad gauge is planned, compared to 4000 km that were targeted for commissioning in 2017-18. The railways plan to procure 12,000 wagons, 5,160 coaches and 700 locomotives. Indian Railways would soon announce a USD 156 billion high-speed train corridors construction plan to connect all major cities in the country, covering almost 10,000 kilometres, along the lines of the government's Bharatmala highways development programme.

The government is currently constructing a 534 km-long bullet train corridor between Mumbai and Ahmedabad at a cost of over USD 15 billion. The project is likely to be completed by the end of 2022. Feasibility studies for various other corridors including Delhi-Chandigarh, Delhi-Mumbai, Delhi-Kolkata and Bengaluru-Chennai have already been done.

The opportunities are huge, and the petrochemical industry stands to benefit in a big way. These proposals and the focus to support the start-ups will also go a long way in encouraging domestic manufacturing and demand.

A number of Indian state-owned energy companies are making major investments to boost their petrochemical activities and are expected to become significant players in the sector. Capacity expansions by several other manufacturers are moving ahead and gradually filling the gap between domestic demand and supply.

The opportunities are huge, and the petrochemical industry stands to benefit in a big way. These proposals and the focus to support the start-ups will also go a long way in encouraging domestic manufacturing and demand. A number of Indian state-owned energy companies are making major investments to boost their petrochemical activities and are expected to become significant players in the sector. Capacity expansions by several other manufacturers are moving ahead and gradually filling the gap between domestic demand and supply.

Overall, the outlook for the petrochemical industry in India is somewhat more positive than it has been recently, as growth in GDP and industrial output is expected to be higher in 2017-18 than in the prior year, and key end-use industries like automotive, packaging, and consumer durables reflect this outlook.

Feedstock

Naphtha

Naphtha is a major raw material for production of Ethylene, Propylene and Aromatics. The current demand in country is lower than the production from refineries and as a result, India is exporter of nearly 7-9 MMTPA.

Natural Gas

India has limited natural gas reserves and requires large quantity of imported LNG (~25000 mmscm/yr.) to meet the demand of the country. Development of unconventional natural gas resources is also on cards in India with ample weightage on CBM and Shale gas development but the lack of data and technology is hitting the same. Hence, domestic production of natural gas in India is highly unlikely to keep up with the demand and the country has to rely on imports to meet its demand.

Coal-Based-Methane

India has the fifth largest proven coal reserves in the world and thus holds significant prospects for exploration and exploitation of CBM. The prognosticated CBM resources in the country are about 92 TCF (2600 BCM) in 12 states of India. Data published by petroleum planning and analysis cell (PPAC) shows that in 2016-2017 domestic production of CBM contributed to 1.78% of India's total natural gas production of over 31,000 MMSCM. In a bid to incentivize production, the Cabinet Committee on Economic Affairs (CCEA) had in February 2018 approved a new policy allowing marketing and pricing freedom for CBM gas. Reliance Industries (RIL) started commercial production from its CBM block at Sohagpur in Madhya Pradesh in March 2017. Following the ramp-up of Sohagpur CBM fields over the next 15-18 months, Reliance will be among the largest producers of unconventional gas in India. RIL recently has sought government's nod to sell coal-bed methane (CBM) gas at over USD 14 per million metric British thermal units (mmBtu). Essar Oil has sold its entire production of coal-seam gas or CBM from a West Bengal block to state-owned GAIL India Ltd. GAIL will buy 2.3 million standard cubic metres per day of coal-bed methane (CBM) that Essar Oil and Gas Exploration and Production (EOGEPL) will produce from its Raniganj block in West Bengal for USD 7.1 per million British thermal unit. The Raniganj East block is India's most prolific CBM block, which has achieved gas production of more than 1 mmscmd (million standard cubic metres per day), which will be gradually scaled up a saleable volume to 2.3 mmscmd.

Methanol

Majority of the demand for methanol in India is being catered by imports as several manufacturing companies have discontinued their production in the country. India's 90% of methanol requirement is met through imports primarily from Iran and Saudi Arabia, where methanol is produced from natural gas which is abundantly available in latter countries at extremely low prices. Methanol market in India is projected to grow at a CAGR of approx. 1%.

Building Blocks

Ethylene & Propylene

Ethylene Capacity is further going to increase from 6253 KT in 2016-17 to 7377 KT by 2017-18 with RIL Jamnagar, Hazira, Gandhar adding up capacity and GAIL, BCPL Assam and OPAL plant getting operational. In 2016-17, production of ethylene and propylene was 5892 KT and 4701 KT respectively. Ethylene Production jumped to 5892 KT in 2016-17 and is expected to go upto 6696 KT in 2018-19. Net availability of Ethylene is set to rise to 6746 KT by 2018-19. Propylene capacity jumped to 5089 KT in 2016-17 with capacity additions at RIL Jamnagar, Baroda and Hazira and OPAL and BCPL Assam, while, production in 2016-17 too increased to 4701 and is further expected to touch 5187 KT in 2018-19.

Butadiene

Butadiene production remains limited in India and is not expected to change in the foreseeable future. Butadiene demand to improve as growth in the automotive sector is likely support robust domestic consumption of synthetic rubber, especially styrene-butadiene rubber (SBR) and polybutadiene rubber (PBR).

Styrene

The Indian Styrenics Market stood at 762 KT in 2016-17. The demand of Styrene has been continuously increasing in Indian plastics market from past few years. The end segment with high styrene consumption was automobiles, packaging, building and constructions, consumer products, medical devices and others. The market saw major investments in enhancing the production capacity of styrene, petrochemical, and downstream plastic processing industries, which helps to drive the strong growth of styrene in the region.

The strong dependency on imports due to the limited domestic production, global market prices, and currency fluctuations are the major constraints for the Indian Styrene Market. India's total imports for Styrene grew by 9.3% in 2016-17 and are projected to increase by ~5% and expected to reach 805 KT in 2017-18 and further to 845 KT in 2018-19.

EDC & VCM

Almost the entire production of EDC and VCM in India are consumed captively by the polymer manufacturers for production of PVC and hence, PVC manufacturers who do not have facilities for captive production of EDC and VCM have to rely entirely on imports to meet their demand for PVC building blocks viz. EDC and VCM.

EDC demand witnessed a flat growth of 0.6% in 2016-17 however it is expected to grow at 3% by 2018-19 and witness a pickup for demand to touch 817 KT. VCM too witnessed a dip from a staggering 8.3% in 2015 16 to 1.9% in 2016- 17. It is forecasted to grow 2.5% in next fiscal before once again witnessing a dip to 0.8% in 2018-19. In case of EDC imports are expected to rise in 2018-19 to 587 KT from 600 KT in 2016-17. Imports in case of VCM is expected to remain around same level as in 2016-17 i.e. 485 KT in coming next two years also.

Aromatics – Paraxylene

Reliance Industries Ltd (RIL) successfully commissioned the last crystallization train of its Para-xylene (PX) complex at Jamnagar. This plant is built with state-of-the-art crystallization technology from BP which is highly energy efficient. With the commissioning of this plant, RIL's PX capacity has more than doubled making it the world's second largest producer of PX with about 11% of global production.

PX import's stood at 1179 KT in 2016-17 and it is expected to fall to 800 KT in 2018-19. Meanwhile exports are expected to increase from 839 KT in 2016-17 to 1968 KT in 2017-18. Capacity addition from RIL will take up the existing capacity to 5786 KT by 2018-19. In 2016-17, PX registered a staggering double-digit growth of 17.4% and is expected to grow at around 18% in 2018-19 with lined upcoming capacities.

Acknowledgements

  • Chemical and Petrochemicals Association of India -CPMA

  • APIC-2018 India Country Report

  • ICIS

  • IHS- Markit

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