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August 23, 2018

CRISIL Research Sector Round-up: Petrochemicals: Capacity additions can bridge demand-supply gap

Prices set to tango with crude oil and feedstock prices; margins to remain healthy

CRISIL Research expects domestic demand for petrochemicals, to grow at a compounded annual rate (CAGR) of 8-9% between fiscals 2018 and 2023. Demand grew ~8.5% on-year in fiscal 2018, owing to healthy offtake from end-use segments. Long term demand will remain robust from major consumer segments such as packaging, automobiles, consumer durables, construction, and irrigation. Demand growth could also arise from continued substitution of metal pipes with plastic pipes, and glass and metal containers with plastic containers. Increasing use of plastics for packaging due to its superior quality and cost-effectiveness will also contribute. Domestic petrochemicals capacity, however, may not keep pace. It is expected to expand at 4-5% CAGR between fiscals 2018 and 2023, vis-à-vis 8-9% demand growth.

 

India is a net importer of most polymers. In fact, import dependency for polyethylene (PE) and polyvinyl chloride (PVC) was 37% and 55%, respectively, in fiscal 2018. This provides enormous opportunity for players to expand existing and add new capacities. In the past, scope for polymer capacity addition was constrained by the unavailability of feedstock olefins, owing to lack of sufficient cracker capacity. Cracker capacity addition has challenges, such as high capital cost and cost competitiveness.

 

However, we see this situation gradually changing. Domestic players are recognising the demand-supply mismatch, and adding cracker capacities. Investments in dual feed crackers provide players with flexibility to switch between feedstocks. For instance, in times of rising crude oil prices, and consequently, naphtha prices, players with dual feed crackers are better positioned to offset the risk of volatile raw material costs, by increasing the proportion of gas as a feedstock. This also helps players maintain, or even possibly, improve margins.

 

Another emerging trend is the integration of refineries with downstream petrochemical units. With high severity fluid catalytic cracking (HS-FCC), refineries are increasing the slate (or proportion) of propylene to address the downstream demand-supply mismatch.

 

CRISIL Research expects crude oil prices to flare up further in 2018 to range between $68-73/bbl (25-30% on-year increase). Naphtha prices will rise at a similar pace. Consequently, global petrochemicals prices are set to rise in 2018, following uptick in feedstock prices. In fact, in the first half of 2018, petrochemical prices (except butadiene) have already climbed, given high crude oil and naphtha prices.

 

However, ethylene prices are expected to strengthen only 10-14%. The rise in ethane capacity in the US will arrest the sharp rise in ethylene prices. With capacity addition expanding ~5% on-year against 3-4% demand growth, we expect ethylene prices to range between $1,260-1,310 per tonne in 2018. On the other hand, ethylene cash cost is expected to spurt 40-45% on-year, on account of steeper rise in naphtha prices. Consequently, we expect cracker margins to contract in 2018 and range between $570-590 per tonne. This is because the increase in ethylene cash cost is expected to outpace the rise in ethylene prices. This figure, however, remains above the 5-year average of $400 per tonne.