Mumbai: Reliance Industries Ltd’s (RIL) proposed $3 billion (Rs13,300 crore) petrochemicals cracker at Jamnagar and a joint venture being mulled with Dow Chemical Co. for its basic plastics and basic chemicals divisions is all set to change the core of India’s largest private sector firm from refining to petrochem.
Currently, the refining business contributes around 66% of RIL’s revenues and more than 51% of its operating profits while the petrochemicals business accounted for a tad less than a third of its earnings before interest and tax (EBIT) in the first nine months of the current fiscal.
With the previously proposed merger of Indian Petrochemicals Corp. Ltd (IPCL) into RIL, the contribution to EBIT from the petrochemicals business would go up to almost 50%.
Senior RIL officials, who didn’t want to be named, said talks with Dow Chemicals for a JV for basic chemicals and basic plastics businesses, which had annual sales of $5.56 and $11.83 billion, respectively, were still underway. “A deal could be completed in three months if both sides agree to the substantial points of the negotiations,” said one RIL official who did not want to be named.
A deal with Dow on a possible venture is bound to take time as the two divisions contributed almost 50.17% of Dow’s EBIT in 2006. At $2.02 billion, the basic plastics division was the single largest contributor to Dow’s EBIT for 2006. “Once the broad contours of the agreement are in place, we will select a mix of investment bankers whom we typically work with to advise us on structuring the transaction,” the official added.
The company is also said to be interested in teaming up with Nova Chemicals Corp., also of the US, though it was unclear as to exactly what the Indian company was hoping to do. Nova also owns a 29% stake in Methanex Corp., the world’s largest producer of methanol.
RIL’s moves to expand its petrochem business through organic and inorganic means are an attempt to catch up with its refining capacity. In the third quarter of the current fiscal, the company processed 7.89 million tonnes of crude, but produced only 4.09mt of petrochemicals.
India’s only Fortune Global 500 company, RIL wants to capture a larger share of the value chain, from processing the refined petroleum products into plastics such as polyethylene, polypropylene and polystyrene, or chemicals such as ethylene glycol.
“In financial year 2006, Reliance’s EBIT margins in the refining and marketing business were 8.3% as compared to 14.4% in the petrochemicals business,” said Abhinav Goel, associate director of Fitch Ratings India.
RIL is already the world’s seventh largest producer of polypropylene and the fifth largest producer of monoethylene glycol.
India currently has excess refining capacity, but thanks in part to high crude prices and a sophisticated refinery and technology, the company has enjoyed among the highest refining margins.
“In fiscal 2006, production of refined petroleum products at 124 million tonnes exceeded consumption in India by 12 million tonnes. The current installed capacity for crude oil refineries in India has now increased to 145 million tonnes,” said Goel.
Fitch forecasts that India will continue to have excess refining capacity thanks to RIL’s 29mt per annum (mtpa) Jamnagar refinery and an expansion of Essar’s Vadinar refinery by another three mtpa. The credit rating agency said that profitability of Indian refiners will be influenced by their ability to tap the export market and utilize product streams for manufacture of petrochemicals.
International rating agency Standard & Poor’s forecasts that global refining margins could fall in a couple of years thanks to meaningful supply from projects currently under consideration or construction.
RIL, India’s largest exporter in fiscal 2006, therefore wants to hedge itself against a potential oversupply scenario by creating captive demand for its refined output through a mega petrochemicals foray.
But there’s one more problem here. A recent Macquarie report forecasts global capacity increases in petrochemicals as well as lower margins and lower average capacity utilization rates.
This is where RIL’s global plan comes into the picture. “Reliance has always had an ambition of global scale capacities. They now want to be one of the largest global players too and have been proactive in analyzing global opportunities,” said Devinder Chawla, executive director at consultancy firm PricewaterhouseCoopers.
C.H. Unnikrishnan contributed to this story.