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Business News/ Companies / News/  RIL prepares to tap anticipated rise in demand for petrochem products
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RIL prepares to tap anticipated rise in demand for petrochem products

Demand for ethylene, polymers, benzene, purified terephthalic acid expected to pick up from fiscal 2016 and peak in fiscal 2017

RIL has petrochemical manufacturing units at 12 locations across India which together produce up to 15.5 million tonnes per annum (mtpa) of various petrochemical products and their derivatives. Premium
RIL has petrochemical manufacturing units at 12 locations across India which together produce up to 15.5 million tonnes per annum (mtpa) of various petrochemical products and their derivatives.

Reliance Industries Ltd (RIL), India’s largest company by revenue, will be ready with a much bigger basket of petrochemical products when customer demand increases in fiscal 2017, the company indicated during a recent interaction.

The downward trend of demand for RIL’s products such as ethylene, polymers, benzene and purified terephthalic acid is bottoming out and is expected to pick up from fiscal 2016 and peak in fiscal 2017, when the company completes an $8-billion project to expand overall capacity by 66%.

This is expected to give a major fillip to the firm’s petrochemical profitability and margins which have languished in single digits in the last five years, analysts said.

Alok Agarwal, chief financial officer, RIL, said among the various petrochemicals, ethylene has already started picking up and expectations are that it will get better and better.

“There is a general feeling that paraxylene will also see an upcyle from 2015 onwards and that will roughly coincide with our own capacity coming up," he said while talking about the company’s petrochemical expansion plans.

Agarwal said with most of the petrochemical expansion of the company getting completed by March 2016, the company does not see any real threat to margins, as despite the upcycle in the demand, no major capacities are coming up before the end of the next two years.

Dhaval Joshi, analyst with brokerage Emkay Global Financial Services Ltd, said that a recovery in petrochemicals is not far off. “With its ongoing mega petrochemical expansions coming closer to completion, RIL would enjoy the advantage of a cycle upturn," said Dhaval Joshi, analyst with brokerage Emkay Global Financial Services Ltd.

Thanks to the timing of the expansion, RIL’s operating profit from the petrochemicals business could go up by over 80% between fiscal 2013 and fiscal 2017, he added.

RIL has petrochemical manufacturing units at 12 locations across India which together produce up to 15.5 million tonnes per annum (mtpa) of various petrochemical products and their derivatives.

Major items on RIL’s menu of 20-odd petrochemicals include ethylene, polyethylene or polythene (PE), paraxylene (PX) and purified terephthalic acid (PTA).

The expansion, which will be completed in a staggered manner, will make the firm one of the global top five manufacturers of most of these products, as per production numbers in various analyst reports.

International brokerage firm CLSA Ltd in a May report said that after the expansion, RIL will become the world’s second-biggest PX manufacturer, third-biggest in PTA and fifth-biggest in several other categories such as mono-ethylene glycol and polypropylene.

These products are mainly used to manufacture plastics, paints, coatings, adhesives, inks and textiles.

Ashish Jagnani, analyst with brokerage UBS Securities India Pvt. Ltd, in a report released on 23 June, said that the expansion will push RIL’s compound annual growth rate of operating profit from 2% between fiscal 2010 and 2013 to 17% between fiscal 2014 and 2018.

Also, domestic demand for PE and its variants called LDPE (low density) and HDPE (high density)—among the most important petrochemical products commonly known as polyethene—is expected to swell, giving RIL the vantage point to capture demand. These are part of the polymer group of petrochemicals, which are high-growth products in developing countries.

Mahinder Singh, secretary general of Chemicals and Petrochemicals Manufacturers’ Association, India (CPMAI), said: “The outlook is very robust. With the new government at the helm and the budget offering some sops for petrochemicals, we expect the demand, the petrochemical cycle to go up soon."

The budget has proposed a reduction of the basic customs duty on ethane, propane, ethylene, propylene, butadiene and ortho-xylene from 5% to 2.5%. It also proposed to exempt various other niche petrochemical products from basic customs duty to boost domestic manufacturing.

“India’s PE demand will likely increase 129% from 2013 through 2023, far surpassing Asia’s projected growth rate of 81% and China’s 87% for the period. On a metric tonnes (mt) basis, that means overall PE demand in India is projected to climb to 8.2 million by 2023, up from 3.6 million in 2013," said a quarterly note by energy research firm Platts in March-end.

Aiming to tap this demand, RIL’s Jamnagar petrochemical complex is expanding LDPE and HDPE capacity by 211% and 69%, respectively. Both are expected to be complete by fiscal 2017.

Polymer demand is expected to see a healthy growth of 7.8% in 2014-15 and 9.2% in 2015-16 and over 8% in 2016-17, said CPMAI in a presentation in May. It also said that while many firms are setting up polymer capacities, it is RIL which is setting up the biggest facilities to cater to the demand.

Similarly, Asian demand for ethylene, an intermediate petrochemical product obtained by breaking down naphtha, is expected to grow by 37% from 46mtpa in 2012 to 63mtpa in 2017. Worldwide demand is also expected to grow by over 20% during the same period, according to a report by Emkay Global Financial Services.

CLSA said in its May note that given the expected upturn in petrochemical cycle due to various global factors, RIL can see a moderate $15/tonne rise in blended petrochemical margin to $400/tonne in fiscal 2017, after seeing flat margins through fiscal 2013 to 2016.

The company‘s annual report released in May had said: “With the economy and consumption being at the bottom of the down-cycle, RIL start-ups (new petrochem projects) would be ideally placed at a time when demand would emerge."

There are words of caution too.

“Everything is not as good as it seems. A lot depends on the demand of China. With the Chinese manufacturing data still not showing signs of improvement, there are chances that the upward trend of petrochemical cycle and the subsequent margins could be delayed," cautioned Soumyadeep Raha, analyst with brokerage Microsec Capital Ltd.

He said, with RIL having invested almost $14 billion in its downstream—petrochem and refining business—a delay in an uptick in demand could be detrimental for its earnings two years from now as an upcycle is largely dependent on the demand from China which has not been very encouraging with its predictions so far.

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Published: 22 Jul 2014, 11:43 PM IST
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