Catching the Asia Petrochemical Boom – a Polyolefin Perspective

7/21/2019 Catching the Asia Petrochemical Boom a Polyolefin Perspective

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PETROTECH 200911 - 15 JANUARY 2009, NEW DELHI, INDIA

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CATCHING THE ASIA PETROCHEMICAL BOOM APOLYOLEFIN PERSPECTIVE

R V Prabhu and George MathewIndian Oil Corporation Limited, Indian Oil Bhavan, 8 th Floor, 1 Aurobindo Marg, Yusuf Sarai,New Delhi 110016, IndiaEmail: [email protected]

ABSTRACT

This paper attempts to highlight the paradigm shift from West to East likely in the Petrochemicalsbusiness with the Middle East emerging as global production hub with natural advantages of lowcost feedstock. Major consumption centers shifting to Asia given the rapid growth in demand inChina on account of chemical intensive and export driven industry & India emerging as globalconsumption centers. This would see shake up of global petrochemical industry with emergenceof National Chemicals and Oil Companies as global players and established western companieshaving to exit or shrink unless they realign by moving eastwards through partnerships or strategicalliances to be near the consumption centers to catch up with Asia Petrochemical boom.

A. Introduction:

The focus would be on the Polyolefins segment considering that IndianOil is investing in aNaphtha cracker project and a downstream polyolefin complex at Panipat near New Delhi.

It would be hard for us to imagine, but;

It was only in the last decade that the World Trade Organization was inaugurated It was only in the last decade that DVDs were introduced; and the first cloned animals

produced. Remember Dolly, the sheep? And how many millions of people have used MSWindows?

The great astronomer Carl Sagan said: You have to know the past to understand the present. Itwas John Sladek, the American Science Fiction Author who took the idea a step further, in one ofhis works, he said: The future will be exactly like the past, only far more expensive.

The winds of change are sweeping through the polyolefin industry also. The gravity of thepolyolefin world is shifting eastwards. Asia is the new demand center and the Middle East thenew production hub. Companies that want to stay in the business are looking to move andtransform before their entire economic rationale is swept from under their feet.

USA's share of global trading in ethylene derivatives has fallen to less than 10 per cent todayfrom 30 per cent in the 1990s, and it will probably be less than 5 per cent by 2010. Over the sameperiod, the Middle East is likely to increase its share to more than half of the globally tradedvolume.

Western petrochemical players are under increasing pressure given disadvantages in feedstock,poor improvement in productivity, expensive workforces and subscale assets. As the gapbetween price and cost diminishes, they have a hard time coping. Add to this the demand growthcenter shifting eastwards and the net result is that petrochemical plants in the US and Europe arebecoming less competitive as compared to those in the Middle East and Asia.


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B. Evolut ion of the Polyolefin Industry Emergence of Asian Demand:

In the last 10 years the Polyolefin industry has evolved. The producers and suppliers to theindustry have changed. Some have disappeared, while others have entered the field. Thetraditional Markets are turning topsy turvy. Asia is expected to rapidly catch up with the US

and Europe in demand levels for petchems. In fact Asian demand is expected to achievethe same levels with the two regions combined by 2010. (Table 1).

Table 1

Polyolefin Demand 2007 MMTAIndia China Asia World % Asia/World

LDPE 0.267 4.27 6.1 18.7 33%LLDPE 1 4.97 7.1 19.3 37%HDPE 1.1 7.07 10.1 30.3 33%PP 1.7 12.81 18.3 43.5 42%Total 4.067 29.12 41.6 111.8 37%

Polyolefin Demand 2010 MMTAIndia China Asia World % Asia/World

LDPE 0.30 5.00 6.50 19.50 33%LLDPE 1.64 8.17 10.80 21.09 51%HDPE 1.81 11.62 15.36 33.11 46%PP 2.79 21.05 27.83 47.53 59%Total 6.54 45.83 60.49 121.23 50%

The traditional, international, major Western companies have been joined by national chemicaland oil companies and by growing regional companies in China and India, and by financialinvestors, all of who have made their presence felt. In the future, more of the same changes can

be expected. The major international chemical companies such as Shell, Exxon Mobil and Dowhave a long history and, therefore, a head start. But the tremendous rate of new crackerinvestments in Asia and the Middle East means that Middle East and Asian entities will quicklycatch up over the next decade. We can expect a real shuffling of the ranking by capacity.Currently, the difference in capacity of the top companies is not huge, but the national companiesare effectively leveraging their positions of direct access to feed stock and resources.

The trend is the growing significance of national chemical companies and national oil companies.Ten years ago, these companies made up only about 11 percent of the global total inPetrochemicals. Today their portion has increased to about 17 percent and is expected toincrease to reach 25% of total capacity in 2020.

Most of these national companies are either in natural resource-rich regions such as the MiddleEast, or in high-demand countries such as China or India. This is largely due to availability ofcrude oil and natural gas in Middle East and the developing markets in Asia which has a largepopulation base. Among the countries in Asia, China and India have emerged as the dominanteconomies. China started as a major consumer by establishing the downstream processingindustry by importing petrochemical raw materials. After capturing a fair share of the globalmarket, China started focusing on upstream cracker investments to increase their raw materialand intermediate security. China has already established a globally competitive downstreamprocessing industry which is growing still further. Middle East, due to feedstock advantage, is fastemerging as the petrochemical production hub for the world largely aimed at the emergingmarkets in Asia.


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India should therefore utilize the emerging potential in Asia and increase the investments inpetrochemicals for a sustained development in the sector. The domestic strengths are in highlyqualified and technically trained manpower, transparent policy framework, legal framework,competitive labor costs, etc. India should use this opportunity to accelerate growth and attractinvestments in the petrochemicals sector.

There are no doubt hurdles existing in India for growth in this segment, hurdles in the form ofinfrastructure (power, roads, ports, warehousing, transportation), Tax structure, regulatorybottlenecks etc., but these should be surmounted by way of affirmative action from both theGovernment and the investors.

Historically, Petrochemicals have a positive linkage with the growth in GDP i.e. Petrochemicalgrowth can be linked at around 1.5 times the GDP growth. Considering that Indias GDP isexpected to grow at between 7 9%, we could assume a growth in the Petrochemical sector atbetween 10-15%. It is this Vision coupled with the availability of feedstock which has promptedIndianOil to enter the Petrochemical Bandwagon.

China and India therefore are set to emerge as the new Global Consumption Centers forPolyolefins.

C. Evolut ion of the Polyolefin Indust ry Middle East The New GlobalProduction Hub:

The Middle East, (read the GCC countries) has attracted huge investments in world scalepolyolefin plants. This is no doubt driven by the low cost feedstock available there and targeted atthe market in China and India since demand for polyolefins in GCC countries is only a fraction ofthe capacity being established.

The current polyolefin capacities in the Middle East are around 12% of the world capacity whichare slated to grow to around 25% by 2010. (Chart 1).

Chart 1

Middle East Share of Global PO Capacity

0

5

10

15

20

25

30

35

LDPE LLDPE HDPE PP

% o

f G l o b a l C a p a c

i t y

Current 2010

The rampant capacity growth is no doubt driven by the Feedstock cost advantage that the GCCcountries offer. Price of Ethane, which is the predominant feedstock in GCC countries, rangebetween US $ 0.75 2.0/mmbtu, whereas prices in other parts of the world range between $ 9-12per mmbtu.


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A recent Jacobs Consultancy study has pointed out that the cost of production of ethylene inSaudi Arabia (based on ethane) is only $ 100/MT as against $ 1200/MT in South Korea.

Similarly a Sagia analysis of CMAI data for 2007 shows that for HDPE delivered from GCCcountries to Europe costs only $ 475/MT, whereas just the cash cost of a EU producer is as high

as $ 920/MT. (Chart 2).

Chart 2

The rationale of low feedstock costs has led to a massive ethylene capacity build up in the MiddleEast whereas the rationale of being a Consumption center has led to a substantial capacity buildup in China also. India also sees substantial capacity addition in 2010- 2011. (Chart 3).

Chart 3

The massive ethylene capacity build up would no doubt translate into equivalent Ethylenederivative capacities also. This has led to a shake-up in the global petrochemical industry with


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established western companies exiting, shrinking or moving eastwards especially to Middle Eastor China through partnerships with local partners especially National Oil Companies.

D. Evolution of the Polyolefin Industry Emergence of New Asian/MiddleEastern Giants:

The combined factors of cheap feedstock in the middle east and consumption growth in Asia hasspawned a group of Asian & Middle Eastern Giants like Reliance Industries, SABIC, Hyundai,Samsung, Honam, Bourouge, Sinopec and its JVs and subsidiaries, Secco, Titan , TPC etc. It isthis group of giants that IndianOil is hoping to join in the near future.

The Projected petrochemical trade growth is over 100 per cent in net trade from Middle East toEast Asia by 2010, with China and India accounting for a major part of the increase. Thus majorcapacity additions are taking place where the Feedstock is available (Middle East) at low cost orwhere there is a market (China, India, South East Asia).

In summary, to achieve a fair measure of success in the polyolefin industry a producer has to beeither close to the feedstock or to the Consumption Centers or an optimized via media betweenboth. Minimizing Logistics costs, both of feedstock and product deliveries are the buzzword of thefuture.

E. Polyolefins An Indian Perspective

India is projected to emerge as one of the top five economies in the world by 2025. Indias rapideconomic growth in the last few years has spurred demand for a wide range of petrochemicals.Consumption of key petrochemicals such as polymers are projected to show double-digit growthsupported by Indias vast middle class that is seeing rising income levels and changing life styles.

An attempt is being made to analyze the Indian poly-olefin industry over the immediate future.

Polypropylene demand in India is currently around 1.8 MMT and slated to grow at a CAGR ofaround 13% for the next five years and 10% thereafter. PP is the polyolefin in greatest demand inIndia accounting for over 40% of the total PO market. Considering strong intrinsic growth in theBiaxially Oriented Polypropylene (BOPP) film (several new units are being commissioned) andRaffia segments coupled with new capacities of around 1.5 MMT coming on stream in 2009 &2010 we should see the polypropylene segment performing strongly in India. India is already anet exporter of around 0.2 MMT of PP and the new capacities coming on stream would seeexports increasing to around 0.45 MMT levels coupled with the operating rates going down toaround 85% from the current 95%.

LDPE demand in India is currently estimated at 0.27 MMTPA. Around 75% of the demand is forfilm and sheet applications such as packaging and plastic bags whereas a majority of the balancegoes into raffia lamination. LDPE would continue to be substituted by LLDPE in the future and asa result LDPE is expected to grow at only around 2% per year in the next five years, probablystagnating thereafter. There are no LDPE capacity additions planned for India since the volumegrowth forecast would be too less to justify a new world scale LDPE facility.

LLDPE demand in India is currently estimated at 1 MMTPA and 70% of the demand is for filmand sheet. LLDPE is also the most commonly used polymer for rotomoulding of water tanks andintermediate bulk carriers. LLDPE is expected to grow at around 15% per year on the back ofstring growth in film and sheet sector combined with equally strong demand growth inapplications such as water tanks, automobile components and toys.


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HDPE demand in India is currently estimated at 1.1 MMTPA. The market is varied with 23% ofthe demand for film and sheet whereas injection and blow moulding applications each account for19%. Raffia is also a significant application for HDPE in India. HDPE pipes although currentlyaccounting for only 12% of the markets is slated for huge growth on the back of theagriculture/irrigation and construction sector. HDPE also is estimated to record a healthy growthof around 12 % in India. India is expected to become a net importer of HDPE as the domestic

demand growth exceeds new HDPE capacity additions.

The projections as mentioned will result in an investment potential of US $ 8 Billion in upstreamcracker complexes and polymer plants and about US $ 6 billion in the downstream plasticprocessing sector which speaks much about Indias potential in the polyolefin segment.

F. Industry Drivers

Petrochemical Industry is driven by the following factors:

The Demand side is influenced by US demand and China demand. This reflects in theGDP, based on the elasticity the demand growth is effected.

On the supply side mergers and acquisitions, new investments, turnarounds anddisruption are the key factors affecting supply.

The prices are influenced by the crude price which in turn depends on world economy,Geopolitical situation, demand & supply, weather and future markets.

The petrochemical prices are influenced by the Crude oil price and the operating rates ofthe plants.

Petrochemical products follow a cyclic upswing and the downturns. In the pastpetrochemicals have sparkled through several cycles and challenges The factors whichinfluence the petrochemical cycles are Technology, market, capital cost, capacity buildups, oil price shocks, operating costs maturity of markets, feedstock availability, scale of

operation, integration through mergers and accusations, location of the project,innovations, capital infusion, responsible care, environmental concerns and publicperception.

G. Hurdles to Asias Market Potential

Several economic, political, infrastructure, environmental, regulatory and petrochemical feedstockhurdles weigh down the market potential of Asia in general and India in particular. These are:

1. Technology Up-gradation2. Rationalization of indirect taxes, duty structures3. Compliance of quality standards.4. Regulatory frame work

5. Creation / Up-gradation of existing plastic clusters / dedicated Plastic Parks with qualityinfrastructure.6. Human resource development7. Plastic waste Management and recycling8. Feed stocks Availability and Pricing9. Infrastructure PCPIR, Cluster formation, dedicated plastic parks, roads, ports,

warehouses etc.

H. Imperatives for Growth

Government would need to deal with, among others, the following


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issues:

Ensure macro economic stability including containment of core inflation. Ensuring cost competitiveness and stimulating domestic demand. Strengthening education and skill building. Investing in innovations & technology. Enabling speedy development of infrastructure. Providing right market framework and regulatory environment to reduce transaction

costs. Ensuring effective coordination between Central, State and Local levels. Creating a standing mechanism for resolving manufacturing policy issues. Enabling Small & Medium Enterprises (SMEs) to achieve competitiveness. Enabling Public Sector Enterprises (PSEs) to meet competitive market conditions.

Industry needs to deal with the following challenges:

Investing in R & D and Technology. Showing a continuing commitment to skills development & knowledge enhancement. Adopting global standards and benchmarking their performance against the best in the

class. Adopting best manufacturing practices & production techniques, Increasing scale of operations and delivering on globally acceptable quality levels.

I. Conclusions

1. The epicenter of the Petrochemical Industry in general has shifted from West of Suezto East of Suez.

2. The Middle East is the new Production Hub for Polyolefins3. Asia especially China and India are the new Consumption Centers for Polyolefins4. Middle Eastern Plants have advantages of cheap feedstock and are therefore hugely

cost competitive as compared to their Western Counterparts.5. Future Polyolefin plants need to be close to either Feedstock hubs or Consumption

centers in order to survive.6. India is witnessing a healthy growth in the Polyolefin segment resulting in an

investment potential of US $ 8 billion in upstream cracker complexes and polymerplants and US $ 6 Billion in the downstream plastic processing sector.

7. There are several hurdles to Asias market potential which need to be addressed byboth Government and Industry by way of affirmative action.

References:

1. Report on Working Group on Chemicals and Petrochemicals, 11 th Five Year Plan.2. ICIS Website, Plants & Projects3. Jacobs Consultancy Reports4. Sagia Analysis of CMAI Data5. CMAI Market Study for IOCL

The authors wish to Thank Ms. Malini Hariharan, Country Manager, ICIS for her valuable inputsand guidance.

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Catching the Asia Petrochemical Boom – a Polyolefin Perspective