The Indian petrochemical industry is in a nascent stage with nearly 70% of the production capacity being controlled by Reliance Industries and its subsidiary IPCL. Although in a surplus situation, demand is likely to pick up since the per capita consumption stands at a paltry 4Kgs as compared to the global average of 24 Kgs.

With this background, there is immense potential for capacity addition in the country. Read more

Budget Measures Excise duty on LNG (liquefied natural gas) has been exempted. Countervailing duty exemption to continue. Excise duty on Polyester Fibre yarn to continue at 16%.  Budget Impact Exemption of excise duty on LNG is a major positive for the petrochemicals companies as major capacities use natural gas as the main feedstock. This shall largely help in reducing the operating cost. The 2% educational cess shall have a marginal negative impact on the companies.  Sector Outlook The petrochemical cycle is currently witnessing an uptrend and with the exemption of excise duties on LNG, the companies are likely to witness a further spurt in operating margins. However, since all the capacities do not use natural gas as feedstock, the benefits are largely company specific. Further, with the entry of mammoths such as IOC and ONGC in the petrochemicals business, the sector is likely to witness intense competition. However, with per capita consumption being one of the lowest, there enough scope for the companies to grow.  Industry Wish List No further reduction in customs duties as the Indian domestic industry shall lose its protection against imports. Currently duty on polymers has been reduced to 20%. Import duty on naphtha to be reduced as naphtha is a major feedstock being utilized by the refineries. Improved supply sources of natural gas as it is a cheaper source of feedstock and is currently in deficit. Since new capacities are being added, natural gas supply has to improve. Categorize natural gas as a declared good as the current levies do take away some benefits from switching over from other fuels to natural gas. The reduction in natural gas levies shall make the industry more competitive in the global arena.  Budget over the years Budget 2001-02 Budget 2002-03 Budget 2003-04 Import duty on fibre intermediates rationalised. Import duty on DMT, PTA MEG and caprolactum reduced to 20% Import duty on polyester chips reduced to 25% Special Excise duty (SED) of 16% abolished on most products except PFY, which continues to attract SED. Peak rate of excise duty reduced to 30% from 35%. Reduction in basic customs duty to 25% Reduction in excise duty on select petrochemical products. Basic excise duty on PFY and other yarns reduced to 20% from 25%.
Key Positives With IOC and ONGC setting up petrochemical plants in the next few years, high competition is likely to check prices of petrochemical products. Since domestic per capita consumption is very low as compared to global standards, there is enormous scope for new entrants to establish themselves. The polymers industry demand growth in the past has been at double digits and the prospect of the sector is positive in the foreseeable future with the prices just in the peak of their cyclical nature.		Key Negatives Declining tariffs has resulted in lower prices adversely impacting margins. With the demand for products still being below expectations, growth prospects remain weak in the short term. The recent increase in cost of crude to USD 33 per barrel levels resulted in increased prices of feedstock (since naphtha is a refinery product). This has impacted margins of the industry to an extent. Any further reduction in the customs will result in further pressure on prices and consequently margins. Demand potential being so high, the domestic market is an attractive destination for global majors such as Exxon Mobil and Dow Chemicals. This shall be a major setback for the domestic players as they are smaller in size compared to these global majors.

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