Project Report on Factors affecting the global and domestic petrochemical
industries
Dissertation Research Proposal on Factors affecting the global and domestic petrochemical
industries
Thesis Writing Help on Factors affecting the global and domestic petrochemical
industries
As the petrochemicals industry is
globally integrated, regional imbalances impact international prices. The Asian
region has greater number of naphtha-based crackers, while the Middle East and North American regions have a larger
number of gas-based crackers. Thus, the feedstock demand-supply situation
impacts the demand-supply scenario in these regions. Other factors affecting
the petrochemicals industry are economies of scale, operating rates,
cyclicality of the industry etc.
Key issues answered through this
analysis:
1.How is the petrochemicals
industry integrated globally?
2.What are the factors that
affect the global and domestic petrochemicals industries?
3.Who are the key players in the
global and domestic petrochemicals industries?
Industry characteristics
Global integration
Basic petrochemicals are largely
in liquid or gaseous form. However, intermediates and derivatives are mostly in
solid or liquid form. Hence, they can be easily transported over long
distances. The increasing use of specialised ships (cryogenic tankers, which
can carry liquids at low temperature and high pressure), has improved the
transportability of basic petrochemicals. As a result, competition has become
global without being restricted to specific geographical markets.
Large capacities have also
influenced the globalisation of the petrochemicals industry. In addition,
hydrocarbon feedstock is widely traded. While trade in ethylene and propylene
remains low due to difficulties in transportation, trade in polymers has been
increasing. The international trade in polymers is continuously increasing with
the commencement of new capacities in the Middle East.
Growth in consumption of petrochemicals is expected to be the highest in Asia
with both China and India being the
major growth drivers.
Given the petrochemicals
industry's global integration, regional demand-supply imbalances have an impact
on international prices. Hence, plant shutdowns, commencement of production at
new capacities and the seasonal demand in a region affect international prices.
For instance, in China,
which is a large consumer of petrochemicals, the demand for polymers is low
during the Lunar New Year holidays (around February). As a result,
international prices tend to drop in February owing to the decline in demand.
Similarly, the level of economic activity in developed countries such as the US and Japan affect global demand and
prices of petrochemicals. Slowdown in the developed economies in 2001 resulted
in a slump in global prices of petrochemicals. In 2006, prices and margins
increased due to large maintenance turnarounds and strong demand from China and the US. Moreover, the economic crisis
in the US
in 2008 adversely affected global demand and prices of petrochemicals. Demand
for all petrochemical products declined, while prices went to the 2005-06
levels. However, demand bounced back post the second half of 2009 on account of
a recovery in economic scenario in the global markets due to which prices
of petrochemicals also registered an
increase.
Meanwhile, domestic prices
remained highly volatile and cyclical as they are linked to landed costs.
Crude oil linkages
Around 50 per cent of the global
cracking capacity is based on naphtha, which is derived from crude oil. Hence,
the price and availability of crude oil affects the petrochemicals industry.
Crude oil prices are highly volatile, thereby imparting volatility to prices of
petrochemical products. Volatility is higher in the case of basic
petrochemicals and intermediates, as against polymers and downstream organic
chemicals given their close linkages with crude oil and lower trade of these
products.
Volatility in crude oil prices
affects the Asian petrochemicals industry significantly, as over 70 per cent of
the cracking capacity in this region is based on naphtha. However, in North America, nearly 65 per cent of the total cracking
capacity is based on natural gas. Prices of natural gas are less volatile,
relatively, as compared to those of crude oil and naphtha. As a result, when
naphtha prices increase, profitability of natural gas-based producers increases
as their feedstock cost remains relatively stable and product prices increase.
Similarly, profitability of natural gas-based producers decreases with a drop
in naphtha prices, as their feedstock cost remains relatively stable and
product prices fall (as naphtha is a by-product of refineries, prices of
naphtha are also linked to the operating rate of refineries). In late 2004, the
naphtha cracker economics turned favourable vis-a-vis gas cracker economics
owing to strong prices of by-products. Among the by-products, prices of
propylene, benzene and butadiene increased sharply.
The trend of petrochemicals
companies acquiring or merging with refining and oil exploration companies and
vice versa is attributed to the strong linkage of petrochemicals with crude
oil. In India,
Reliance Industries has backward integrated from petrochemicals to refining and
oil exploration. Similarly,the Indian Oil Corporation (IOC), which is into
crude oil exploration and refining, has entered the petrochemical sector by
building greenfield
projects. IOC's naphtha cracker and a petrochemical complex was commissioned in
May 2010.
Meanwhile, Oil and Natural Gas
Corporation (ONGC), engaged in the business of oil exploration, development of
oil fields, production of crude oil, and natural gas, has announced plans of
setting up an aromatics complex in Mangalore. Moreover, considering the higher
value addition from the secondary processing units (which yield propylene and benzene),
domestic refiners are also enhancing the yields of secondary processing units.
Economies of scale
The investment required per tonne
of capacity decreases as capacity increases. In addition, other costs (per
tonne of capacity) such as administration, logistics and marketing also
decrease with increasing capacity. Higher capacity also gives the producer more
bargaining power in the purchase of feedstock. As a result, larger players in
the petrochemical industry are more cost competitive than smaller players. In
the past, several small players either closed down or were acquired by larger
players due to lack of economies of scale. This trend is likely to continue, as
smaller players will find it increasingly difficult to compete with cost
competitive larger players. In India,
Reliance Industries Limited (RIL) acquired IPCL and consolidated its
petrochemical operations.
Over the past 3 decades, capacity
sizes have increased on account of increasing demand and the resolution of
technical problems that had restricted large capacities. The capacities of
newly commissioned crackers have increased to over 1.2 million tpa.Plant
operating rates critical to profitability
The petrochemical industry is
capital intensive, resulting in high interest and depreciation costs. Hence,
plants need to operate at high rates, in order to reduce the fixed cost per
unit of production. Higher operating rates reflect the demand for products and
hence, the bargaining power of producers increases over that of the consumer.
In case of petrochemicals, when the demand is adequate, the industry tends to
operate at a capacity utilisation rate of around 90-95 per cent. In such a
situation, the pricing power shifts from the consumer to the producer. In 2006,
the global operating rate for most petrochemicals was high and in the range of
90-95 per cent due to the tight demand-supply situation. However, in 2008 due
to weak demand on account of weak economic scenario in the global markets
operating rates fell to around 84-85 per cent thereby cracker margins also
declined sharply.
Operating rates for ethylene vary
across regions. In Eastern and Central Europe, operating rates are estimated to
have been lower in the past few years due to low demand growth, small and
inefficient capacities and significant competition from the Middle East and Asia. In North America,
operating rates were estimated to have decreased in 2011 to around 84 per cent on account of
slowdown in demand coupled with increase in capacities. Operating rates in the Middle East remained at around 80 per cent on account of
new capacity additions. The Middle East capacity additions are expected to
continue going ahead, hence, Middle East exports to Asia and Europe
are expected to increase. Despite the global slowdown, operating rates in Asia
remained higher when compared to other regions largely on account of demand
from key markets of China
and India.
Feedstock and product prices
Naphtha prices have become highly
volatile over the last few years, owing to increased volatility in crude oil
prices. Naphtha prices (c&f Japan) increased from $273 per tonne in 2000 to
around $724 per tonne in 2010; they increase by 30 per cent y-o-y to $930-940
per tonne in 2011 mainly on account of an increase in crude oil prices during
the year.
In many regions, availability of
feedstock (besides the relative economics of different feedstock) influences
the establishment of a plant. Some new crackers being planned have the
flexibility to use different feedstock. Diversity of feedstock could result in
price differences. Pricing policies of natural gas producing countries such as
the Middle East, Malaysia and Indonesia, could affect the competitiveness of
countries facing a shortage of natural gas, for example India.
Product pricing is complex, as a single
feedstock yields many co-products, prices of which are correlated. Moreover,
different feedstock can be used to produce the same product. In general, during
periods of low supply (in relation to demand), prices of petrochemical products
are based on the consumer's willingness or ability to pay. During periods of
oversupply, prices are based on the marginal cost of production.
Cyclicality
The petrochemical industry, like
most capital-intensive commodity industries, is cyclical in nature. Demand for
petrochemicals is linked to economic growth. Demand increases when economy is
strong; consequently, profitability of players increases, leading to capacity
additions by existing players and entry of new players. However, as it takes
3-4 years to build petrochemical plants, demand could decrease or stagnate
before completion of these capacities or capacity additions could exceed
demand. This could lead to a decrease in petrochemical prices causing the
industry to face a downturn and players reducing operating rates or shutting
down their plants.
Petrochemical prices reached a
high in 1995. As a result, large capacity expansions were undertaken in the
Asia-Pacific region. Despite the Asian economic crisis of 1997, there was a 70
per cent increase in Asian ethylene capacity during the period between 1998 and
2005, as a result of deployment by international companies attempting to secure
a production platform in Asia. These companies
included oil majors (ExxonMobil and Shell) and chemical majors (Dow), all of
which opted for greenfield
developments, rather than acquiring existing Asian plants. In 2004,
petrochemical prices and margins breached all time highs. Improvement in demand
for petrochemicals led to spurt in capacity expansion plans announced in the
Middle East, China
and other parts of the world. It is
estimated that about 45-50 per cent of the new capacity (in ethylene) is likely
to come from the Middle East; remaining
capacity expansion will come mainly from the other Asian region.
Fragmented and competitive
industry
The global petrochemicals
business is very competitive with a large number of petrochemical companies
having small market shares. In the case of most petrochemicals, the top 10
producers account for around 45 per cent of the total capacity. In addition,
the petrochemicals business is highly capital intensive, which acts as an entry
barrier for new players and small companies. Global petrochemical companies
compete largely in terms of cheap availability of feedstock, prices and the
ability to offer new and improved products (through innovations in product
applications), and on proximity to markets.
Industry structure
International market
The petrochemical industry is
devoid of any players dominating the market. Production capacities are distributed
across regions, no single region has a dominant position in the market.
In 2011, of the total ethylene
capacity of around 148 million tpa, the top 10 ethylene producers accounted for
over 45 per cent. Most of the ethylene capacity is concentrated in North
America, Western Europe and Asia. With the Middle East emerging as the lowest cost producer of
ethylene, the industry structure is changing in terms of the regional
distribution of capacity. In 2011, the total capacity for propylene was
estimated to be around 92-93 million tpa. Propylene production through the
refinery route accounts for a significant share of total propylene production.
Refining is the major source of aromatics, benzene-toluene-xylenes (BTX). The
change is likely to affect the structure of the aromatics industry. North
America and Western Europe are expected to emerge as net importers of benzene,
while Asia, largely the Middle East, is
expected to emerge as the largest net exporter of aromatics.
The industry is undergoing
consolidation, with polyolefin players merging due to increasing competition
from new integrated capacities being set up in the Middle
East. In the polymer industry, capacities for production are
distributed across regions. The industry is characterised by the absence of
market dominance by any one producer or a group of producers. The capacity
share of top 10-polyolefin producers is around 40-45 per cent of the global
capacity. The industry is moving towards consolidation. In polyolefins,
Lyondell-Basell continues to be the market leader with a production capacity of
over 10 million tonnes, mostly for PP. Dow/Union Carbide Union and Exxon Mobil
are other big players in the petrochemicals space, but with more balanced
portfolios across all polyolefins. The next tier of players has less than half
the capacity of leading companies, including companies as Ineos, Sinopec and
SABIC.
Similar to most petrochemicals,
no player has a very significant market share in PE. Dow Chemicals (along with
Union Carbide) and Exxon Mobil Corporation have the world's largest PE
capacities. In 2011, global PE capacity is estimated to be around 90-91 million
tpa.
World polyolefin capacity share
by regions
 |
| Source-CRISIL Research |
Note: Polyolefins include PE, PP,
PS and PVC
Source: Industry and CRIS
INFACAsia and North America are the largest producers of Polyolefins,
accounting for 45 per cent and 16 per cent of global polyolefins capacity in
2011,respectively.The share of Asia and middle east has continuously been
increasing over the past five years on account of huge capacity additions while
that of North America and Western Europe is decreasing mainly due to less
capacity additions coupled with closing of inefficient capacities.
Competition
The emergence of low-cost
producing regions for olefins, primarily in the Middle
East, is expected to result in a pressure on margins of other
players in the industry. Prices of ethylene depend largely on operating rates
in high-cost regions and on cost of incremental ethylene supply.
In the case of propylene and BTX,
competition comes from alternate methods of producing chemicals, primarily the
refinery route. The Middle East is expected to
emerge as the most competitive producer of most petrochemicals. As a result, a
shift is likely in the regional trading pattern with the Middle
East emerging as the largest producer of ethylene and
ethylene-based derivatives. However, in the case of feedstock like propylene, Asia is expected to remain a major player (in the medium
term).
Large PE manufacturers operate
mainly in mature markets. Therefore, competition is high and demand for their
products is low. Most players are setting up joint ventures in growing markets
of Asia and South America. Competition is in
terms of product differentiation, through the manufacture of specialty grades,
use of better product and process technology (such as metallocene catalysts)
and price.
Domestic market
Currently, the domestic
petrochemical industry is oligopolistic in nature with four to five large
producers. However, competition has been increasing gradually, with existing
producers expanding capacities and thus trying to eat into each others market
share. Earlier in 1980s and 1990s, domestic production of hydrocarbons
increased significantly, resulting in excess availability of naphtha. Many
derivatives of petrochemicals such as plastics were perceived as cost effective
and superior alternatives for conventional materials such as glass, wood and
metals. Synthetic fibers, which were perceived to be a luxury, became critical
to supplement cotton production. Low crude oil prices resulted in a decrease in
price of imported petrochemicals. As a result, demand for petrochemicals rose
significantly, many capacities were set up to meet increasing domestic demand.
These trends have defined the existing structure of the domestic petrochemicals
industry.
At present, Reliance Industries
dominate the industry. In the early 1990s, Reliance Industries commissioned
three downstream plants in the first phase of its cracker complex. It
commissioned its 750,000 tpa mother cracker and other downstream units in 1997
at Hazira, Gujarat. IPCL started three cracker
complexes - Baroda, Gujarat (set up in 1978, having an ethylene capacity of
130,000 tpa, subsequently increased to 175,000 tpa); Maharashtra Gas Cracker
Complex (MGCC) at Nagothane (set up in 1990, having an ethylene capacity of
300,000 tpa, subsequently increased to 400,000 tpa); and Gandhar, Gujarat (set
up in early 2000, having an ethylene capacity of 300,000 tpa, subsequently
increased to 400,000 tpa). Competition has increased with the commissioning of
new capacities by Gas Authority of India Limited (GAIL) and Haldia
Petrochemicals. In April 1999, GAIL set up a 300,000 tpa cracker at Auriya,
Uttar Pradesh, as a part of its forward integration plan. The capacity has been
subsequently increased to 440,000 tpa. In April 2000, Haldia Petrochemicals set
up its 420,000 tpa cracker at Mednipur, West Bengal
(the capacity was subsequently increased to 520,000 tpa). Recently, in May 2010
Indian Oil Corporation Limited (IOCL) commenced operations of its 800,000 tpa
ethylene capacity, thus further intensifying competition in the domestic
market. Moreover, with entry of new players like Indian Oil Corporation (IOC)
(which has already entered in 2010) and ONGC Petro-additions Ltd (OPaL) (which
is expected to come on stream in 2014-15), competition is slated to increase
further.
Domestic ethylene capacity share
 |
| Source-CRISIL Research |
Domestic polyolefin capacity
share (2011-12)
Reliance Petroleum has merged
with RIL, making the latter an integrated player in the petrochemical industry.
RIL has strengthened its position as a dominant player in the domestic
petrochemicals market (especially in PP) with the takeover of IPCL (in 2006-07).
Further with the commencement of a 900 kt PP unit in Jamnagar in 2009-10, share of RIL in the
total domestic PP market further
increased .
In India, RIL dominates the polyolefin
industry; it became the dominant player in the domestic market after the
takeover of IPCL. Together they have a production share of around 67 per cent.
RIL's total polyolefin capacity is 4.37
million tpa as of March 2012. Another major player in the polymer market is
Haldia Petrochemicals with a current capacity of 1.04 million tpa. However,
Haldia Petrochemicals faces locational disadvantages since its complex is
situated in East India, which along with South India
accounts for smaller portion of the total polymer demand.
Competition
Until the early 1990s, domestic
competition was limited due to high tariffs, a favourable demand-supply
situation and a high concentration ratio. In the late 1990s, competition
increased due to the gradual lowering of tariff barriers. Competition also
increased significantly with the commissioning of cracker complexes by RIL
(1997), GAIL (1999), IPCL (1999), and Haldia Petrochemicals (2000).
In the 1990s, competition in the
domestic market increased due to a rise in imports. In recent years,
competition has grown significantly due to new capacities set up in the Middle
East and Singapore.
Earlier, high customs duties effectively protected most domestic producers.
Tariff levels have gradually fallen over the past decade. At present, domestic
prices are closely linked to global prices (landed costs). As a result,
domestic producers have limited flexibility in pricing their products.
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