Petrochem consolidations round the bend

The petrochemical industry may see a phase of consolidation in the face of major capacity expansion coming up in West Asia, China and India, and an impending downturn in the industry in the next couple of years, according to analysts.

The industry saw its last slump in 2000-01. That was when India’s largest petrochemical company became larger by acquiring cash-strapped medium-sized companies such as Raymond Synthetics, of the Raymond group, JK Corporation’s Orissa Synthetics, and the RPG group’s India Polyfibres.

“Historically, the industry has been cyclical in nature, and we could see a downturn in 2008-09, which will last till 2013-14,” said Kumar Manish, associate director, KPMG, a global advisory firm. “It is likely to lead to another round of consolidation in the industry with the bigger companies buying out the medium-sized ones.”

Some of the medium-sized companies include Chemplast Sanmar, BASF, Century Textiles and Garware Polyester, among others.

“Smaller companies may prove interesting for the Chinese and West Asian companies as it will give them critical mass,” another Mumbai-based analyst said.

An official at GAIL, another prominent petrochemical company, said it was not yet looking at acquisitions, but at organic growth.

Large capacity for manufacturing petrochemicals, such as purified terephthalic acid (PTA) and polyester staple fibre (PSL), is being added in West Asia, where feedstock such as gas and naphtha are available, and in China and India, where the markets are large and growing.

“Right now margins are certainly above average,” Manish said. High margins are attracting people to set up small petrochemical manufacturing units. During the expected squeeze, margins could decline by as much as 100 per cent.

Haldia Petrochemicals, one of the four large petrochemical companies in the country, is putting off expanding its naphtha cracker plant.

Instead, it is planning to manufacture high-value products such as styrene and butadiene in the short to medium term, to boost its bottomline.

The country, currently, imports most of styrene and butadiene products, and manufacturing these domestically would help Haldia Petrochemicals tide over the impending downturn, Haldia Managing Director Swapan Bhowmik said in Kolkata on Monday.

Haldia Petrochemicals is also strategically located next to Indian Oil Corporation’s (IOC) refinery in the area. It can use feedstock such as naphtha for its plant.

“Only companies which have integrated refineries and petrochemicals units can optimise profits. Standalone smaller companies may not be able to pass on the adverse impact of slack demand to customers,” KPMG’s Manish said.

The government is attempting to integrate petrochemical units with refineries by promoting petroleum, chemicals and petrochemicals investment regions (PCPIRs) in the country. These regions are being planned as investment hubs for the industry.