The petrochemicals growth challenge
New Delhi   09-Jun-2010

B. M. Bansal

The availability of new hydrocarbon resources in India has spurred the demand for petrochemicals in the country and spawned an industry that is based largely on captive and low-cost feedstock. There is no denying that opportunities in the petrochemicals business must be capitalised upon for growth.

Today, the petrochemical industry is driven by size and cutting-edge technology. In the current competitive environment, small-sized plants make no sense.

Feedstock selection

Technology, particularly process technology, also has a key role to play in both the new and existing assets by lowering production costs and improving quality. Supply chain management is another important factor to make any such venture successful. The moot point is: Is infrastructure in place to optimise logistics? Are the risks factored in to manage and make solutions? To evaluate the inputs for successful petrochemicals platforms, we should look at how the competitive environment is changing and its implications on the global industry.

Worldwide, competitiveness is determined by feedstock cost and availability. Rising feedstock costs of naphtha-based petrochemical plants considerably reduces their competitiveness.

In the situation of crude oil prices strengthening, the cost advantage of Middle Eastern producers which have access to low cost feedstock widens. At the same time, margins are supported by a tight supply-side, as cracker outages restrict supplies of olefin feedstocks required for production of derivatives.

The rising cost of crude oil prices in a demand-constrained environment has made feedstock selection vital for competitiveness. Meanwhile, the spread in the price of alternative petrochemical feedstock costs has also widened considerably. In addition to the above factors, proximity to markets helps in ensuring cost-efficiency and competitiveness of the entire value-chain. Integration is a key element of any downstream strategy, which gives fully integrated players a competitive edge. Maximum value in integration comes from directing hydrocarbons to the highest value application.

Challenging period

Over the past year, the petrochemical industry worldwide has faced one of the most challenging periods. The combined effects of the economic slowdown and a cyclical industry posed major challenges. The supply-side continued to lengthen as new cracker and derivative capacity came on stream.

Despite the fragile demand in the US markets, petrochemical markets were largely kept tight last year with a shortage of olefins constraining production of derivatives.

With constrained demand, the long-term outlook for growth is still bright. The new growth outlook sees major markets contracting; however, the GDP is expected to grow as industries rebuild inventories and confidence returns. In fact, prospects for the petrochemical industry depend on many factors beyond production control such as outlook for crude oil price, global economy outlook and even currency fluctuations.

Energy majors such as Indian Oil have for long had a presence in the specialty chemical and aromatics segment of petrochemicals with a world-scale linear alkyl benzene (LAB) and an integrated para-xylene/purified terephthalic acid (PX/PTA) capacity. It has recently commissioned the world's largest operating naphtha-based cracker along with a downstream petrochemical complex at Panipat.

With this, the company has entered the olefin segment and offers a full product slate covering all segments of petrochemicals.

Today, its petrochemicals investments are primarily for enhancing operating performance and downstream integration.

As per Nexant's (a global provider of clean energy solutions) forecasts, the price of crude oil and the growth rate of the global economy potentially have the greatest influence on the performance of the petrochemical industry; yet they are among the hardest measures to predict.

Impact of crude prices

The price of crude oil is of critical importance to petrochemical producers, as the prices of the majority of petrochemical feedstocks directly track crude oil. Strengthening demand generally allows producers to raise prices to support higher margins.

The overriding factor is, thus, the need to respond to the global energy challenge since it will have an impact on the petrochemicals business that relies heavily on oil and gas for feedstock and energy.