ICRA says petrochemical sector to face tough times ahead

New Delhi: With the olefins cycle likely to decline further, domestic petrochemical producers are expected to face tough times going forward which in turn is bound to lead to subdued returns. According to a report by ICRA, most Indian petrochemical players have enjoyed robust cash earnings over the past several years and their net debt levels have been relatively low.

Ravichandran, Group Head, Corporate Ratings, ICRA, said, “Changing industry dynamics both globally and domestically, besides emergence of new industry influencing determinants will have a bearing on the petrochemical sector.” Significant among the influencing factor is the evolving demand-supply scenario, the report said.

Demand for virgin polymer set to decline

“On the demand/consumption side, governments and brand owners are responding to a rising tide of negative public perception against single-use plastics leading to on-going efforts to reduce, reuse, recycle plastic materials extending to even banning of some uses of plastic materials. Accordingly, an increasing trend of recycling and reuse that is likely to accelerate going forward, would dent the demand for virgin polymer and impact the margins of producers,” said ICRA.

Notwithstanding the backlash, improving living standards, population growth, increasing urbanisation and lack of cost-effective alternatives would continue to support the growth of many plastics over the next decade. “Accordingly, companies across the globe are investing in new ethylene capacities besides which, existing oil refineries are either reconfiguring and/or adding units to maximise the production of chemicals and petrochemicals,” said the release.

EVs important part of meeting climate change goals

According to ICRA, world over, Electric vehicles (EVs) are now being considered an important component for meeting goals on climate change in line with the Paris Agreement’s targets. In tune with these and other prevailing factors in various countries, governments across the world have extended incentives including tax exemptions, waivers on fees etc. to support the adoption of electric vehicles. “The fuel most at risk from EVs is gasoline besides which diesel would also be impacted. With a forward-looking scenario of declining consumption of gasoline, refiners would be increasingly looking to divert this stream (light naphtha) for the production of petrochemicals. Besides this several refiners globally are working on plans to maximise conversion to chemicals using various cracking technologies that would convert heavier cuts of crude oil (such as gas oils) to lighter streams to enable conversion to chemicals leading to increasing supplies,” it said.

‘Industry now passing through a phase of capacity investment’

Added Ravichandran, “The global operating rates of Ethylene plants had peaked in CY2017; however the industry is now passing through a phase of capacity investment with spreads between HDPE-Naphtha and PP-Propylene significantly below their 5 years averages since Q2/Q3 FY2019. Owing to supply overhang, Ethylene over capacity and down cycle in margins are projected through 2023. Nonetheless, the propylene market is tighter than ethylene but new ‘on-purpose capacity’ could lead to mild down cycle through 2023.”


As for domestic demand, the same for PE (excluding LDPE) and PP has grown at a CAGR of 9-10 percent over the past five years (FY’2015-19) with the country being a net exporter of PE and PP. During the same period, the demand for PVC has grown at a CAGR of 6.5 percent over the same period, with the country being a net importer.

However, the weakness in demand of some products lately notwithstanding, the domestic consumption of commodity polymers is expected to grow at a CAGR of 7-8 percent over the long term.

‘Subdued returns for Petrochemical producers in the offing’

The financials, past cash earnings of most Indian petrochemicals players had been strong over a period of time and their leverage has been low. Moreover, the credit profile of some of the players is supported by their diversified business profile including Refining & Marketing operations, sovereign ownership and strategic importance to the government. “Going forward,” concluded Prashant Vasisht Co-Head, Corporate Ratings, “the impact of evolving scenario overall, will result in subdued returns for the Indian Petrochemical producers. From a credit point of view, the tolling margins for all types of crackers (naphtha, gas, ethane and multi-feed) are expected to remain subdued and below their last 10-year averages over the medium term owing to a supply overhang, demand slowdown and more intense competition.”