Indian Petrochemical Opportunities-November

8/12/2019 Indian Petrochemical Opportunities-November

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Exhibit 1

INDIAN DOWNSTREAM

PETROCHEMICALS

OPPORTUNITIES &

PARTICIPATION OPTIONS

INTRODUCTION

Exhibit 1 presents the current and futuregrowth of Global petrochemical industry.The World is following a natural growthpattern - of people, resources and livingstandards speeded up by the ITrevolution. There are no winners or losersbut just the dynamic changes.Organizations that adapt to changes will

always thrive.

The industry players have two choices -Just join in the band wagon.. Or end upcleaning the confetti after the parade leavesthe town.. The choice is left to the individualorganizations..

The major changes in the Globalpetrochemical industry are attributed to thefollowing:

Changes in Natural Gas/Naphthaper BTU Value

The developments in resourcerich Nations that are permittingthem to capture more value

The changing Global political anddemographic trends

All three have a major impact on the futureproduct process migration trends Globally.

As Exhibit 1 presents, China has been thecountry/region of interest for the wholeworld in the last decade because of theunprecedented growth in consumptionpattern brought on by the political changes.Factors such as (1) large population, (2)desire to improve the living standards and(3) the governmental actions resulting in the

liberalization, have allhelped China and in turnthe whole worldprogress.

The next region poisedfor growth is INDIA.India represents, likeChina: (1) a large marketfor consumer products,(2) demographicchanges that areaccelerating theincrease in disposableincome, and (3)increasingindustrialization andGlobalization.

Besides these similarities, India presentsseveral additional advantages: (1) over 300million strong middle income consumerbase that represents one of the mosteducated group in the world, importantly

speaking English the Global Language bydefault, (2) Indian population is the mostscientifically educated and prone to workwith brains rather than hands thusembracing the IT revolution the newdriving factor for the Global growth.


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Biggest mistake Global Petrochemical

Industry will have to avoid - Unilaterally

translating Indias progress in

Information Technology to

Petrochemicals and Plastics ..,

Indian petrochemical industry has beenprogressing very well in the past 15 yearsand at a faster pace than ever before, butnot at the speed of information technologyand service industries.

Most of the world translates the progressand growth in the Indian InformationTechnology directly to all industrial sectorsincluding petrochemicals which is far fromtruth.

India is essentially aland of newconsumers brought onby the informationtechnology revolution but not

manufacturing. UnlikeChina, India does notyet have the infrastructure, raw materials,industry structure to be the manufacturingregion thus the progress made ininformation technology cannot be directlytranslated to capital intensive manufacturingsectors like petrochemicals and plastics.

In this article, we want to put in perspectivethe Indian petrochemical growth with thecurrent situation and future trends. The

analysis is specifically targeted to Globaloil/petrochemical/plastics organizations thatare planning on developing their neweropportunities for Indian subcontinent at thecracker, cracker plus 2/3 downstreamproducts.

The article will focus on the futureopportunities in Indian petrochemicals andplastics and participation options for theGlobal players.

OBJECTIVESThe overall objectives of this article are to:

1. Present the current progress in Indiaas a precursor to the futurepetrochemical industry development

2. Present current status and futuredirection of the cracker and cracker

plus 2/3 downstream petrochemicalproducts.

3. Present participation options forGlobal petrochemical players.

4. Some recommendations for takingthe full advantage of the

opportunities India has to offer.

BACKGROUND

India is the largest true democracy in theworld and will remain so for the foreseeable

future.

Unlike U.S andEngland twocountries withsame heritageseparated by a

common language English, India is agroup of diverse heritages, with differentcultures, habits, dresses, religions allcombined into one great Nation by acommon language English.

The unity in diversity gives India a surefirepath to remain democratic government ofthe people by the people and for the people more than any other nation in the world.India is the only country where politics arenot restricted to rich and educated - anyonecan be a political leader as long as he/shehas the political support of the people.

India is a broad combination of a small richclass, medium sized middle class and alarge poor class. As a consequence, thereal progress made by middle class and richclass is swept under the carpet by thebroadly visible poverty exploited by therest of the world for donations.

The middle class in India accounts forapproximately 300 million people, highlyeducated, largest concentration of Englishspeaking people in the world.

Like most successful democracies, broadpolitical policy directions in India are unlikelyto change regardless of which


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Government is in power All democraticgovernments are for the people with fewphilosophical differences thats the powerof democracy.

CHANGING DEMOGRAPHICS

India is only 60 years old after its freedomfrom over 200 years (Bicentennial) of Britishrule. The first 25 years of Indianindependence were used to focus on (1)making India self sufficient in agriculture, (2)feeding the growing population, and (3)fighting three major wars one with Chinaand two with Pakistan. In the process, Indiadeveloped the ability to defend itself againstall the future aggressors simultaneouslymaking it self sufficient in both guns andbread/butter.

India developed the five year plans tomodernize itself from the long neglect anddilapidation by two centuries of Colonialrule. India instituted first, second and thirdfive year plans to modernize the agricultureand defense. By the time India reached thelate seventies the direction of the growthhad to change and transition to more wealthgrowth and took a major transition. Theeighties essentially represented a period ofconfusion and transition for the Indianeconomy in terms of developing newobjectives.

The economic reforms of the early ninetiesbuoyed by the great Information Technologycatapulted India into the World economy asa formidable player with great potential.

In the last decade, India transformed itselfinto the new growth engine for the world.Indias work ethics, emphasis on technicaleducation, ENGLISH language,entrepreneurial and competitive spirit havecarved its undeniable future position in theGlobal Economy.

The following factors highlight Indiascurrent demographic position:

India has 1.1 billion people growingat 1.4% per annum

The total GDP of $790 billiongrowing at an average of 7-8% p.a

Young Nation with an average ageof 28 years, with 35% of the

population below 15; 50% of thepopulation below 25 and secondlargest group of people in the agegroup 25-34

Most educated among the adultgroups in the world with greatincome potential

Over 3 million college graduates peryear - #1 in the world

Rising GDP growth - 1950-80 3.5%; 1980-2002 6.0%; 2002- 20068%

Slowing population growth 1951-1980 2.2% - baby boomgeneration 2001-2010 - 1.5%

Increasing literacy rate -95017%; 2000-65%; 2010 80%approximately on 800 millioneducated people with higher thanaverage education.

Middle Class is Exploding 1980 65 million; 2000- 220 million;2010-368 million

Poverty is declining 1980 -46%;2000-26%; 2010 16%

Productivity is rising - 30% to 40%of GDP growth is due to risingproductivity

Per capita income gains 1980 -$1178; 2000- $3051

India is now the 4th largesteconomy - will cross Japan by 2012

All of the above factors will culminate intothe future growth of India. Of specialimportance are the economic reforms

undertaken by the then Indian governmentto propel Indian economy by making Rupee(Indian currency) fully convertible with theworld economy a timely move, so Indiacould use the past to become self sufficientin both guns and butter.


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INDIAN CHEMCIAL INDUSTRY

OVEREVIEW

India historically been an agriculturalcountry focused on feeding its masses

simultaneously fighting wars with theunfriendly neighbors. A major portion ofIndias chemical industry was orientedtowards fertilizers and dyes stuffs.

With no abundant sources of naphthaand natural gas the industry was alwaysplanned and controlled by thegovernment to assure equal distributionto benefits to everyone alike (like anydemocratic government should).

Nationalized Indian petrochemicals wereoperated to provide low cost keroseneto general people, taxing gasoline andother plastics as a luxury items. Most ofthe petrochemicals were under heavytariffs to encourage domesticdevelopments.

MODERNIZATION

With the 1990s economic reforms Indiacould freely enter most of the

petrochemicals with gradual reductionsin the tariffs. Petrochemicals wereremoved from the list of industriesreserved for the public sector,

Several 100% Foreign Direct Investmentis currently permitted with profits anddividends that can be repatriated.Special economic zones are set up forexport oriented units and industrialparks. All these issues are Indias wayof spreading a red carpet for foreign

direct investment into Indianpetrochemicals and plastics.

Most of the cracker capacity in India isequally distributed between ethane andnaphtha. India is currently a netexporter of naphtha after naphtha wasderegulated in 1998. Even today, nearly

31% of the naphtha is used forproducing fertilizers to support theagricultural needs.

Exhibit 2presents the locations of the newrefineries and new exploration sites in India.

Exhibit 3 presents the locations of Indianpetrochemicals complexes.

The new developments in the gasexplorations and the natural gas prices at

$4/MMBTU are competitive with US, but arestill higher than Middle East prices (at leastuntil 2012 when Middle East is expectedto reach parity with the rest of the World).Thus the feedstock prices areadvantageous for local producers, but notfor outsiders.

Exhibit 2

Exhibit 3: Indian Petrochemical ComplexesPlanned Crackers

Existing Crackers

RILHALDIA

IOC

IOC

RIL(IPCL)

RIL(IPCL)

RIL(NOCI

L)

GAIL

ChennaiPetroleum/ IOC

ONGC/ MRPL

HPCL/Total/GAIL/ OIL

GAIL

GAIL

RIL(IPCL)

RIL

Planned Crackers

Existing Crackers

RILHALDIA

IOC

IOC

RIL(IPCL)

RIL(IPCL)

RIL(NOCI

L)

GAIL

ChennaiPetroleum/ IOC

ONGC/ MRPL

HPCL/Total/GAIL/ OIL

GAIL

GAIL

RIL(IPCL)

RIL


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The states of Maharashtra (Bombay) andGujarat (home of Reliance) have alwaysbeen in the forefront of chemical industry inIndia and remain so.

INDIAN PETROCHEMICALS AND

PLASTICS (CRACKER PLUS 2/3)

STATUS

There have been very few changes in theIndian petrochemicals and plastics in thelast two decades. But, the few changesthat did take place had a Global impact onthe petrochemicals and plastics industry.

Historically, Indian cracker plus 2/3 industryhas been owned and operated by public

sector units IPCL (Indian PetrochemicalsLtd); GAIL (Gas Authority of India Ltd. );NOCIL (National Organic Chemicals IndiaLtd). These organizations still account formajor portion of the petrochemicals todayincluding the planned operations of ONGC(Oil and Gas Commission of India).

The two significant privately heldorganizations that had a major impact onthe Indian petrochemicals scenery include:(1) Haldia Petrochemicals and (2) Reliance.

Together, Haldia and Reliance account for86% of ethylene and 87% of the propylenemaking the private sectors domination ofthe petrochemicals.

Nearly 100% of the polyolefins and 65% ofthe PVC are owned by the integratedplayers with no significant non-integratedplayers in India limiting the options forparticipation in Indian cracker plus 2/3participation options.

Haldia Petrochemicals today accounts forapproximately 18% of the ethylene and 14%of the propylene capacity in India. RelianceIndustries on the other hand accounts forapproximately 68% of the ethylene capacityand 73% of the propylene capacity in India.Thus demonstrating an undeniable

domination of Reliance Industries on theIndian petrochemical scenery.

Reliance Industries Ltd.

Reliance Industries is the largest privatesector organization in India (2.8% of IndiasGDP). Reliances exceptionally Backwardvertical integration strategy helped itachieve such a phenomenal growth.

Unlike most petrochemical and plasticsorganizations in the world, Reliance startedits growth strategy from its textile andpolyester operations and verticallyintegrated backwards into crackers for theirEG production then moved into polyolefinsand plastics - an unique/exceptionalstrategy in the world.

Because of complete understanding of theconsumer and markets and supply chains,they have accomplished the feet of beingamong the top ten global players (in all oftheir core businesses)

Reliance is the largest player in the Indianpetrochemical industry - (acquired assets ofNOCIL and IPCL, previously Govt.operations). It is a common occurrence inIndia for the government operated industrialorganizations to be declared economicallysick and sold to private firms at bargainprices both at state and central governmentlevels.

Reliance is based in Western India(Maharashtra & Gujarat). Reliance is soonto start up the worlds largest refineryIncreasing global presence plus Indiandomination. With oil/gas energy operationsand expansions into downstream marketsincluding communications, groceries,beauty salons, and vegetables Reliance hasits hands on the pulse of India,

The major strategic advantages of Relianceincluding - Access to capital, low-cost labor;supply chain synergies history of all or


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nothing, have made them a householdname in India and worldwide.

Gas Authority of India Ltd (GAIL)

GAIL is Indias public sector flagship naturalgas company. It entered the petrochemicalssector in 1999 extending its operations fromgas processing and supply. GAILcaters to about a fifth of polymersdemand in India mainly focused onHDPE/LLDPE.

Located in North India, GAIL has plansfor 1000, 280 and 400 KTPYpetrochemical complexes (in AndhraPradesh, Assam and Kerala). GAIL isundertaking feasibility studies for a3000 KTPY plant in IRAN.

When all the plans come to fruition,GAIL will be a major contributor toIndian plastics.

Haldia Petrochemicals

Limited

Haldia was jointly promoted by West BengalIndustrial Development Corporation, The

Chatterjee Petrochem (Mauritius) Co.Ltd. and the Tata Group. Located inEastern India (West Bengal), is currently thesecond largest private enterprise with acapacity of 520 KTPY of polyoelfins. Haldiais essentially a small cash strapped regionalplayer with little/no Global impact

OiL & Natural Gas Commission

(ONGC) and IOC

Both are public sector organizations in theenergy sectors and are newcomers to thepetrochemicals sectors with announcedfuture plans for the participation.

With the exception of these top players, theIndian chemical industry dominated bysmaller regional players in the downstreamoperations.

Comparison of China versus

India

A comparison of India and China (Exhibit 4)is a valuable from the viewpoints of

understanding the future competitiveness ofIndia and also fine tuning the participationoptions.

Indian economy buoyed by thedevelopments in information technology isoriented towards service and knowledgeeconomies with great consumptionopportunities. India has never been amanufacturing economy and compared toother Global options offer few advantages.

China on the other had is heavymanufacturing oriented economy with labor,infrastructure oriented economy in additionto domestic consumption of cracker plus 2.

As illustrated in the exhibit, Indianindustrys downstream processing industry(or lack of it) will be the major bottle-neck forthe foreseeable future.

Indian downstream processing industry waspositioned to be a small scale sector by theIndian Government to encourage poorerpopulations. The industry is currently facingan uphill task to change the prior positionand move to large scale industry.

Exhibit 4

Cracker

Naphtha

Gas

Cracker

Plus 2

Cracker

Plus 4

Functional

Products

End Use

Products

Converting

Industry

Cracker

Naphtha

Gas

Cracker

Plus 2

Cracker

Plus 4

Functional

Products

Comparison of India & China

Converting

Industry

End Use

Products

Cracker

Naphtha

Gas

Cracker

Plus 2

Cracker

Plus 4

Functional

Products

End Use

Products

Converting

Industry

Cracker

Naphtha

Gas

Cracker

Plus 2

Cracker

Plus 4

Functional

Products

Comparison of India & China

Converting

Industry

End Use

Products


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One major converter coming into Indiacan/will disrupt the industry and politicalsituation for ever move that requiresnimble strategy.

INDIAN PETROCHEMICALS AS A

PART OF GROWING REGIONS

The Global developments in thepetrochemicals can be summarized asfollows:

1. Movement of commoditychemicals and plastics to regionsthat have a real/apparentfeedstock advantage

2. Organizations becoming globalwith emphasis on service/value

added petrochemicals in thecurrent regions with low GDPgrowth

3. Global organizations planning todevelop asset light strategiesand shift the production to lowcost/low labor regions of theworld.

4. Focus on growth regions in theorder of priority- China, India,Middle East, Sub Saharan Africaand South America

These strategies in general represent theappropriate generalizations for Globalplayers to pursue.

This will result in:1. Increased emphasis on consumption

in the developing nations2. A new and renewed Global race for

specialty value addedpetrochemicals products

3. Increased emphasis on R&D andinnovation using the knowledge

advantaged NationsIndia fits very well into these strategies.

What can India Offer?

1. Indian offers the growing consumermarkets unparalleled in theGlobal growth

2. India offers Knowledge basedadvantages with the highereducation with technical emphasis

3. Proximity to low cost feedstocks inmiddle east and China (assumingoil, natural gas and coal will remain

the leading energy drivers)

Indian cracker plus 2/3 option iscomplicated with regional issues;

The current situation in India provides lowerfeedstock advantage for locals only, thus,making competition for outsiders tough.India can/will be an excellent addition to theregional strategy of production focused inthe Middle East and Africa, with itsknowledge based industry.

The major viable options for Globalpetrochemical organizations in Indiasprosperity include:

Option - 1Participate with Cracker plus 2/3

Option - 2Participate with cracker plus 2/3 as a part ofMiddle East/Africa Strategy

Option - 3Participate as a supplier of feedstock (e.g.,Gas)

Option 4Participate to develop service/innovation forfuture growth - noting Innovation is notR&D, Innovation is beyond R&D

The specific strategy for the organizationwill depend upon the individual situation.However here are the caveats to watch in

each situation.

Options 1 and 2 - Participate inCracker plus 2/3

As indicated in the diagram, cracker plus2/3 is complicated and crowded. With somany new announcements from Reliance


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and the public sector organizations, whohave an advantaged feedstock position inIndia, participation as an outsider will bemore complicated.

The choices will whittle down to: (1) with

Reliance or without Reliance; (2) With publicsector organization and/or (3) with anothermajor multinational or alone.

Each of these strategies come with theirown limitations. Reliance has never had asuccessful multinational joint venture inpetrochemicals and plastics, in spite of allthe discussions. Reliance alwaysmaintained all or nothing attitude in all oftheir operations. A jv strategy, thoughpossible, will require additional analysis.

Participating without Reliance in India willbe an uphill task because of their superiorpositioning and downstream supply chainposition.

Most of the public sector organizations justannounced new capacities and are in initialstages. However, if IPCL is an example ofthe future to come, the future is non-specific. Again, competing againstReliance will be an uphill task with orwithout public sector cooperation.

Participating alone and/or with anothermultinational corporation will be toughbecause of no feedstock advantage andpotential compaction with publicsector/Reliance alone and/or together.

Option 3 - Participate as a suppl ier offeedstock (e.g., Gas)

The current situation of feedstock supply,especially for gas and/or naphtha will beadvantageous, especially if done incombination with Middle East sources. Theoil and gas exploration activity in India,especially by Reliance and other newcomers will be formidable competition towatch.

Option 4 - Partic ipate to developservice/innovation for future growth

One of the specific strategies now beingfollowed by several multinationalpetrochemical organizations, albeit asuccessful one.

It is important to differentiate the R&D intoseveral parts: (1) Technical services, (2)Product development specific to customers,(3) Product development for long termproduct offering, (4) basic R&D and (5)Innovation. Each of these functions havespecific requirements that may or may notmatch what India has to offer.

A careful selection of specific strategy willhelp the organizations help in a long term.Chemical Market Resources can assist theorganizations in accomplishing andachieving their goals.

Please call 281-557-3320 for more

information.

Indian Petrochemical Opportunities-November

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