Roland Berger India Chem 20101109

7/27/2019 Roland Berger India Chem 20101109

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SustainingtheIndiaAdvantag

Prepared by :

Handbook on

Indian Chemical Industry


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Disclaimer:

All rights reserved. Includes copyrighted material.

The same may not be reproduced, distributed, modified or in any manner communicated to any third party except with the written approval of Tata

Strategic Management Group.

This report is for information purpose only. While due care has been taken during the compilation of this report to ensure that the information is

accurate to the best of Tata Strategic Management Group's knowledge and belief, the content is not to be construed in any manner whatsoever as a

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anyone basis this report.


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Handbook on Indian Chemical Industry 03

demand shift has happened in the past, but is largely completed, customer industries

like textile and leather, asclassicexamples, havecompletedthatyearsago. Whatis

essentialtounderstandis, thatemergingmarketsshowstrongergrowthpotential

andhaveproventodosoevenin the financial crisis, e.g. with China showing approx.5% growth even in 2009 andthemarketsarebecomingcriticalsize. Theimpactof

thesedevelopmentshastobeanalyzeddifferentlyforglobalmajorsandthelocal

championsinthesecountries.

For the global majors, the crucial questions will be the strategyaroundhowto

participateonthisgrowth, includingassetandinvestmentallocation, exportsvs.

localproduction, adoptionofbusinessmodels, cooperationwithlocalsvs. stand-

aloneactivitiesandmanymore. Aboveallthisistheneedtoachieveandsustaina

profitabilitythatsatisfiestheirshareholders. And, nottobeforgotten, tomaintain

andideallyincreasethebusinessinthestronghomemarketsEuropeandtheUS

thesewilleveninthe next 20 years account for a very large portion of global

chemical business:

For the local champions, the challenge consists of two steps. First step is the coverage

and supply of domestic markets not leaving them to the global majors, and secondly

the subsequent development of a global business where sustainable competitive

advantages can be achieved. A good example for this is API production, where

accordingtoindustryreports, IndianandChineseproducersalreadycover 65-70%

oftheworldmarket

In feedstock driven commodities (in particular petrochemicals and polyolefins) the

increasing production capacity in low feedstock cost countries is a historical fact and

is likely to continue. However, it is clear amongst industry experts, that Middle East

will never serve the whole world. Considering that, the long-term challenge for the

chemical industry is to find the right balance between low cost production hubs and

local/regional commodity production close tothe customers. Western Europe and

the US have been through this process to a large extent already, plant closure and

efficiency gains as well as value chain integration efforts have shown results. Looking

to China and India as the major countries of futuredemand, bothhaveshowna

strongwilltoestablishandmaintainacommodityindustrythemselves, howeverthe

strategiesaredifferent.

While China is putting a lot of effort into developing a coal-based petrochemical

industry (andbydoingsorelyingonthe domestic carbon feedstock) and successfully

invites international partners to do so, the Indian Government has set up PCPIRs with

strong focus on downstream integration, providing an ecosystem for chemical

companies to prosper. This is an India only effort so far, and international companies

are not heavily involved yet. Irrespective of which strategy will be more successful, it

clearly shows that these regions are willing and able to develop a commodity industry

on their own, but, also as a matter of fact, that has to prove its position in a global

context still.

Concepts for feedstock driven commodities


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Handbook on Indian Chemical Industry04

Understanding customer industries' needs

Implications for India

Last but not least, theglobalchemicalindustryhastofacethechallengeto

completeits

transformation

from

aproduction

and

technology

driven

industry to a

customer oriented one. Given the complexity and the tremendous range of products

and services offered by the chemical industry, this will play a more prominent role for

customer oriented segments like specialty chemicals than for specification-based

commodities. There is for sure no "one-size-fits-all" approach, but the following two

issues will playastrongroleintermsoffutureprofitability

Adapting product developments to the actual needs of the customers, in mature

countries where customerindustriesarenotwillingtopayforthebestpossible

product/serviceanymorebutonlyforthebest suitable one, as well as adapting

product portfolio and service to the local needs of emerging marketse.g. a

growingmiddleclassinIndiagettingaccess to chemical related products has

different needs and perceptions vis--vismatureEuropeangroupofcustomers

Andinparticularlocalcompaniesare "naturally" positionedbesttofulfillthese

needs

Set up organizations (from sales force to group structures) that allow to most

efficiently target these customer groups.Anumberofcompanieshavealready

designedtheirfrontendaccordingtocustomergroups (e.g. DuPont), andthisis

likelytocontinue

Summarizing, it becomes clear that the global future of the chemical industry willlook substantially different than today. There will be a place for everybody - the global

majors of today, the world-scale Middle East commodity producers as well as local

champions in India and elsewhere developing their home markets. But amongst all

groups, the successful ones will be those who manage to adapt early to the upcoming

changes and doing so, createalong-lastingcompetitiveadvantage. Indianchemical

playersareexcellentlypositionedinthis "newgame", supportedbyaPCPIR

infrastructurebeing built, having a government that understandsandsupportsthe

needsofthechemicalindustry, beinglocatedinoneofthemostprosperous

marketsintheworldandlastbutnotleastbeingabletorely on a well skilled and

educated workforce. Taking these good staring points combined with the

entrepreneurial spirit, social and political responsibility and a forward looking

understanding of the future framework provides an excellent outlook to the Indian

Chemical industry.

l

l

By-Dr. Alexander Keller, Partner - Energy & Chemicals, Roland Berger Strategy Consultants


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Global Chemical Industry

Globally, the chemical industry is estimated to be ~USD 3.4 trillion. Global chemicals

industry grew at a healthy rate of ~9% p.a. during the period 2004-2008. However,

the industry went through a dramatic downturn in 2008-2009 due to the global

economic recession. In 2009, the global chemical industry is estimated to have seen a

decline of 4.5 5% over 2008 levelsasdemandfromlargeend-useindustriessuch

asconstruction, automotives, electronics etc. fell massively worldwide. The

downturn witnessed shutting down and idling of significant capacities and other cost-

cutting measures like workforce reduction.

Post 2009, as global economy has started recovering, chemicals industry is starting to

register slow volume growth due to restocking and revival of underlying demand.

While the recovery in Europe is still sluggish, America is expecting a V-shaped

recovery curve as per the American Chemistry Council and China saw a 21% y-o-y

growth in chemicals output in October 2009. However, it is expected that with

subdued demand in near future and reduced margins due to poor capacity utilization,

it might still take 2-3 years before the global chemicals industry is back to the growth

rate levels of 2008. During the period 2008-2013, the chemicals industry is expected

to grow at ~5.3% CAGR.

Source: Datamonitor, Tata Strategic Analysis

Global chemicals industry Fy 10(USD Bn, % share)

Base Chemicals,

1,525 , 45%

Specialty

Chemicals, 740

22%

Pharmaceuticals

900 , 27%

Biotechnology

180 , 5%

Agrochemicals,

50, 1%

Total: USD 3,395 Bn


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Base chemicals has a lager share of the domestic chemicals industry vis--vis global.

Base chemicals are raw material driven; bulk manufacturing chemicals produced by

standardized reactions unlike pharmaceuticals, and specialty chemicals which are

more R&D intensive, high value, low volume chemicals.

Petrochemicals (Olefins and aromatics) form the largest sub-segment of the base

chemicals industry. Olefins demand in India is expected to grow at 10% per annum

while aromatics demand is expected to grow at 12% per annum over the next four-

five years. India is soon expected to be among the world's top 5 manufacturers ofpetrochemicals products ETA and poly-propylene.

Pharmaceuticals is the second largest segment with 24% share. Over the last 30

years, India's pharmaceutical industry has evolved from being a marginal global

player to becoming a world leader in the production of high quality generic drugs.

India exports pharmaceutical products to more than 200 countries. Exports of drugs

and pharmaceuticals from India rose by 25% to ~ Rs. 384 billion in FY09 compared to

~ Rs. 307 billion in FY08.

Indian specialty chemicals industry is expected to return to pre-recession growth in

the next couple of years primarily driven by large demand in end use industries like

automotives, electronics, packaged food, textiles etc. and strong domestic capabilitybeing supplemented by both domestic and international investments. Many foreign

companies have made significant commitments to India and have plans to continue

to invest over the long term not only because of the abundant availability of skilled

and cheap labor but also because of the certainty of potentially huge markets.

Biotechnology accounts for 3% of the total chemicals industry. Indian biotechnology

industry crossed the USD 3 billion mark in FY10 (including bio-services and bio-

informatics), registering a y-o-y growth of 17%. The industry is fragmented in nature

with presence of over 300 domestic and international companies. However, it is

witnessing several partnerships/ acquisitions as companies try to expand capabilities

and capacities.

Source: Industry reports, Tata Strategic Analysis

Agrochemicals

2, 2%

Base Chemicals,

43.3, 53%

Biotechnology

2.5, 3%

Pharmaceuticals

20, 24%

Specialty

Chemicals, 15

18%

Indian chemicals industry Fy10(USD Bn, % share)

Total: USD 83 Bn


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Agrochemicals comprise ~2% of the total industry. The agrochemicals consumptions

in India (580 gms/ hectare) is low compared to global standards of 10-12 kg/ hectare.

Indian agrochemicals industry is largely exports driven with over 60% of production

being exported to USA, U.K., Russia, Europe, South Africa, Bangladesh, Malaysia etc.

Strong end use industry demand is expected to boost growth for the Indian chemical

companies, both domestic & multinational.

Increasing local production requires global competitiveness to withstand imports as

well as for exports of surplus. Key success factors needed are feedstock cost &

availability, value chain access, technology, capital investment, presence of strong

local players as well as access to a rapidly growing large domestic market. India is

today seen as a growth market for many western companies. Domestic companies

have built significant assets and have the opportunity to leverage them and will needto strengthen them further to withstand global competition. It could be worthwhile

to explore partnerships, in select areas, for mutual beneficial development.

CONCLUSION


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Basic Organic Chemicals


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2010


Introduction

Organic chemicals are a significant part of Indian chemicals industry. The chart below

shows select major organic chemicals. Availability of natural gas for use as feedstock

is a critical part of the entire production process. Formaldehyde and acetic acid are

important methanol derivatives and are used in numerous industrial applications.

Phenol is an aromatic compound and derived from Cumene, a benzene and

propylene derivative.

Feedstock (Natural Gas/Naphtha)

Methanol

FormaldehydeAcetic Acid

Select organic chemicals

PhenolFormaldehyde

UreaFormaldehyde

Benzene

Cumene

Phenol

Indian Organic Chemicals Industry

Industry Overview

The consumption of organic chemicals in India has increased at a CAGR of 6.4% from2.02 million metric tons per annum (mmtpa) in FY04 to 2.76 mmtpa in FY09. The

domestic supply however, has shown a negative CAGR of 2.3% to reach 1.31 mmtpa

in FY09 against 1.47 mmtpa in FY04. The deficit has been met by a large increase in

imports over the years. The net imports have grown at a CAGR of more than 20%

2.0 2.02.2

2.4

2.62.8

1.5 1.5 1.6 1.5 1.5

1.3

FY 04 FY05 FY06 FY07 FY08 FY09

Demand Supply

Demand & Supply(Mn tons)

Source: Dept. of Chemicals & Petrochemicals


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2010


from 0.55 mmtpa in FY04 to 1.51 mmtpa in FY 2009. Themajorreasonoflower

domesticproductionoforganicchemicalshasbeenoversupplyinglobalmarkets

leadingtocheaperimportsoforganicchemicalsintoIndia. Asaresult, thecapacity

utilizationlevelsofdomesticproducershavefallenfrom92% in FY04 to 65% in FY09.

Evenafterdiscountingtheimpact of the global economic crisis on the Indian

industry, the average utilization levels have been around 80% in FY07 and FY08.

No. Organic Chemical Production (000 tons) Share in

Fy07 Fy08 Fy09 Fy09

1. Methanol 396 351 237 18%

2. Formaldehyde 235 243 232 18%

3. Acetic acid 288 316 266 20%

4. Phenol 71 75 76 6%

5. Others 555 567 506 38%

Total 1,545 1,552 1,317 100%

Production details of major organic chemicals in India

Source: Dept. of Chemicals & Petrochemicals, CMIE

The major organic chemicals are methanol, acetic acid, formaldehyde and phenol. The

four chemicals constitute around 60% of total organic chemicals produced in India in

FY09.

Post the global economic crisis, the production of organic chemicals in India is also

expected to have recovered and reached 1.5 mmtpa in FY10.

Methanol, a very versatile chemical is primarily produced from natural gas or naphtha.

Key SegmentsMethanol

0.01

Demand and supply of methanol (Mn tons, Fy09)

0.24

1.3

1.06

Production Import Export Consumption

Source: CMIE report


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Demand for methanol has increased at a CAGR of 10% from 0.8 mmtpa in FY04 to 1.3

mmtpa in FY09. The domestic production of methanol is not sufficient to meet the

demand of methanol in India. As a result, in FY09, the net import of methanol was

1.06 mmtpa i.e. more than 4 times the domestic production of 0.24 mmtpa. Import of

methanol has increased at a high CAGR of 22% from 0.4 mmtpa in FY04 to 0.85

mmtpa in FY09.

The two main end-user industries of methanol are chemicals and energy. In the

chemicals industry, methanol is used mainly to manufacture formaldehyde, acetic

acid, di-methyl terephthalate (DMT) and some solvents. In the energy industry,

methanol goes into the manufacture of methyl tertiary butyl ether (MTBE), tertiary

amyl methyl ether (TAME), di-methyl ether (DME) and bio-diesel among other

chemicals. Methanol is also used for blending with petrol.

Over the years the usage pattern of methanol has remained same. However, share of

formaldehyde in sectoral usage of methanol has improved from 34% in FY06 to 38%in FY09 primarily due to increase in demand of formaldehyde from plastic and paints

industries. The demand of methanol for production of DMT has fallen primarily due

to closure of Bombay Dyeing's DMT plant.

Indian manufacturers have small capacities compared to global standards. GNFC, the

largest producer of chemicals in India has a capacity of 230 kilo tons per annum (kta)

followed by Deepak Fertilizers and Rashtriya Chemicals and Fertilizers Ltd (RCF) with

capacities of 100 kta each.

MTBE

16%Pharma

14%

DMT9%

AceticAcid9%

Others18% Formald

hyde34%

MTBE16%

Pharma15%

DMT2%

AceticAcid9%

Others20% Formald

yde38%

Sectoral usage of methanol(% share)

Source: Crisil research, Tata Strategic analysis

FY06 FY09

Acetic Acid

Acetic Acid is the main alcohol based chemical and is primarily used in the production

of Vinyl Acetate Monomer (VAM), Purified Terephthalic Acid (PTA), AceticAnhydride

andAcetateEsters. TheAceticacidderivativesareappliedinvariousindustriesas

mentionedintablebelow:


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Demand for acetic acid has grown at a CAGR of 10% from 0.34 million tons in FY04 to

0.55 million tons in FY10.

The demand growth has happened mainly due to increase usage by manufacturers of

PTA and organic esters such as RIL and Vinyl Chemicals. New PTA capacities added by

Indian Organic Chemicals (IOC) (0.55 million tonnes per annum) and RIL (0.53 milliontonnes per annum) in the recent past have spurred demand growth further.

Most of the demand was met through domestic production earlier. However, due to

oversupply of acetic acid in global markets and depressed prices, imports of acetic

acid have grown from 0.02 mmtpa in FY04 to 0.29 mmtpa in FY09. Cheap imports

have led the domestic manufacturers to reduce their plant capacity utilization.

Market size of acetic acid is estimated to be around Rs. 1,450 crores in India in FY09,

of which imports constitute more than 50%. Major acetic acid producing companies

in India are GNFC, Jubilant Organosys and IOC. Acetic acid is manufactured in India

S. N Derivatives Applications

1. Vinyl Acetate Monomer Adhesives, textiles, paints and paper

2. Purified Terephthalic Acid (PTA) PET bottle resins, films and polyester fibre

3. Acetic Anhydride Cellulose Acetate which goes in cigarettefilters and textile applications

4. Acetate Esters Solvents in a wide variety of paints, inks and

other coatings

0.27

0.550.01

0.29

Production Import Export Consumption

Demand and supply of acetic acidMn tons, Fy09

Source: CMIE report

through two routes: the methanol route and the ethyl alcohol (from molasses) route.

Manufacturing acetic acid using methanol is more cost-competitive and, therefore,

more profitable. GNFC is the only company in India to manufacture acetic acid

through the methanol route. It has a competitive advantage in acetic acid because of


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the assured supply of the raw material and its lower cost of production and hence,

was able to hold its 30% market share in a weak global price scenario.

Unlike methanol, production of its derivative formaldehyde in India is sufficient to

meet the domestic demand. The production of formaldehyde has increased, at a

similar pace as has its demand, at a CAGR of 3% from 0.20 mmtpa in FY04 to 0.23

mmtpa in Fy09.

Formaldehyde

0.23 0.23

Production Consumption

Demand and supply of formaldehydeMn tons, FY09

Source: CMIE report

Phenol is a significant type of organic chemical with numerous applications as

mentioned in the table below. Its demand is closely linked to end user industries like

the construction and automobile industries.

More than 70% of demand of phenol is met through imports with no fresh supply

addition in last few years. There are only two suppliers - Hindustan Organics and S I

Group with capacity of 40 Kta each in FY09. As the consumption has grown from 0.18

MarketsizeofformaldehydeisestimatedaroundRs. 190 croresinIndia. Total

productioncapacityis 0.23 mmtpainFY09. Major formaldehyde producingcompanies in IndiaareKanoriaChemicals, HindustanOrganic, RockHardandAsian

Paints. Thefirsttwocompanies account for 44% of formaldehyde production in India.

AsianPaintsproducesformaldehydeforcaptiveconsumption.

Derivatives Applications

Phenolic resins Plywood adhesives, construction, automobile

& appliance industries

Caprolactam Nylon and synthetic fibre

Bisphenol-A Polycarbonates in electronics and housing industries

Phenol


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l

Growth Forecast & Drivers

Recently, Government has also levied anti-dumping duty on import of phenol

from countries such as USA, South Korea and Taiwan.

Indian organic chemicals market is expected to grow at a growth rate of 5% to reach ~

3.53 mn tons by FY14. Key segments expected to grow are methanol and phenol.

1. Rise in methanol demand: Domestic methanol demand is expected to grow at a

CAGR of 6.8% from FY10 to FY14. The key growth drivers are growth in

construction, infrastructure and new areas such as fuel blending and bio diesel.

The demand from the formaldehyde segment (largest user of methanol) is

expected to grow at 8%. Despite the higher operating rates expected in future,

more than 2/3rd of demand will still be required to be met by imports.

0

0.5

1

1.5

FY10 FY11 FY12 FY13 FY14

0

20

40

60

80

100

Demand Production Operating rate

Methanol Market Outlook

RHS

Demand & Supply (Mn tons)

LHS

Operating rate (%)

Source: Crisil report, Tata Strategic analysis

2. Rise in phenol demand: The demand of phenol is expected to grow at a CAGR of

8% from 0.14 mmtpa in FY10 to reach 0.19 mmtpa in FY14. The improvement in

demand is primarily driven by growth in application of phenolic resins in the

decorative laminates sector, dyes and drugs in pharmaceutical industries. growth

in application of phenolic resins in the decorative laminates sector, dyes and drugs

in pharmaceutical industries.


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Key Challenges

1. Lack of cheaper raw material availability: Feedstock (naphtha and natural gas)

and power are critical inputs for organic chemicals industry. Costs of these rawmaterials are high in India compared to countries like China, Middle East and other

South East Asian countries such as Thailand and Indonesia. Given the poor

infrastructure with lack of adequate facilities at ports and railway terminals and

poor pipeline connectivity, domestic manufacturers will continue facing difficulty

in procuring raw materials at a cost competitive with the global peers.

2. No domestic price discovery: Domestic prices of organic chemicals are highly

correlated with international prices. Given the small scale of domestic operations,

local manufacturers are more influenced by global demand and supply forces.

3. Large global capacity additions: Apart from the current oversupply in global

markets, there is another cause of concern for domestic manufacturers, withfurther large capacity additions happening in global markets. For example,

globally, methanol industry is expected to witness excess capacity in the future

due to a spate of capacity additions in gas rich countries such as Middle East and

Russia. In China itself, 20 million tons of methanol capacity is expected to be

coming upstream by 2010.

0

0.1

0.2

FY10 FY11 FY12 FY13 FY14

97

98

99

100

Demand Supply Operating rate

Phenol Market Outlook

RHS

Demand & Supply (Mn tons)

LHS

Operating rate (%)



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Methanol capacity additions

2009 China (delayed) 20

2010 Egypt, Russia 1.6

2011 Middle East, South East Asia 4

South America

Year Regions Capacity (Mn tons)


4. Low capacity utilization: Due to oversupply in global markets, prices of major

organic chemicals have taken a steep decline, thereby forcing the domestic

companies to under utilize their plants operating levels. The average capacity

utilization has fallen from > 90% in FY04 to 65% in FY09. Though, post the global

economic crisis in FY09, utilization levels have improved, but are still far behind

the utilization levels of more than 90%.

1. Consolidation: Since most of the Indian manufacturers operate on a small scale

compared to global peers, there is a room for consolidation in Indian organic

chemicals industry. Domestic players can take advantage of economies of scale

arising from consolidation and become more competitive thereby preventing

cheaper global imports.

2. Improved feedstock supply: Domestic organic chemicals players don't have theadvantages of backward integration and hence, they lack pricing flexibility.

However, given the new finds of natural gas reserves in the country, domestic

manufacturers will be able to get supply of feedstock at stable prices.

3. Wider product portfolio: Commodity chemicals companies can improve their

product portfolio by adding specialty chemicals such as polymers additives, water

treatment chemicals, lubricating additives, etc. This will help in improving their

margins but requires significant R&D efforts.

4. Forward integration: Petrochemical companies producing benzene and

propylene can look for forward integration opportunity given the demand-supply

deficit in phenol market. Similarly, an opportunity exists for companies withbetter access to natural gas supply to venture into the methanol market facing

continuous supply deficit.

5. Outbound approach: Even successful companies from west are shifting their base

to resource rich nations like Saudi Arabia, Qatar, Russia, etc. Indian organic

chemical companies may also explore opportunities outside the country either

through greenfield or brownfield projects.

Key Opportunities


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References

1. Annual Report 2009-10, Department of Chemicals & Petrochemicals

2. Performance of Chemical & Petrochemical Industry at a Glance (2001 - 2007),Department of Chemicals & Petrochemicals

3. Working Group on Indian chemical industry for formulation of the 11th Five Year

Plan, Planning Commission, Government of India

4. Commodity Chemicals: Industry Profile, Crisil Research, January 2010

5. Industry: Market Size & Shares, Centre for Monitoring Indian Economy, April 2010

6. GNFC Analyst Report, ICRA Research, June 2010

This report has been authored by:

Pratik Kadakia ([email protected]) and Chirag Surana


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Petrochemicals


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Introduction

Global Petrochemicals Industry

Petrochemicals are chemicals made from petroleum and natural gas. Currently

naphtha and natural gas are the main feedstock as they are most easily processed

into basic petrochemicals. Olefins such as ethylene, propylene, butadiene and

aromatics such as benzene and toluene are basic petrochemicals and their further

derivatives are known as end products petrochemicals such as polymers, synthetic

fibers, elastomers and surfactants.

Size of the petrochemical industry is determined by the size of ethylene and

propylene capacity built. Both constitute almost 70% of global basic petrochemicals

market. Global ethylene capacity was estimated at 130 million tons in 2009 and is

expected to achieve a CAGR of 3% to reach 155 million tons in 2014. Whereas, global

propylene capacity, estimated at 90 million tons in 2009, is expected to achieve a

CAGR of 5% to reach 115 million tons in 2014. Based on their cumulative capacity and

overall market share, the market size of basic petrochemicals was USD 320 billion in

2009 and is expected to reach USD 385 billion in 2014.

320

385

2009 2014

4%

Global Market Size(USD Bn)


Major countries are North America, Western Europe and East Asia and majorpetrochemical companies are Lyondell-Basel, Dow, Sinopec, Exxon and Ineos.

As a downstream industry of exploration and refining business, the petrochemicals

industry is a significant industry for the Indian economy. The Indian basic

petrochemicals market grew at a rate of 5% from USD 5 billion in FY2005 to an

estimated USD 6.5 billion in FY2010. Considering end products market which includes

Indian Petrochemicals Industry

Industry Overview


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polymers, synthetic fibers, elastomers and surfactants, the total petrochemical

market has grown at a CAGR of 8% from USD 6.8 billion in FY2005 to USD 10 billion in

FY2010.

India is the fifth largest consumer of polymers in the world after China, United States,Japan and Germany.

By global standards, its contribution is not very large, primary reason being low per

capita consumption of polymers in India, only 5 kgs, compared to world average of 25

kgs.

The Indian petrochemicals market is influenced by international demand and supply

forces as the domestic market is oversupplied. The total installed capacity of major

basic petrochemicals (ethylene, propylene, butadiene, benzene & toluene) in FY2005

was 5.97 million metric tons per annum (mmtpa) against the total demand of 5

mmtpa, leading to a surplus of 0.97 mmtpa. This surplus got further increased to 1.59

mmtpa by FY2010 as capacity additions grew at faster pace than demand.

5,970

8,120

5,000

6,530

FY05 FY10

Capacity Demand

Basic petrochemicals installed capacity and demand ('000 tons)


Even in the end products petrochemicals market (polymers, elastomers, synthetics

fibers and surfactants), the oversupply gap has increased from 0.74 mmtpa in FY2005

to 1.76 mmtpa in Fy2010


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7,540

11,840

6,800

10,080

FY05 FY10

Capacity Demand

End products petrochemicals installed capacity and demand ('000 tons)


Polymers: Polymers are popularly known as plastics, Polyethylene, polystyrene,

polypropylene and polyvinyl chloride are major types of polymers. Consumption of

polymers has increased from 61% to 69% of total volume of major end products

petrochemicals between the period FY2005 and Fy2010.

61%69%

28%23%

4%2%

6% 6%

FY05 FY10

Polymers Synthetic Fibers Elastomers Surfactants

Source: Industry Report, Tata Strategic Estimates

End product petrochemicals market: share (% of total)

Synthetic Fibers: Synthetic fibers account for about half of all fiber usage, with

applications in every field of fiber and textile technology. The market share of

synthetic fibers has decreased from 28% in FY2005 to 23% in FY2010.

Elastomers: Elastomers are polymers with elastic properties. They find applications in

manufacturing of various types of tyres and non-tyre goods. Share of elastomers have

declined from 6% in FY2005 to 2% in FY2010.

Key Segments


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Surfactants: Surfactants stabilize mixtures of oil and water and find application in

detergents, emulsifiers, etc. Its share has remained same in overall market at 6%.

Segment Major Products Main Applications

Polymers Polyethylene, polystyrene

polypropylene, polyvinyl coating

chloride (PVC)

Synthetic fibers Polyester, nylon, acrylic fiber Fiber and textile technology

purified terephthalic acid

Elastomers Styrene butadiene rubber Tyres, toys, consumer items

poly butadiene rubber

plasticized PVC

Surfactants Linear alkyl benzene and Detergents, emulsifiers, foaming

ethylene oxide & conditioning agents

Packaging, Carrier bags, extrusion

Competitive Landscape - Polymers IndustryPolymers constitute 70% of end products petrochemicals market in India. Indian

polymers industry is oligopolistic in nature with only 3 large producers - Reliance

Industries Ltd. (RIL), Haldia Petrochem Ltd (HPL) and Gas Authority of India Ltd (GAIL).

Market entry barriers are high with high start-up costs and raw material costs. Post

acquisition of IPCL, RIL has obtained majority of the market share (70%) of total

polymers market followed by HPL and GAIL (11% respectively). RIL produces all forms

of polymers namely Polyethylene (PE), Polypropylene (PP) and Poly vinyl chloride

(PVC). HPL and GAIL produce PE and PP but don't produce PVC. Other domestic

players are Finolex Industries, DCW, Chemplast and DCM Shriram. All of them

produce only Poly vinyl chloride (PVC).

Auriya

(0.51 )Haldia

(1.04)

Patalganga

(0.29)

Nagothane

(0.47)

Gandhar

(0.47)

Ha

(1.20)

zira

Jamnagar

(1.93)

Baroda

(0.38)

Capacity in mmtpa

Existingplants

RIL

IPCL

&

HPL

GAIL NaturalGas

Naphtha

NaturalGas/

Naphtha

PE, PPPVC

PE, PP

PE

Company

Feedstock

Focus

Capacity

4.74

1.04

0.51

Major polymers facilities in India (FLY10)

Finolex

Chemplast

Naphtha

NaturalGas

PVC

PVC

0.26

0.24

DCW

Naphtha PVC 0.09

DCM Naphtha PVC 0.07

Ratnagiri

(0.26)

Source: Crisil Report, Tata Strategic

Mettur

(0.24)

Tuticorin

(0.09)

Kota

(0.07)


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2010


Key Trends

Growth Forecast & Drivers

Market Trends

Technology Trends

Regulatory Trends

Increase in global demand: Global demand for ethylene is forecasted to grow at a

CAGR of 4.5% and that of propylene to grow at a CAGR of 5.5% between period

2010 and 2014. Ethylene and propylene will continue to have major share (80%) of

total petrochemicals demand

Capacity expansion: Between 2010 and 2014 ethylene capacity additions is

expected to grow by 22 million tonnes. Major capacity build up is happening in

China, large demand centre and Middle East, ethane rich region towards the end

of 2010.

Depressed margins: With oversupply hinging in the global petrochemicals market,

margins will increasingly come under pressure in early 2011.

Low utilization levels: Global capacity utilization levels are expected to be at all

time lows of 80% in 2011 as compared to 90% now.

Product switch: Linear low density polyethylene is increasingly replacing the usage

of low density polyethylene in India. Only 1 ton of ethylene is required to produce

1 ton of LLDPE whereas > 1 ton of ethylene is required to produce 1 ton of LDPE

Change in feedstock mix: With increase availability of natural gas and new gas

finds, the dependency on naphtha as major feedstock for petrochemicals

complexes have reduced. In Middle East, substantial capacity additions will be

based on ethane as a feedstock.

Loss of duty protection: Government's protection cover is getting eroded gradually

with import duties on feedstock naphtha increased from 0% to 5% in Union Budget

2007-2008. Also on final products, import duties have been reduced over the years

from high of 70% in early 1990s to 5% (basic duty) in 2006.

Reduced fiscal benefits: As India is fast becoming a refining and petrochemical

surplus nation, Government has also taken away the income tax holidays and

other fiscal benefits from the industry. Only oil exploration companies now enjoy

the benefits based on the profit-sharing mechanism with the government.

The demand for basic petrochemicals is expected to grow at a CAGR of 9% to reach

10.27 mmtpa by FY2015. However, market will still be oversupplied to the tune of 1.7

mmtpa in FY2015. The demand growth will be driven by olefins segment including

ethylene, propylene and butadiene. Demand as well as capacity growth in aromatics

such as benzene and toluene will be marginal compared to overall market size.

Indian end products petrochemicals market is also expected to grow at a CAGR of 9%

to reach 15.1 mn


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2010


tons by FY2015. The surplus capacity is also expected to grow from 1.76 mmtpa in

FY2010 to 3.28 mmtpa in FY2015. The major drivers for demand growth are:

3,040

5,460

3,300

4,300

FY10 FY15

2,900

4,850

2,780

4,300

FY10 FY15

Ethylene Propylene Butadiene Benzene Toulene

Basic petrochemicals: Demand and supply forecastCapacity ('000 tons) Demand ('000 tons)

Total 11,970 Total 10,270

Source: Crisil Report, Department of Chemicals & Petrochemicals (GoI), Tata Strategic analysis

8,1206,530

7,240

11,0403,800

4,500

FY10 FY15FY10 FY15

Polymers Synthetics Elastomers Surfactants

End products petrochemicals: Demand and supply forecastDemand ('000 tons)

Total 18,440 Total 15,160

Source: Crisil Report, Department of Chemicals & Petrochemicals (GoI), Tata Strategic analysis

6,980

2,290

11,260

2,800

Capacity ('000 tons)

11,840 10,080

1. Low per capita consumption: Consumption pattern in India varies from that of

the world. Per capita consumption of polyolefins in India was 6 kgs. in 2009

compared to global average of 25 kgs With the economic growth expected to

continue, this gap is also expected to narrow down significantly.

2. Rise in polymers demand: The demand of polymers is expected to grow at a

CAGR of 10% from 6.98 mmtpa in FY2010 to reach 11.26 mmtpa in FY2015. The

high growth in demand is primarily driven by growth in packaging, infrastructure,

agriculture, healthcare and consumer sectors. As per a Goldman Sachs report, the

packaging sector itself will constitute 6.2 mmtpa of polymers demand by FY2012.


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2010


3. Development of PCPIRs: Development of Petroleum, Chemicals & Petrochemicals

Investment Regions across India is also expected to induce development of

industries consuming petrochemicals as major raw material. Till now PCPIRs have

been approved in states of Andhra Pradesh, Gujarat, West Bengal and Orissa.

PCPIR project in Orissa alone is expected to invite Rs. 2.3 lakh crore worth of

investment from petroleum and petrochemicals sectors. Similar scale of

investments is envisaged in other approved projects.

1. Volatility in raw material prices: More than 50% of global petrochemical

capacities are based on naphtha, a crude oil derived product. The prices of crude

oil products have witnessed significant volatility, thereby making petrochemicals

prices highly volatile.

2. Increased competition: Large capacity additions taking place in ethane richMiddle East and demand rich China. Out of the 22 million tons of ethylene

capacity additions expected during period 2010 and 2014, 9 million tons is

expected in Middle East alone. Since, ethane based petrochem products are

cheaper than petrochem products in India, domestic producers are expected to

witness margins pressure.

3. High entry barriers: Given the capital intensive nature of the petrochemical plant

and tariff barriers, new entrants and small and medium size companies are

prohibited from easily entering into the market.

4. Low capacity utilization: Due to oversupply in global markets, prices of

petrochemicals have taken a steep decline, thereby forcing the domesticcompanies to under utilize their plants operating levels. The average capacity

utilization has fallen from 95% levels before global economic crisis to 80% in

2009. Even post crisis, the capacity utilization rates are below 90%.

1. Backward & forward integration: Given the volatility of crude oil prices and

India's heavy dependency on oil imports, there is opportunity for oil and oil

related companies to reap benefits of increase in presence across the value chain.

For e.g Reliance Industries Ltd. successfully backward integrated from refining

and petrochemical company to oil and gas exploration. IOC which is primarily a

refining PSU has ventured into exploration in the past and currently building

greenfield petrochemical projects.

2. Improved feedstock supply: Availability of feedstock dictates the location of the

plant. Domestic products are uncompetitive due to high costs of naphtha when

compared with ethane based products from Middle East. One means to improve

the competitiveness of the domestic products is by improving the infrastructure

support as is the case in Middle East, China and Singapore. Also going forward, as

more natural gas becomes available in India, the domestic players are likely to

shift from naphtha to cheaper natural gas thereby increasing their

competitiveness in the market.

Key Challenges

Key Opportunities


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2010


3. More value-add products in portfolio: Demand for performance plastics such as

biodegradable polymers is expected to be on rise across the world including

India. Given the environment concerns with traditional plastics, companies

should look at expanding their portfolio and include more value add products.

4. Increased geographical presence: Given the capital intensive nature of the

project and high costs associated in India (due to no duty waivers, no/ very less

tax exemptions and high interest costs), the domestic companies may also look

outside for organic and inorganic opportunities. Many western companies such as

Dow, Shell, etc are increasing their presence in energy rich countries like Saudi

Arabia, Kuwait, Qatar, etc. and setting up manufacturing facilities.

1. Annual Report 2009-10, Department of Chemicals & Petrochemicals

2. Performance of Chemical & Petrochemical Industry at a Glance (2001 - 2007),

Department of Chemicals & Petrochemicals

3. Working Group on Indian chemical industry for formulation of the 11th Five Year

Plan, Planning Commission, Government of India

4. Petrochemicals: Industry Profile, Crisil Research, August 2010

5. Petrochemicals: Opinion, Crisil Research, August 2010

6. PCPIR Orissa Article, Business Standard, August 14 2010

References


Pratik Kadakia ([email protected]) and Chirag Surana


36/235

Fertilizers


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2010


Global Fertilizer Industry

Fertilizer consumption in FY09 had declined by 7% from FY08 to reach 156.7 million

tons nutrients. Because of the highly fluctuating crop and fertilizer prices during the

financial crisis, farmers in most countries (India being an exception) reduced or

postponed investments in agricultural inputs.

The improved economic and financial situation is expected to have a positive effect

on fertilizer demand. Stable commodity prices make it less risky for the farmers to

invest in fertilizer.

Global fertilizer industry is expected to grow at 3% CAGR till 2015.

3%

162.5

170.4

174.7179.1

183.7

188.3

FY10 FY11 FY12 FY13 FY14 FY15

Global(Mn ton nutrients)

fertilizer demand

Source: IFA

Factors affecting fertilizer demand1. Increasing food grain consumption is a major demand driver for fertilizers.

According to Food and Agriculture Organization of the United Nations (FAO) the 2010

world cereal output is expected to reach 2.28 billion tons. This would be 2%

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2002 2004 2006 2008 2010

Production Utilization

World Cereal Production and Utilization

(Mn tons)

Source: FAO


39/235

2010


increase over the previous year. World cereal utilization, currently at 2.25 billion tons,

has been rising at 2.0-2.5% over last 8 years.

2. Scope for expanding cultivated land in the next five years is limited. The per capita

land availability is expected to go down to 0.15 Hectare by 2015. Hence yield gainsare expected to contribute to most of the output growth. This will lead to increased

usage of fertilizer per hectare of land.

0.27

0.15

1998 2015E

World - Available arable land per capita

(Hectare)

Source: Yara fertilizer handbook, PotashCorp

3. Biofuel production using cereals, sugar cane and oilseeds as feedstock is another

major driver for fertilizer demand. About one-third of US maize, 55% of Brazilian

cane and two-thirds of EU rapeseed were used as feedstock for biofuel in 2009.

Increased demand for biofuels would require higher production of these

feedstocks. Biofuel production also influences the prices of these feedstocks

which has a larger indirect impact on fertilizer demand.

The evolution of current economic situation poses a major uncertainty for fertilizer

demand. If the economic situation in some of the major economies does not

improve, it could lead to increased speculation in agricultural commodities which

directly affects fertilizer demand. Some other uncertainties include evolution of policy

priorities in China, the fertilizer scheme in India (two large fertilizer consuming

countries) and bio-fuel consumption which will be affected by governments' priorities

on climate change.

The forecast for fertilizer demand is subject to major

uncertainties


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2010


Fertilizer consumption in India

30.9 31.4

9.2 9.7 10.2 10.9 11.8 11.9 12.1

7.0 6.8 7.2 8.6 9.4 9.7 10.1

7.4 7.0 7.1 8.2 8.6 8.8 9.0

26.6 27.9 29.126.5 29.9

FY09 FY10 FY11 FY12 FY13 FY14 FY15

Urea DAP Other complex OtherSource: Crisil, IFA

Fertilizer Product Consumption: India

(Mn tons)

India is one of the major regions contributing to the rising fertilizer demand. A better

monsoon and higher prices of farm goods are expected to increase fertilizer

consumption in FY11 compared to FY10. Monsoon rains in June-September this year,

a key factor in fertilizer demand, was 2% above the normal.

The fertilizer demand in India is expected to grow at 4% CAGR from FY09 to reach 63Mn tons in FY15, higher than the global growth rate of 3% during the same period.

Urea is a widely consumed fertilizer product. It contains the nutrient N only. Of all

nutrients, application of N was the least affected during the recent crisis. N-fertilizers

need to be applied through the life cycle of crop and demand for it is mainly inelastic.

Global Urea Outlook

151.2158.4 163.5

169.7 174.5

155.6 162.9 169.9

179.1193.4

2010 2011 2012 2013 2014

Global Urea demand-supply

(Mn tons)

Demand SupplySource: IFA


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2010


Global urea demand is expected to grow by 4% CAGR, to reach 174.5 Mn tons by

2014. The growth rate is expected to be higher in the case of South Asia driven

primarily by India.

The growth in capacity addition, however, will outpace the demand. According to TheInternational Fertilizer Association (IFA), global urea capacity is expected to grow by

6% CAGR to reach 222 Mn tons in 2014. This would result in a supply of 193.4 Mn

tons in 2014. Between 2009 and 2014, about 55 new plants are planned to come on

stream. East Asia will contribute 32% of net increase in capacity.

Natural gas is the most efficient feedstock for Urea production; most of the global

capacities are based on natural gas. West Asia with vast natural gas availability has

become a major hub for urea manufacturing. It is also a major exporter of urea. Coalis used as a feedstock in China due to its easy availability.

China has world's largest urea capacities but it mostly caters to domestic

requirement. Hence incremental capacities which would be important from trade

point of view are those which would come from low consumption regions i.e. West

Asia and Africa.

Urea capacity in low-cost feedstock regions to meet world

demand

18

5 5

3 34

14

10

0.5

32

12

0.50

2

4

6

8

10

12

14

16

18

20

Incremental capacities

Incremental consumption

EAsia

SAsia

WAsia

EEC

A

NAmer

ica

Africa

LAmer

ica

Region wise incremental capacity and consumption of urea

(2015 over 2009, Mn tons)

Source: Crisil, IFA

North America, Western and Central Europe are expected to add limited capacities

due to high cost of natural gas in these regions. Increase in demand is expected to

outpace the increase in capacity in South Asia.

The incremental capacity in West Asia and Africa is expected to meet the demand of

the deficit regions.


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2010


India Urea Outlook

India currently relies heavily on import to fulfill its urea demand. India imported 5.7

Mn tons of urea in FY09 to meet its demand of 26.2 Mn tons.

2726

2829

3031

5.7

4.5

5.8

6.2 6.36.6

0

5

10

15

20

25

30

35


3

4

5

6

7

8

9

production consumption import

Trend in Urea demand-supply scenario

(Mn tons)

Source: Tata Strategic analysis, FAI

This dependence on import is expected to continue in near future since urea capacity

is not expected to increase enough to meet the 4% annual increase in demand.

India's urea demand is expected to reach 31 Mn tons in FY14 whereas domestic

capacity is only expected to supply 24 Mn tons.

In India approximately 85% of urea production is based on captive ammonia

production while ammonia is procured externally only for the remaining 15%. Major

feedstocks used for urea manufacturing are natural gas, naptha, coal, fuel oil or LSHS.

Of all the feedstock mentioned here, natural gas is most cost effective and resultant

urea manufacturing cost is lowest. But traditionally majority of urea manufacturing in

India were naptha based. Retention pricing scheme (RPS), introduced in 1977,

assured 12% return on net worth of fertilizer plant and hence there was no clear

incentive for cost cutting.

Urea production in India


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2010


Naptha

17%

Caprolactum

1%

Natural

Gas, 72%

Fuel oil

9%

Coke oven

gas, 1%

Source: Crisil, FAI

Feedstock wise share of captive ammonia capacity

(% of total)

Recent policy developments in India:

Nutrient based subsidy scheme (NBS)

Greenfield projects at IPP-linked prices

The NBS scheme, in effect from April1 2010, is an attempt by the government to

encourage balanced fertilizer consumption in India. As per the policy, subsidy on

complex fertilizers would be calculated based on nutrient level and not at the product

level. Through this, govt. has changed the subsidy from constant farm gate prices to

constant subsidy. Producers now have the freedom to charge retail prices. Followingthe policy announcement, players hiked DAP prices by around Rs. 600 per ton. Prices

of other complex fertilizers were also raised.

Urea has been kept out of this policy, but its maximum retail price was increased by

10% from Rs. 4,830 to Rs. 5,310 per ton with effect from April 1.

The result has not been very encouraging in the limited time frame with most farmers

still preferring to use urea, the cheapest fertilizer. The sale of urea in kharif 2010

season, up to July 31, rose to 7.4 Mn tons from 6.8 Mn tons in the same period last

year.

Govt. of India introduced an investment policy in 2008 to overhaul production of urea

in the country and reduce dependence on import. As a part of this policy revamping

of existing urea unit plants and brownfield projects were encouraged through IPP-

linked prices.

However, for Greenfield projects the govt. decided prices based on competitive

bidding. As per the policy the govt. decides the location and potential investors bid

for the project. Whoever agrees to sell it by taking lowest amount of subsidy from the

govt. wins the bid. This policy failed in its attempt at putting up new Greenfield urea

plants in India.


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2010


The New Urea Investment Policy 2010, to be released by the end of this year, is

expected to make the policy more investor friendly. All Greenfield projects would be

assured a price which is 95% of IPP. The policy is also planned to provide additional

benefits for reviving the sick units under the Fertilizer Corporation of India (FCI) and

Hindustan Fertilizer Corp Ltd.

It is estimated that nearly Rs. 30,000 crore investments would come up in next 3-4

years if the policy is made truly investor-friendly and sufficient gas is made available.

Rock phosphate is the key raw material for manufacturing of DAP, MAP, TSP and other

NPK fertilizers. Almost all of rock phosphate is converted into phosphoric acid and

85% of phosphoric acid is converted to phosphatic fertilizers.

Global rock phosphate capacity is expected to increase by 4% CAGR to reach 228 Mn

tons by 2014.

Global Phosphatic Fertilizer Outlook

190196

205211

220228

0

50

100

150

200

250

2009 2010 2011 2012 2013 2014

4%

Source: IFA

Global Phosphate Rock Capacity

(Mn tons)

Rock phosphate reserves are mainly concentrated in China, Morocco and US. Top 5

rock-phosphate producing countries account for about 80% of world production.

China is the largest producer and consumes almost all its production. The US is the

second largest producer and consumer. Morocco is the third largest producer and

largest exporter of phosphate rocks.


45/235


46/235

2010


Region 2010 2011 2012 2013

China 2,680 1,500 1,020

Morocco 730 450 900

Brazil 240 2,900 2,000

Tunisia 360

Jordan 500

Saudi Arabia 1,800

Venezuela 320

Vietnam 325

Egypt 600

Source: IFA

P O capacity addition ('000 tons)2 5

Global DAP demand to rebound

Di-ammonium phosphate (DAP) contains both N and P type nutrients with higher P

percentage. It is applied mainly to meet the P requirement of the soil. DAP is the most

consumed amongst all phosphatic fertilizers.

DAP demand is mostly elastic unlike Urea demand. It is mainly used during sowing

and its reduced application does not result in immediate adverse effect on yield. The

global DAP demand declined by 8% in 2008 over 2007 during the economic crisis.

7.210.6 14.0

4.6

3.1 4.12.0

2.1 2.9

5.63.7 5.2

7.5 8.56.2

2004 2009 2014

E Asia S Asia N America L America ROW

Global DAP Consumption

(Mn tons)

Source: IFA, Crisil

5 year CAGR

of 6.3%

26.9 25.6 33.0


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2010


Going forward DAP demand is expected to be strong, primarily driven by India

(Largest importer of DAP), China and North America. It is expected increase by 6%

CAGR to reach 33 Mn tons by 2014.

Global DAP/MAP capacity is expected to rise by 4% CAGR to reach 42.5 Mn tons by

2014. Bulk of this incremental capacity is coming up in reserve rich regions of East

Asia, North America and Africa.

Major capacity expansions for DAP

India Phosphatic Fertilizer Outlook

9.29.7

10.210.9

11.8 12

6.2

5.24.6

5.9

7

8

0

2

4

6

8

10

12

14


Production Demand ImportSource: IFA

Trend in DAP demand-

(Mn tons)

supply scenario

Indian DAP demand is expected to increase by 5% CAGR and reach 11.9 Mn tons by

2014.

Domestic DAP production declined in FY09 as there was a fall in international prices

of DAP without a similar fall in the prices of raw material. The rise in DAP

consumption was met by increasing imports. India is currently the largest importer of

DAP in the world.

Import of DAP is expected to rise from 6.2 Mn tons in FY09 to ~8 Mn tons in Fy14.

DAP and other complex fertilizers can be manufactured in same unit. The availability

of other complex fertilizers is very limited in the international market compared to

DAP availability. Hence, producers are expected to manufacture greater quantities of

other complex fertilizers in the unit and meet DAP deficit through imports.


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2010


Fall in DAP price made imports sustainable

Rock phosphate, ammonia and sulphur are the main feedstock for manufacturing

DAP/MAP. Of these three, rock phosphate is the most critical feedstock and is not

available in India.

When DAP price peaked in 2008 the subsidy bill increased for Govt. of India (GoI).

This led the govt. to promote Indian DAP manufacturers to scout for rock phosphate

reserves globally. Syria, with high phosphate rock reserves was looked as a good

investment opportunity. India's Oswal chemicals and fertilizer limited has plans to

operate a phosphate-refining plan in Syria, it has signed an MOU with the Syrian govt.

450 470540

610

331

1,128

400

541

430

0

200

400

600

800

1,000

1,200

2006

2007

2008

2009

2010P

2011P

2012P

2013P

2014P

International DAP Prices

($/ton)

Source: Crisil, Fertecon

International DAP prices have moderated after reaching its peak in 2008. This has

made import of DAP more sustainable.

Muriate of Potash (MOP) contains potassium nutrient. Like DAP its demand is mostlyelastic. Potash fertilizer demand in 2009 was down by 8.6% over 2008. Farmers rather

opted to mine their soils to utilize the accumulated nutrient reserve in the soil.

Global Potash Outlook


49/235

2010


29.932

33.534.7

35.8

3839.2

41.442.9

45.8

0

10

20

30

40

50

2010 2011 2012 2013 2014

Demand Supply

Global Potash Supply/Demand Balance

(Mn tons)

Source: IFA

4.6%

Global Potash demand is expected to grow at 4.6% CAGR to reach 35.8 Mn tons by

2014. Demand will be primarily driven by East Asia (mainly China), Latin America,

North America and South Asia (mainly India).

Global potash capacity is expected to increase from 41.6 Mn tons in 2009 to 54.7 Mn

tons in 2012. This would mean a supply of 47.1 Mn tons in 2014. The additional

capacity is expected to come mainly from Canada and Russia.

BHP Bilton is trying to acquire Potash Corporation which controls 18% of world

market for Potash. Earlier this year, two Russian major companies Urakali and Silvinit

announced that they are being merged and the combined company would control

10% of global Potassium market.

The global Potash trade is heavily cartelized with two companies Canpotex and

Belarussian Potash Company controlling 70% of the global capacity and influencing

the prices. Canpotex represents North American producers Potash Corp, Mosaic and

Agrium, whereas Belarussian Potash Company represents Russian producer Uralkali

and Belaruskali of Belarus. BHP has mentioned that if it becomes successful in

purchasing Potash Corp, it would eventually sell potash through its own channel and

not through Canpotex. The acquisition of Potash Corp is also likely to have an effect

on supply levels, as the company has curtailed production to support prices during

times of weak demand, while BHP is inclined to run operations at their full capacity.

M&A in global potash industry


50/235

2010


India Potash Outlook

Consumption of 'K' nutrient declined from 3.3 Mn tons in FY09 to 3 Mn tons in FY10.

The demand for 'K' nutrient in India is expected to grow at ~4.5% CAGR from FY09 toFY14 to reach 4.1 Mn tons (nutrient) by FY14.

The demand for complex fertilizers is expected to increase by ~7% CAGR and reach

~9.7 Mn tons (product) by FY14.

7.0 6.87.2

8.6 9.3

9.7

0

2

4

6

8

10

12


Production Consumption

7%

Complex fertilizer (excluding DAP) demand-supply

(Mn tons)

Source: Crisil, FAI

Going forward, the domestic production of other complex fertilizers is expected to

meet the domestic demand.

BHP Bilton's acquisition of Potash Corp. may upset the two existing potash cartels and

could lead to a change in industry dynamics.

With no domestic potash reserves, India imports potash largely as potassium chloride

at around Rs. 17,000/ ton. It offers a large subsidy on this and sells it to farmers for

Rs. 4,000/ ton. Due to India's large dependence on imports, a significant change in

global industry dynamics could impact Indian govt.'s subsidy bill. India could still try

to use its big buyer advantage and get favorable terms in changing industry scenario.

Potash Corp. acquisition could impact Indian govt.'s subsidy

bill


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2010


Co-

operative

26%

Public

sector

29%

Private

sector

45%

Share of capacity of nitrogenous fertilizer

(% share, Nov' 09)

Source: FAI

Publicsector, 8%

Co-

operative

35%

Private

sector

57%

Share of capacity of phosphatic fertilizer

(% share, Nov' 09)

Source: FAI

Concentration

Due to the capital intensive nature of the fertilizer manufacturing projects, the

industry is relatively concentrated, where a few player capture large chunk of the

market.The share of top 5 companies in total urea production in India is ~65% and in

case of DAP it is ~84%.

Fertilizer sector % share of top 5 companies(2009)

Urea ~65%

DAP ~84%

Complex (excluding DAP) ~80%

Source: FAI

FERTILIZER INDUSTRY STRUCTURE IN INDIA

The fertilizer industry in India is mainly characterized by govt. control. Since the

fertilizer sector is of national importance, traditionally GoI has controlled the sectorby regulating the investment, production, distribution and pricing. The most distinct

characteristic of Indian fertilizer sector is partial dependence on monsoons for

demand.

The private sector leads in capacities in urea as well as phosphatic fertilizer sectors.

As of Nov. 2009, out of 37 plants in India with a nitrogenous fertilizer capacity of 13.1

Mn tons, 23 were in the private sector with a total capacity of 5.9 Mn tons. In case of

phosphatic fertilizers, 57% of total capacity was held by private sector.

Ownership structure


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2010


Major Companies

IFFCO is India's largest urea manufacturing company producing ~3.2 Mn tons of urea

annually. It has urea plants in UP and Gujarat and achieved net sales of ~Rs. 5,876

crore in FY '09 for its urea division. Other prominent companies in the Indian urea

industry are National Fertilizers, RCFL, KRIBHCO, Chambal Fertilizers etc.

Company Name Capacity ('000 TPA) Sales (Rs. Cr, 2009) Location

IFFCO 4,242 5,876 Aonla, Phulpur (UP),

Kalol (Gujarat)

NFL 3,231 5,006 Vijaypur (MP), Bhatinda

(Punjab), Panipat (Haryana)

KRIBHCO 2,594 2,597 Hazira (Gujarat)

RCFL 2,037 - Trombay, Thal (Maharashtra)

CFCL 1,729 2,240 Kota (Rajasthan)

NFCL 1,195 1,800 Kakinada (AP)

Urea Manufacturing Companies

Source: Crisil, Capital Line

The production, sales and location of 6 major urea manufacturers is provided in the

table above.

IFFCO is India's largest DAP manufacturer as well. It has an annual capacity of ~3.7 Mn

tons capacity. Other leading manufacturers are Godavari Fertilizers, GSFC, Tata

Chemicals etc.

Govt. of India (GoI) is trying to shift all the urea manufacturing units to natural gas

based units by 2013. With the advent of RIL's KG basin natural gas and the increasing

supplies of LNG, the availability of natural gas is expected to improve.

The Govt. has allocated the initial 40 Mn metric standard cu. m per day (mmscmd) of

RIL KG basin natural gas to various units on the basis of a gas utilisation policy. The

priority has been given to fertilizer sector so as to meet their gas demand.

Other developments

Natural Gas allocation


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Oman has agreed to invest $ 3 Billion in India

Oman has agreed to invest around $3 Bn for revival of closed plants of Fertilizer

Corporation of India and Hindustan Fertilizer Corporation and expansion of Rashtriya

Chemicals and Fertilizers through Oman Oil Company.

In addition to this, both countries are also looking at ways to expand the existing

capacity of the 16.5 lakh tons urea project of the Oman India Fertilizer Company

(OMIFCO) to 25 lakh tons.

End users Initial Allocation

(mmscmd) (mmscmd)

Actual Allocation

Fertilizer plants Meet demand 15.33

Power plants 18 (Maximum) 18

City Gas Distribution 5 (Maximum) 0.87 (3.75 to steel plants)

projects

LPG making units 3 (Maximum) 3

Total 40 40.9

Gas Allocation

Source: Gas utilization policy

Subsequently, the govt. has allocated an additional 50 mmscmd gas, of which 20

mmscmd is on firm basis and additional 30 mmscmd is on fallback basis. With the

new allocation, the govt. has tried to meet the demand of the power sector.

End users Firm allocation

(mmscmd) (mmscmd)

Fallback allocation

Power 12.08 12.0

Fertilizer 0.18 -

Steel 0.44 -

Refineries 5.38 6.0

Captive power plants - 10.0

CGD projects - 2.0

Additional Allocation

Source: Gas utilization policy


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Aditya Birla Nuvo Limited (ABNL) gets preliminary nod for

capacity expansion

Outlook on Indian Fertilizer Industry

ABNL, earlier known as Indo Gulf Fertilizers, has received first stage environmentapproval for its urea expansion project. The project envisages setting up a 2,200 tons

per day (tpd) ammonia unit and a 3,850 tpd urea unit at its Jagdishpur complex in

Utter Pradesh. The complex currently has 1,910 tpd ammonia capacity and two urea

units, each of 1,625 tpd.

Sale of urea at IPP linked price even for Greenfield projects is expected to promote

fresh investments for Greenfield projects. The Investment Policy of 2008 has already

provided incentives for brownfield expansion and improvement in facility for existing

plants by linking the prices to IPP. In a way, GoI has rewarded all the existing Indianurea manufacturers and also encouraged new companies to invest in the market.

Indian companies are also encouraged to invest in natural resource rich countries

overseas. The Indian govt. is ready to enter into firm offtake agreements at prices

decided by mutual consultation for such projects abroad. There is already a trend of

some Indian companies forming joint ventures abroad, like Oswal chemical and

fertilizers in Syria, and this trend will catch up with other Indian companies as well.

Availability of feedstock has been an issue for Indian fertilizer industry. Against the

industry's demand of 42 mmscmd of natural gas in FY09 , according to Fertilizer

Association of India, only 28 mscmd was available to it. That may change as big new

gas discoveries go into production. The govt. has given priority to gas based ureaplants and and these plants would be supplied gas so as to make them run at full

capacity. The govt. allocated 15.33 mmscmd of gas in this regard from RIL KG basin. In

2009, fertilizer companies started receiving natural gas supplies from the Krishna-

Godavari basin. With availability of natural gas fertilizer production is expected to

improve in India.


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2010


References

1. Fertilizer policies, The Fertilizer Association of India (FAI), retrieved on

September 13, 2010

2. Fertilizer production, consumption and import statistics, FAI, retrieved on

September 13, 2010

3. Fertilizer Outlook 2010-2014, International Fertilizer Industry Association

(IFA), Annual conference, June 2010

4. Phosphate Outlook, TFI Outlook Conference, Oct 2009

5. Fertecon Phosphate report, August 2010

6. Global Supply and Demand Outlook for Fertilizers, IFA, December 2009

7. Global Fertilizers and Agricultural Chemicals, Datamonitor, February 2010

8. Newspaper articles: The Hindu, Mint, Business Standard

9. Fertilizer Annual Review , Crisil Research, January 2010

10. Gas utilization policy, Ministry of Petroleum & Natural Gas, Govt. of India

11. Annual Report 2009-10, Department of Fertilizer

12. Yara fertilizer handbook

13. PotashCorp Industry report


Pratik Kadakia ([email protected]), Anshul Saxena ([email protected]) and Binay Agrawal

([email protected])


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Introduction

l

l

l

Caustic Soda & Chlorine

Alkali chemicals is the oldest and the largest segment of the chemical industry. These

chemicals serve as key inputs for a number of industries such as aluminium, soap,

detergent, glass, tyre, rubber, pulp and paper, pharmaceutical, water treatment,

textiles, leather, fibre etc. The key chemicals in the chlor alkali industry are

Caustic soda

Chlorine (including liquid chlorine)

Soda ash

Caustic Soda (chemically known as sodium hydroxide) and chlorine are produced

together through the electrolysis of common salt solution (sodium chloride or brine).

Caustic soda and chlorine are generated in the ratio of 1:0.89. Demand for chlorine

drives caustic soda production globally, but in India the industry has developed in line

with the demand-supply balance of caustic soda.

There are three alternative technologies used to manufacture caustic soda from

brine. These are mercury cell, membrane cell and diaphragm technologies.

1. The membrane cell technology involves lower power costs compared to the other

two. It is also the most environmental friendly as it does not use any hazardous

materials as compared to mercury cell and diaphragm technologies which usemercury and asbestos respectively.

2. The diaphragm technology involves higher capital and power costs. The quality of

caustic soda is also of inferior quality. However, it is popular as the purity of

chlorine from this method is highest and chlorine demand is major driver for

caustic soda production globally.

3. Mercury cell technology involves lower capital costs compared to membrane and

diaphragm technologies. However, it is not so popular because of related pollution

hazards due to use of asbestos.

Globally the diaphragm technology is the most widely used while in India the

membrane cell technology accounts for more than 90% of the total capacity.

Globally the total capacity of caustic soda is estimated to be around 78.6 Mn tons in

2009. China has the highest caustic soda capacity at 27 Mn tons, accounting for 34%

of world capacity. North America has a capacity of 15.5 Mn tons. India has a capacity

of 2.9 Mn tons and accounts for 4% of the global caustic soda capacity.

Introduction

Global Scenario


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2010


Europe

21%

North

America

20%

Others

0.08

India

0.04

Asia

(excluding

India

China)

0.13

China

34%

Global caustic soda capacity(78.6 Mn tons)

Source: Crisil

China and Middle East are fast emerging as key production hubs for caustic soda. It is

expected that there would not be any significant capacity additions in developed

countries like North America and Western Europe primarily due to unattractive cost

structures and flat demand.

Global consumption of caustic soda in 2009 is estimated at 63.6 Mn tons. Asia is the

largest consumer of caustic soda and is expected to remain the same in near future.

Majority of caustic soda is exported from North America, the Middle East and Asia.

Australia and Latin America are the leading importers.

Consumption Mix

Inorganics

15%

Pulp &

Paper

15%

Others

26%

Water

treatment

4%

Alumina

8%

Soaps/det

ergents/tex

tiles, 13%

Organics

19%

Caustic Soda: Global Consumption

(63.6 Mn tons, 2009)

Source: Crisil

The majority of caustic soda is used in the chemicals and paper industry. Aluminium,

textiles, soaps & detergents and water treatment are other major areas consuming

caustic soda.


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2010


Western region accounted for approximately 47% of the estimated capacity of 2.76

Mn tons in FY09 because of its proximity to salt which is one of the key raw materials.The southern regions accounts for 25% of the total capacity. The northern and

eastern regions have a share of 15% and 13% respectively.

South

25%

East

13%

North

15%

West

47%

Caustic Soda: regional capacity distribution

(2.98 Mn tons, FY10)

Source: AMAI, Crisil

54.9 58.3

140.7155

185.1

370.2

62

17.630.9

39 37.859


Import Export

Large

spike in

import

Caustic Soda import/export

('000 tons)


Large increase in caustic soda import in Fy10

Imports grew rapidly at CAGR of 46.5% from 54.6 thousand tons in FY05 to 370.2

thousand tons in FY10. In FY07 and FY10 a sharp rise in import was seen. Exports

increased at a CAGR of 28.6% from 17.6 thousand tons in FY05 to 62 thousand tons in

FY10.


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2010


DCM Shriram9%

KanoriaChemicals

5%

Others39%

ABNL4%

ABCL4%

Grasim9%

ChemplastSanmar, 5%

AndhraSugars, 4%

PunjabAlkalies, 5%

GACL16%

Caustic Soda: Market share of companies

(Rs. 4,560 Cr., FY09)

Source: Capitaline, Crisil

Major Companies

Gujarat Alkalies and Chemicals Ltd. (GACL) is the market leader in caustic soda

segment in India accounting for 16% of the total domestic sales value in FY09.

The Aditya Birla Group, through its companies such as Aditya Birla Chemicals Ltd

(ABCL), Grasim industries Ltd and Aditya Birla Nuvo Ltd (ABNL) capture around 16% of

domestic market. Other major companies are DCM Sriram, Grasim Industries, Punjab

Alkalies, Kanoria Chemicals and Andhra Sugars. The top five companies account for

almost 45% of the total domestic sales of caustic soda in India.

Pulp &Paper16%

Soaps/detergents

9%

Pharma6%

Textiles13%

Alumina

17%

Others40%

Caustic Soda: India Consumption(2.3 Mn tons, FY09)


Key Applications

The key end user industries of caustic soda in India are textiles, paper, soaps and

detergents and aluminium. Alumina is the largest end-use industry accounting for

17% of the total caustic soda consumption in FY09. Caustic soda is used in processing

of bauxite ore in the aluminium industry. The processing of bauxite ore gives alumina

which is in turn used in the manufacturing of aluminium. Paper and textiles


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2010


accounted for 16% and 13% respectively of total caustic soda consumption in FY09. In

the paper industry it is used in water treatment, de-inking of waste paper and as a

raw material in pulping and bleaching processes. In the textile industry, caustic soda is

used in processing of cotton fibers and bleaching of fabrics.

Global consumption of chlorine in 2009 is estimated at 55.4 Mn tons. Chlorine is used

in manufacture of paper and pulp, ethylene dichloride (EDC), which is used for

producing polyvinyl chloride (PVC), manufacture of chlorinated paraffin wax,

fertilizers and pesticides.

Chlorine Consumption

Global Scenario

Chlorine: Global Consumption(55.4 Mn tons, 2009)

Others

30% Chlor.Inter

6%

Water

treatment

4%

Vinyls

36%

Pulp and

Paper, 2%

Inorganics

2%

Organics

20%

Source: Crisil

Chlorine: India Consumption(1.9 Mn tons, FY09)

Pesticides

5%

Others

13%

Chlor.Inter

11%

Water

treatment

2%

Vinyls

18%

Pulp and

Paper, 8% Inorganics

23%

Organics

20%


Indian Scenario

Consumption of chlorine in India in FY09 is estimated at 1.9 Mn tons. The key end-

user industries of chlorine in India are PVC, inorganic and organic chemicals. Vinyl, a

key determinant of chlorine demand in India, accounted for 18% of total chlorine

demand.

Since caustic soda and chlorine are co-products capacities and production of caustic

soda and chlorine are correlated. Chlorine production has been growing in line with

the growth of caustic soda manufacturing and has not been determined by the

growth of the chlorine-based downstream industries. There is more chlorineproduced in India than there is demand.

Like caustic soda, chlorine capacity also increased at a CAGR of 7.5% from 1.9 Mn

tons in FY05 to 2.7 Mn tons in Fy10. Production also increased at 4.4% CAGR from 1.6

thousand tons in FY05 to 2 Mn tons in Fy10.

Caustic soda and chlorine capacity are correlated


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Industry CAGR over next 5 years

Alumina 17-18

Paper 4-5

Soaps/detergents 3-4

Textiles 4-5

Demand for caustic soda from end-use industry

Source: Crisil, Tata Strategic Analysis

Industry Outlook

Demand for caustic soda is expected to be driven mainly by growth in end use

industry i.e. alumina, paper, detergent and textiles. Domestic alumina production is

likely to more than double to 10.5 Mn tons from current production of 4 Mn tons.

Strong growth in industrial, infrastructure, automobile, transportation and power

sectors would drive the demand for alumina. Demand for caustic soda from bothpaper and textile industry is expected to grow at ~5% whereas demand from

detergent industry is expected to grow at ~4% in next 5 years.

Driven by end use industry growth, demand for caustic soda is projected to grow at a

rate of 7.3% from 2.55 Mn tons in FY10 to 3.6 Mn tons in FY15.

Imports are projected to reach 611.2 thousand tons in FY15 from 370 thousand tons

in FY10. This is due to the projected demand-supply gap in the industry.

The increase in capacity is expected to be driven by companies like GACL, which is

slated to add caustic soda capacity of about 200 thousand tons at its Dahej facility.

Demand supply forecast

2,5502,663

2,901

3,3023,499

3,631

370 392

471

565588

611

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


0

100

200

300

400

500

600

700

800

900

1000

production consumption import (RHS)

Trend in caustic soda demand-supply scenario

('000 Tons)

Source: Crisil, Tata Strategic


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2010


Other expansions coming up are of about 112.5 thousand tons by Reliance Industries

Ltd. and 75 thousand tons by Kanoria Chemicals. Aditya Birla Chemicals Ltd. is setting

up two Greenfield projects with a combined capacity of ~90 thousand tons.

Soda ash is chemically known as sodium carbonate. Broadly there are two ways in

which soda ash is produced; it is eit

Roland Berger India Chem 20101109

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