Good days behind for petchem industry: Icra

Kolkata: Good days are feared to be over for the domestic petrochemical producers, who have been enjoying robust cash earnings over the past several years. Petrochem producers' net debt levels have also been low.

“Changing industry dynamics both globally and domestically, besides emergence of new industry influencing determinants will have a bearing on the petrochemical sector,” said K Ravichandran, Senior VP and Group Head, Corporate Ratings, Icra.

And that’s not without reasons. Significant among the influencing factor is the evolving demand-supply scenario. On the demand/ consumption side, governments and brand owners are responding to a rising tide of negative public perception against single use plastics leading to on-going efforts to reduce, reuse, recycle plastic materials extending to even banning of some uses of plastic materials, analysts pointed out.

Going forward, the olefins cycle is likely to decline further and that in turn would lead to subdued returns, they added.

The trend of recycling and reuse is likely to accelerate going forward. That would dent the demand for virgin polymer and impact the margins of producers. Notwithstanding the backlash, improving living standards, population growth, increasing urbanisation and lack of cost effective alternatives would continue to support the growth of many plastics over the next decade. Accordingly, companies across the globe are investing in new ethylene capacities besides which, existing oil refineries are either reconfiguring and/or adding units to maximise the production of chemicals and petrochemicals.

On the supply side, with the shale gas boom in the US, prices of natural gas and ethane fell in 2009 and have remained low since then. “The US market invested in ethane based capacities which are now coming on line, besides many projects are still under construction, owing to the large cash cost advantage of ethane cracking over naphtha cracking for ethylene production,” Icra said.