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RUN-UP TO BUDGET 2005-06

Petrochemicals Sector

Rationalise duties   fe-ICRA SNAPSHOT • The size of the Indian petrochemicals industry (based on the turnover of major companies) is estimated at more than Rs 300 billion. The demand for commodity polymers and fibre intermediates (the most important groups of finished petrochemicals) increased at a rate of over 10% per annum during nineties. Fuelled by setting up of large capacities , the production of petrochemicals has shown a sharp increase over the past ten years. However, on account of rising demand, many petrochemicals now have marginal over-capacity and significant over-capacity is present only in petrochemicals, wherein India can export . • RIL and IPCL dominate the Indian petrochemical crackers with a combined share of over 65%. Haldia Petrochemicals Ltd (HPL) and Gas Authority of India Ltd (GAIL) are the other new medium-sized players • The industry’s profitability is characterised by high level of cyclicality . Currently, the global petrochemical margins have been on an upswing. This has led to sharp rise in profitability of Indian petrochemical players in 2004. Key Issues facing the industry • Slow growth in demand: Demand growth for major petrochemical products has slowed down during the recent past on account of several factors, namely, high prices of petrochemicals, high price sensitivity of Indian plastic processing market (on account of large recycling), poor competitiveness of downstream plastic processing industry and slow industrial growth. Notably, a significant contributor to the growth in Chinese petrochemical demand is its fast rising exports of plastic products. The SSI reservation on large number of plastic products in India restricts the size of a plastic processing company and its competitiveness in the global market. • Rise of Middle East cost competitive capacity: A significant capacity is being built in the Middle East, which would be based on cheap gas. Given the nearness of Middle East capacity to India, Indian petrochemical producers would need to develop suitable strategies so as to be counter the onslaught of rising Middle East production. CEO SPEAK The duty on intermediates like PTA, MEG and caprolactam should be brought down from 20 % to 5% at par with the duty on naphtha and paraxylene. Duty on PFY may be cut from 20 % to 15%, so that there is enough duty differential between intermediates and finished products. Excise duty on PFY may be brought down 24% to at least 16% — OP Lohia, MD, Indo Rama Synthetics fe Perspective • Correct the inverted customs duty structure as it is anomalous and is a disincentive for creation of domestic capacity at the higher end of the value chain CII suggestions • Reduce customs duty on naphtha to 5% • Reduce customs duty on catalyst s • Revise customs duties to encourage value addition ASSOCHAM Wishlist • Reduce peak customs duty on raw materials and intermediates to 10% or 15% • Charge lower rate for raw materials and higher for finished goods

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