Higher demand and margins for the petrochemicals segment are likely to boost the fourth-quarter earnings of oil refiners and marketers like Reliance Industries Ltd., Indian Oil Corp. and GAIL India Ltd.
Prices of industrial polymers—including high- and low-density polyethylene, and purified terephthalic acid, among others—rose between 10% and 38% on a sequential basis, according to data from JPMorgan. On an annual basis, the increase ranged between 7% and 64%.
Brokerages expect the operating profit of these companies to rise.
- Indian Oil’s Ebitda margin will rise nearly 375 basis points over last year, according to Nirmal Bang. The brokerage expects the company’s operating profit to grow 209.6% year-on-year.
- Edelweiss projects GAIL’s Ebitda to rise 30% sequentially, aided by higher petrochemical and trading margins.
- Reliance Industries’ petrochemical spreads, Morgan Stanley said in a report, will rise 20% sequentially and 29% year-on-year. That’s projected to result in 20% sequential growth in the company’s oil-to-chemicals operating profit.
Demand for products like polyethylene, polypropylene and polyvinyl chloride surged across sectors after markets opened up following lockdowns last year.
Polyethylene witnessed demand from packaging, medical, consumer and durables sectors, while demand for polypropylene recovered on the back of a recovery in automobile, consumer durables and food packaging industries. Usage of polyvinyl chloride rose earlier this year as construction activities resumed.
Demand for polyvinyl chloride packaging is expected to further grow as Indians shop online and their preference for canned food rises.
Prices of naphtha—a key petroleum product used to make industrial solvents, laundry soaps and cleaning fluids—rose 38.4% sequentially in the fourth quarter at a time when crude oil turned expensive by nearly 35.2%, according to a Motilal Oswal report.
Although some polymer-naphtha spreads have declined over the last quarter, they remain above their long-term average, the brokerage said. Polyethylene and polypropylene naphtha spreads were 18-31% higher than their long-term average whereas PVC naphtha spreads were 160% higher than their long-term average in the fourth quarter.
The higher spreads reflect the strong pent-up demand visible once the global economy opened up in the second half of the last fiscal.
Tightened supply of petrochemicals following delayed turnaround of refineries after shutdowns and postponement of commissioning of new units because of the second wave of Covid-19, too, contributed to the high spreads.
“Refineries continue to operate at lower rates across the globe due to suppressed demand for petroleum products, primarily aviation turbine fuel,” the Motilal Oswal report said. “This also reduces the supply of petchem products from refineries, supporting the upward movement in petchem product prices and spreads.”
Petrochemical product demand is expected to outpace refinery product demand, according to Jefferies. While petrochemical demand is projected to grow at an annualised rate of 4% over the next decade, the corresponding figure for refinery products is 1%.
Yet, petrochemical margins may face headwinds owing to large capacity additions and likely reduction in imports by China. According to an ICICI Securities report, Chinese demand may remain strong at best for another year and its petrochemical imports are expected to decline as it adds capacity. It expects China’s imports to fall by 53% year-on-year in 2021.
India’s petrochemical production rose 16% year-on-year to 43.52 million metric tonnes in 2019-20, DV Sadananda Gowda, minister of chemicals and fertilisers, said in response to a Lok Sabha query in March 2021, adding the country remains a net importer of chemicals and petrochemicals.
Imports have risen in the last few years, the minister said, amid higher production cost, smaller scale of operations and domestic production failing to meet demand.
The government reduced customs duty on naphtha from 4% to 2.5% in this year’s union budget to boost local production.
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