IMPACT: PETROCHEMICALS

INTERIM BUDGET

MEASURES

• Reduction in peak customs duty applicable to polymer products.
• Abolition of special additional duty of 4 per cent.

IMPACT
The petrochemical industry is on the threshold of an upswing. Import of polymer producers will be cheaper by 11 per cent due to the cut in customs and special additional duty.

Since the duty differential between final products and raw material (naphtha) has narrowed, companies will face pressure on margins.

OUTLOOK
Analysts expect the petrochemical sector to show a remarkable turnaround this year.

As per a report by ICICI securities, the petrochemical industry can be appropriately described as a "desert rose" as it suffers a six-eight year downturn, which eventually culminates into an explosive peak.

The report quotes global consultants as saying that a sharp slowdown in capacity increases due to low margins over the past eight years portend prospects of an intense boom in the petrochemical cycle over the next two years.

A look at the petrochemical product prices reveals that the sector peaked out in fiscal 2005 and currently product prices are at nearly 50 per cent discount to peak values.

This itself lends scope for rise in product prices given that demand in both domestic as well as international markets is quite buoyant.

Particularly, the buoyant shipping freight rates due to increased global trade is likely to further the boom in the petrochemical cycle.

Moreover several petrochemical majors deciding to prevent bunching of new capacities across the globe there is expected to be no new capacity additions. With no units coming up, coupled with positive demand growth, the petrochemical margins are improving.

Middle East which houses cheapest gas based petrochemical units has also decided against any new petrochemical complexes this calendar year.

In fact the new capacities which were added in early 2000 are operating at full capacities and products are absorbed across various geographical regions.

Impact - Negative

RELIANCE INDUSTRIES
Operating margins Reliance may come under pressure as polymer imports will be 11 per cent cheaper, according a Cris Infac analyst. In fiscal 2003, polymers accounted for nearly a quarter of Reliance's revenues.

The savings on account of lower energy costs could provide some relief but will be too little to offset the impact of lower prices.

Reliance's prices are nearly on a par with import prices and, hence, will have to be brought down further to compete with imports.

Analysts say there may not be too much pressure on the companies to slash prices immediately as imports are not exactly flooding to India, given the huge uptake in Chinese demand.

Lower duty on mobile handsets will have make the phones affordable for many more, propelling Reliance's mobile subscriber base.

The outlook for the largest private sector company Reliance Industries is pretty much bright.

Analysts say that there are multiple triggers for the stock. Firstly, its staple business - petrochemicals which accounts for 50 per cent of operating profits and 45 per cent of gross sales - is set to perform well on the back of cyclical upturn.

According to the oil analysts at ICICI Securities, Reliance's profits are highly sensitive to the petrochemical cycle and the petrochem crescendo could double Reliance's profits in fiscal 2005.

IPCL
Operating margins of IPCL may come under pressure over the near-term as polymer imports will be 11 per cent cheaper, according a Cris Infac analyst.

However, the upswing in demand for petrochem products will ensure that the company witness significant gains both on volume and price front marginalising the impact of tariff reduction.

Outlook for IPCL looks bright for the year. The cyclical upswing will have a disproportionately positive impact on IPCL.

The company has been showing strong operating performance after it was take-over by Reliance. In the first nine months of fiscal 2004, the company's net sales went up 18 per cent to Rs 4274 crore.