Petchem Momentum May Be Petering Out For Reliance Industries To Indian Oil

After rising last fiscal, prices of petrochemicals have declined so far in the ongoing financial year amid global logistical snags and demand evaporating because of the second Covid-19 wave. That’s likely to impact segment’s earnings for India’s oil marketing firms.The Bloomberg SE Asia General Purpose Polymer Index, which represents prices of polymers—or substances used to make everything from textile fibres to paints, glue and drugs—has declined by over 4% over last month in June. PP-naphtha spreads fell the most over May, by 16%, while those for PVC-ethylene dropped 3.8%.Capacity addition by China can also create challenges for the sector in the second half of 2021.Polymer spreads witnessed a buoyant FY21, rising to multi-year highs in its second half. That came as a result of pent-up demand once economies in Asia and the Middle East opened up after lockdowns imposed to curb the pandemic’s first wave were relaxed. .The market intelligence provider ICIS expects global petrochemical demand to reduce by 14.5 million tonnes this year if the pandemic isn’t controlled. India’s demand for polypropylene, it said, would have to be scaled down as the lockdowns imposed by several states has hit domestic consumption.S&P Global Platts, however, foresees a revival and higher supply in some segments. Demand for polypropylene in downstream medical, hygiene and packaging applications may be offset by increased supply in the second half of 2021, the commodities information provider said in a report.Polypropylene capacity of around 7.04 million metric tonnes per year is expected from June till the year-end in Asia and the Middle East. Of this, 4.3 MMT per year is from China alone and the remainder from other countries.India is a major importer of most petrochemicals, but weak domestic demand has prompted local producers to seek exports to prevent an inventory build-up.Yet, they will face shipping hurdles.Container ShortageA shortage of container freight space is expected to create delays and increase logistics costs. According to ICIS, container rates in the last week of May from the Far East to the U.S. west and east coasts rose to a new record. It expects the shortage to persist till the fourth quarter of 2021.Exports to China are taking a hit, with its economic growth slowing pace. That’s expected to slacken further as Asia’s largest economy adds petrochemical manufacturing capacity. ICIS estimates China’s polypropylene and paraxylene imports to fall by well over half year-on-year in 2021.The phenomenon is yet to affect the earnings of Indian oil refiners and marketers. Operating profit of the petrochemical segment of Reliance Industries Ltd., Indian Oil Corp. and GAIL India Ltd. rose 52%, 373% and 291.3% over last year, respectively, in the quarter ended March.Analysts, however, expect the recent fall in demand and supply-chain issues to drag the segment’s revenue and profit in FY22.Here’s what brokerages said:Nirmal Bang on GAIL and Indian OilGAIL’s petrochemical revenue may fall 3% over last year to Rs 6,780 crore in FY22E compared to a 30% growth in FY21.Its petrochemical segment’s Ebitda is expected to decline 25% year-on-year to Rs 1,067 crore in FY22E compared to 957.2% rise in FY21.Indian Oil’s petrochemical segment volumes to increase 2% to 2.78 MMT in FY22E compared to 19% in FY21.Its petrochemical segmental Ebitda may increase 38% to Rs 20,430 crore in FY22E, compared to 453% increase in FY21.Yes Securities On GAILGAIL’s polymer segment sales to decline 7% to 810 TMT in FY22E, compared to 18% growth in FY21.CLSA On RILRIL’s petrochemicals gross margin is expected to grow 5.5% in FY22E to $385 per tonne compared to 17% growth in FY21.ICICI Securities On RILLarge capacity additions in petrochemical segment may hurt margins, resulting in downside to petrochemical Ebitda in the medium term. Its petrochemical Ebitda has been revised downwards to 10% year-on-year for FY23E.

Petchem Momentum May Be Petering Out For Reliance Industries To Indian Oil

After rising last fiscal, prices of petrochemicals have declined so far in the ongoing financial year. Here’s why.

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