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SPECIAL REPORT: PETROCHEMICALS

India to outweigh Chinese polyolefin demand growth over the next ten years

September 2014

by Hetain Mistry, Senior Analyst, Petrochemicals

PlAttS SPeCIAl RePoRt: PetRoCHeMICAlS | 2


IndIA TO OuTwEIgH CHInESE POLyOLEfIn dEMAnd gROwTH OvER THE nExT TEn yEARSGlobally, the regional growth centres for polyethylene (PE) and polypropylene (PP) are Asia, Central and South America, Central and Eastern Europe, South America and the Middle East. Asia and Africa, is forecast to show the strongest polyethylene demand growth over the next ten years, with 6% CAGR and 7% CAGR respectively, according to Platts Petrochemical Analytics. Out of Asia, Indian demand growth is projected to be stronger than China’s, with the subcontinent’s PE demand expected to be 8% CAGR, compared to China’s 6.1 % CAGR. In terms of polypropylene, Asia and Africa are both expected to exhibit the strongest growth in consumption over the forecast period with growth rates of 6% and 5% respectively. Within Asia, Indian demand growth is expected to outweigh China’s with the former to register an annual growth of 7.7% over the next ten years, compared to China’s 6.2%.

Global demand is expected to average 4.8% for PE and 4.5% for PP, making India’s demand growth higher than the global market. However, India’s demand is working from a smaller base and, in absolute tonnage terms, is relatively small compared to China and in a global context.

The nation’s share of global demand is set to increase from 5% to 7% between 2013 to 2025, which is a rise of close to 50%, putting it above the Middle East, Central and South America and Africa. During this period, India will reach half the size of the mature North American market. This shows the progress that India is expected to make, however the country will still lag significantly behind China in the years to come.

Due to the huge potential of India’s petrochemical industry, we envisage India surpassing China in terms of demand growth. Furthermore, in terms of economic development, the South Asian giant remains behind China. India’s plastics penetration into traditional material based goods is yet to gather momentum, with per capita use relatively low compared to demand size. While this is true to China, it is not as low, with 15kg per person for PE and PP, compared to India’s 5kg per person for PE and PP. Incidentally, India’s per capita use is on a par with Africa. This illustrates there is a lot of progress to be made in India, as per capita use is still growing and has a long way to go.

China and India’s gross domestic product (GDP) growth are forecast to be similar over the next ten years. However, India’s demand growth for PE and PP is expected to be much higher, as Platts Petrochemical Analytics forecasts higher multipliers of growth versus GDP for India, compared to the Far East Asian giant.

For India we see growth of PE and PP to be 1.2 times GDP, whereas for China we see future growth below economic growth at 0.75 times GDP, underlying our belief that the India’s demand for plastics has a lot more potential.

Population growth to play a partIndia’s stronger demand outlook will be boosted by its population growing at a faster rate than China’s especially if the latter continues to adopt the one child policy.

Polypropylene demand per capita

Source: Platts

0 5 10 15 20 250

2

4

6

8Projected % CAGR (2014-2025)

Polypropylene consumption (2014) kg/capita

Africa

IndiaAsia

Central andSouth America

Eastern Europe

Middle East

Japan

China

Western Europe

NorthAmerica

Size of bubble indicates 2014market size in million mt

32 19

3

3

31

4

3

7

8

Polyethylene demand per capita

Source: Platts

0 5 10 15 20 25 30 35 400

1

2

3

4

5

6

7

8

9Projected % CAGR (2014-2025)

Polyethylene consumption (2014) kg/capita

Africa

India

Asia

Central andSouth America

EasternEurope

Middle East

Japan

China

Western Europe

North America

Size of bubble indicates 2014market size in million mt

2239

5

5

34

5

3

12

16

0

500

1000

1500

202520182011200419971990

Source: World Bank

(millions)

China and India population forecast

IndiaChina



According to World Bank population forecasts, India’s rate of population growth is expected to be 1% year on year over the next ten years, compared to China which is predicted to flat line. As a result, by 2024, India’s population is forecast to catch up with China’s.

India’s ethylene/polymers industry remains smallIndia’s petrochemical industry is much smaller than China’s with 9 operational ethylene crackers, whereas China has close to 58 crackers. In terms of future projects, China outweighs India on that front, even if we exclude the coal based olefins revolution that is taking place in the Far East.

Currently, we see up to 18 ethylene crackers projects mooted in China, compared to three in India. Although, major petrochemical producers such as Reliance are undertaking construction of large world scale crackers using feedstock from their refineries, evidently more can be done in the future.

No feedstock advantageUnlike the Middle East and the US, India does not have access to cheap feedstock whether it is gas or refinery stream based. The majority of existing facilities rely on naphtha coming from refineries as a feedstock for olefins production. China is similar in terms of their feed composition, having to rely on refinery supplies, however unlike India, China have invested heavily in petrochemicals and continue to do so.

Taking a look at India’s net trade position of the petrochemical feedstock, it is currently a net exporter according to the latest set of annual data for 2013. Net exports have remained above 6 million mt/yr since 2010, illustrating that supplies remain ample, especially with recent refining additions.

With this surplus, instead of major producers selling at a premium on the international market, refiners (especially the companies integrated with petrochemical facilities) could take a wider strategic outlook by discounting naphtha prices and divert their light end feedstock production to the domestic petrochemical industry in order to boost supply.

Recent moves to capture US ethaneThe key Indian petrochemical producer Reliance has made moves to capture the cheap US ethane for their crackers. It has been an objective of the producer for a while to bring the feedstock in and recent moves by European producers has spurred the major into action. South Korea’s Samsung Heavy Industries has been contracted

to build six very large ethane carries (VLEC’s) in order the ship the ethane to India and these long haul movements are expected to feed Reliance’s Jamnagar refining and petrochemical complex in Gujarat on the west coast of India. This development is an encouraging sign that Indian petrochemical producers are looking to find a competitive feedstock in order to grow production, however having a viable competitive domestic feedstock.

India’s PE and PP balancesThis investment across the olefin and polyolefin value chain is crucial when looking at the supply and demand balances of PE and PP. India is forecasted to remain in deficit over the next ten years and grow to a deficit of 4.3 million mt by 2025, quadrupling from the 2013 position. This is expected to materialise despite some projects coming on in the near term.

Indian cracker projects (mt)

Project Location FEED bidders/ FEED EPC bidders/ Estimated EPC Feedstock Capacity Estimated year awarded stage year awarded stage year use estimate of completionReliance Jamnagar Refinery Jamnagar Fluor 2012 Technip 2013 Refinery Off Gases 950,000 Q1 2015 Expansion Ethylene PackageBPCL Kochi Petrochemical Kochi 2014 2015 Naphtha 220,000 Q2 2018 Complex with Ethylene crackerONGC Naheij OPAL Ethylene Dahej Linde 2012 Samsung Engineering 2014 Naphtha 1,050,000 Q2 2016

Source: Platts Petrochemical Analytics

-6

-4

-2

0

2

4

6

8

10

20252022201920162013


(million mt)

Indian PE supply/demand balance

PE demand surplus/deficitPE production

-4

-2

0

2

4

6

8

20252022201920162013


(million mt)

Indian PP supply/demand balance

PP demand Surplus/deficitPP production



For polypropylene the story is different in the context of the short to medium term, as PP surpluses will remain up to 2020, despite narrowing. The net trade position is expected to grow from 0.3 million

mt in 2013 to 1.1 million mt by 2016 as projects come on stream and then fall back to 400,000 mt by 2018. The market is expected to remain balanced in 2019, and rise to surplus in 2020 when Essar’s project will boost supplies. However by 2022 a deficit 400,000 mt is expected, growing to 2.1 million mt by 2025, as demand growth continues without project expansions.

The other question to ponder is could India explore other feedstock options not linked to oil and natural gas, following China’s path?

Currently, the Far East Asian giant is planning to exploit its coal reserves over the next ten years in order to boost olefin production and increase polymer output. As with China, India has an abundance of coal, ranked fourth in terms of coal production globally behind the US, Russia and China, with current estimated reserves to be 606.8 million mt. Despite having ample coal reserves the appetite for using this raw material within the chemicals arena is practically non-existent.

One of the key barriers to India not being able to exploit coal for olefins production is down to the type of coal available. Sub-

Chinese cracker projects (mt)

Project Location FEED bidders/ FEED EPC bidders/ Estimated EPC Feedstock Capacity Estimated year awarded stage year awarded stage year use estimate of completionFujian ethylene project Ligure Zhanzhou HQCEC 2014 HQCEC 2015 Naphtha 1,200,000 2018Sinochem Quanzhou Quanzhou UOP/Honeywell 2011 SEG 2013 Naphtha 1,000,000 Q2 2017 Petrochemical Co., LtdChina oil refinery project Jieyang SEG 2012 SEG, HQCEC 2017 Naphtha n/a 2020CNOOC Huizhou ethylene project Huizhou Technip 2013 Technip 2014 Naphtha 1,000,000 2016Sinopec Kuwait Petroleum Zhanjiang 2015 2016 Naphtha 1,000,000 2020 Zhanjiang Branch of joint integration projectsCNOOC Hainan ethylene project Yangpu CB&I 2014 CB&I 2015 Propane/ 1,500,000 2018 ButaneSinopec Hainan Refining & Hainan SEG 2015 SEG 2016 Naphtha 1,000,000 2019 Chemical (HRCC)Sinopec Lianyungang 2015 2016 Naphtha 2,000,000 2018Dalian Shide Group Ethylene Phase 1 Dalian 2015 2016 Naphtha 1,300,000 2019Sinopec Qingdao Refining & Quiangdao 2014 2015 Ethane 1,000,000 2020 Chemical Co., LtdShanghai Gaoqiao ethylene Shanghai SEG 2013 SEG 2015 Naphtha 1,000,000 2017 relocation project to CaojingPetroChina Sichuan Chengdu Technip 2010 Chengda engineering 2011 Naphtha 800,000 2014 Petrochemical Co., Ltd & TechnipPetroChina-Rosneft Orient Tianjin Nangan SEG, HQCEC 2015 SEG, HQCEC 2017 Naphtha 1,200,000 2020 Refinery & PetrochemicalsPetroChina oil refinery project Kunming 2010 2016 Naphtha 1,000,000 2019 in YunnanPetroChina Lanzhou Ethylene Lanzhou Wison 2015 Wison 2016 Naphtha 1,000,000 2019Sinopec Yangzi ethylene III Nanjing SEG 2012 SEG 2015 Naphtha 800,000 2017 transformationFormosa Plastics Ningbo Ningbo 2014 2015 Naphtha 1,200,000 Q2 2018 Ethylene CrackerCNPC Taizhou Refinery & Taizhou 2015 2016 Naphtha/ 1,200,000 Q4 2020 Petrochemical Complex condensate


Indian PE/PP Projects (mt)

Producer Location Product Capacity Start upBCPL Assam LLDPE 110,000 2014BCPL Assam HDPE 110,000 2014Reliance Industries Jamnagar LDPE 400,000 2015Reliance Industries Jamnagar LLDPE 250,000 2015Reliance Industries Jamnagar HDPE 250,000 2015GAIL Pata LLDPE 200,000 2015GAIL Pata HDPE 200,000 2015Oil and Natural Gas Corp Dahej LLDPE 540,000 2018Oil and Natural Gas Corp Dahej HDPE 520,000 2018Mangalore Refinery MRPL Mangalore PP 440,000 2014ONGC Dahej PP 340,000 2014Indian Oil Corp. Paradip PP 700,000 2016Essar Gujarat PC Vadinar PP 900,000 2020




bituminous coal is the preferred coal for chemicals production as it is a lighter, cleaner and easier to extract than the alternative anthracite coal. China have idled most their older methanol and PVC plants based on anthracite coal due to the lack of competitiveness mainly down to high capital costs and inefficiencies of these plants. A key factor driving the new proposed coal based chemical projects are as a result of having access to the cleaner sub-bituminous coal using more efficient technology. The coal reserves India mostly has is anthracite coal, with limited levels of sub-bituminous coal available, compared to China, where nearly half the available reserves are based sub-bituminous coal reserves.

Furthermore, the energy derived from coal in India is twice that of energy derived from oil. Worldwide, energy derived from coal is about 30% less than energy derived from oil. Despite around 51% of coal in China currently used mainly for power generation, growth in CTO/MTO capacity is potentially huge.

Despite India having an abundance of coal reserves, actual production of coal in India is ranked lower, which is also another limiting factor for the raw materials use in other industries apart from energy generation. According to BP’s statistical review, India’s overall production share of coal globally is 5.9%, compared to China’s 47.4%, and fifth overall. Also, India’s coal production only accounts for 16% of Chinese production and this has been the lowest ratio between the two countries in the last few years.

Location is an issueAnother key factor in determining why China has capitalised coal more swiftly than India, is the location of the coal reserves. In China, the majority of the coal is inland in rural areas, which are less densely populated.

Whereas in India, the majority of the coal reserves are situated in densely populated states of West Bengal, Bihar, Orissa, Jharkhand, Chhattisgarh, Telangana and Madhya Pradesh. As a result, stronger environmental pressures in India could be a reason why projects are not moving forward. The CTO process emits more carbon dioxide (co2) and uses more water than the traditional methods of olefin production. The amount of water needed to produce one ton of olefins using a CTO process is estimated between 15 metric tons (using new technology) and 40 metric tons (using older technology). This compares to just 0.8 to 2.7 metric tons of water needed to produce one ton of olefins using refinery based feedstocks in a cracker. With regards to co2, around 7.2 mt of carbon dioxide is emitted for every ton of olefin produced, compared to 1.5-3 mt of co2 emissions for naphtha cracking. These higher numbers, combined with India’s efforts to provide clean water and better air for its ever growing population, especially in the poorer states of Orissa and Bihar, constitute a clear impediment to CTO production.

Political structures play apartDifferent political structures between India and China could be a possible factor why India has not considered coal to chemicals. All the coal mines are state owned in India and are geared towards power and energy generation. In China, however it is a mixed


Naphtha (67%)

Ethane (17%)

Propane (16%)

Indian ethylene capacity by feedstock

0

2

4

6

8

2013201220112010

Source: JODI

(million mt)

Indian naphtha net trade

Global PE and PP demand

2013 World (%) 2025 World (%)China 27 China 32Asia (excl. China & India) 17 Asia (excl. China & India) 17North America 16 Europe 16Europe 19 North America 12Middle East 7 India 7Central & South America 6 Middle East 6India 5 Central & South America 6Africa 3 Africa 4


3

4

5

6

7

8

9

10

20252022201920162013

Source: IMF/Platts Petrochemical Analytics

(%)

China vs India growth

China GDPChina PO demand growthIndia GDPIndia PO demand growth

ownership structure between the private and public sector, and the government has encouraged further coal based investments through a more stream lined structure, with central governments having a stronger say in provincial matters. This is in contrast to


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India where structures are more inefficient due to more convoluted political structures.

Finally, economic development and stronger disposable income in China has led to rapid growth for various industries on the demand and supply side. India has a long way to go to catch up to China and until they do that, they are unlikely to look at coal and expand their petrochemical industry as a whole.

However, for all of China’s strengths there are weaknesses which could let India catch up. In the future China is planning to add more environmental legislation which could curb growth for various industries, especially heavier process chemical production. Also, gone are days of double digit economic growth in China, indications are that super cycles may not repeat themselves in the

next few years, which could mute demand from key consumer sectors. If this materialises, we could one day see the elephant surpass the dragon.

0

50000

100000

150000

200000

250000

IndiaChinaRussiaUSA

Source: BP

(million mt)

Top global coal reserves

Sub-bituminousAnthracite

0

900

1800

2700

3600

4500

2013201120092007200515

16

17

18

19

20

Source: BP

(million mt) (%)

Coal production in China and India

India % of Chinese productionChina

India’s existing ethylene crackers (mt)

Producer Location Feedstock CapacityGAIL Pata- Uttar Pradesh Ethane/Propane 500,000GAIL Pata Naphtha/Ethane 450,000Haldia Petro- Haldia- West Bengal Naphtha 670,000 chemicals Ltd.IOC Haryana- New Delhi Naphtha 800,000IPCL Baroda- Gujarat Naphtha 130,000IPCL Gandhar- Gujarat Ethane/Propane 300,000IPCL Nagothane- Maharashtra Ethane/Propane 550,000Reliance Vadodara Naphtha 170,000 IndustriesReliance Hazira- Gujarat Naphtha 1,000,000 IndustriesOPAL Dahej Naphtha 1,050,000BCPL Assam Naphtha 220,000


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