Petrochemical sector faces margin pressures in 2024 amid global oversupply, weak demand

The petrochemicals sector is expected to witness profitability pressures as global demand softens further due to a slower-than-expected recovery in the global economy, coupled with an oversupply situation in the next 12-18 months, which will exert pressure on margins and profitability of producers.

“While Indian demand is likely to remain healthy, the global weakness in demand and oversupply situation will keep the petrochemicals spreads under check for the Indian players as well in the medium term, as has been the case over the last few quarters, where the petrochemical segments of all the companies have reported profitability pressures,” ICRA Senior VP & Co-Group Head Corporate Ratings Prashant Vasisht told businessline.

The oversupply situation in the global petrochemicals industry and subdued demand has already impacted the margins of players in the second half of 2022 and 2023 calendar years (CYs).

Haldia Petrochemicals CEO Navanit Narayan said, “The year 2023 has been a bad year for petrochemicals due to high volatility in feedstock prices and depressed margins. Delay in recovery of Chinese market and commissioning of large projects in China and India created large capacity overhang which further delays the recovery of pricing and margins.”

Stress to persist

Vasisht pointed out that global petrochemicals demand has been weak, amid inflationary pressures, which, coupled with an oversupply situation, has exerted pressure on the spreads, which are likely to witness headwinds in the near to medium term.

“Several capacities in Asia, mainly in China, were added amid a tepid demand scenario and has resulted in many of these products being directed to other markets like India. While India has also increased its capacities and more additions are in the pipeline, it’s import dependency continues. This situation is likely to continue in the near to medium term, thereby exerting pressure on the profitability of the pet-chem players,” he explained.

In an August 2023 report, Moody’s Investor Service projected, “Demand for petrochemicals will likely remain soft as we expect global economic growth will slow this year and remain subdued in 2024. At the same time, petrochemical supply will grow significantly this year as new capacities, particularly in China, come on stream.”

Atmanirbharta

India, a net importer of petrochemicals, will increase its pace of investments in the sector to increase domestic production to meet the higher demand in the next 3-5 years as its industrial and commercial sectors grow.

India’s petrochemical sector is projected to grow at about 11 per cent per annum from 2021-27 to $100 billion in 2027, and will continue to grow at a similar rate to reach $350-$370 billion in 2040, a March 2023 report by McKinsey & Company said.

Narayan explained that while the petrochemical industry suffered in terms of squeezed margins, the refining industry witnessed significant value creation during the year from strong gasoline and diesel demand and prices.

Higher profitability by these sectors is likely to provide further impetus to their downstream integration towards petrochemicals. Considering long-term sustainability, several Oil and Gas players are likely to integrate further towards petrochemicals considering the growth forecast and in order to find an outlet for crude oil, the demand outlook of which is bearish in the long term, he projected.

Echoing a similar sentiment, Vasisht said: “Industries such as consumer durables, packaging, e-commerce, automotive, etc. spark domestic demand for petrochemicals, and ICRA expects this demand for polymers to witness a CAGR of 6-8% per cent in the medium to long term.”

Despite the current weak scenario, the Indian oil marketing companies (OMCs) have remained steadfast in their plans to increase their ‘petrochemicals intensity index’ by expanding their portfolio, he added.

For instance, he said the Indian Oil Corporation (IOC) has announced a 3-MTPA (million tonne per annum) project for ₹61,000 crore at Paradip. Hindustan Petroleum Corporation (HPCL), through its JV, HPCL-Mittal Energy, has also commissioned a 1.2-MPTA dual feed cracker plant and its Rajasthan refinery is also setting up a 2.4-MTPA capacity.

On the other hand, Bharat Petroleum Corporation (BPCL) has announced a 1.2-MMTPA pet-chem project in Bina, which is likely to entail a capex of ₹49,000 crore. These capacities are likely to become operational in three to five years, which will help reduce India’s pet-chem import dependence, Vaisht said.