INDIA AND THE GLOBAL PLASTICS SUPPLY CHAIN, EMAP, LONDON 2004

Françoise Pardos, Pardos Marketing, February 2006

India as a regional and global power house

Many experts and conferences point out to this view. India is getting mentioned together with China, not forgotten any more. Comparisons are made, and outlook evaluated.

At a Chemical Week conference in March 2004, the annual Asia/Pacific Chemical Industry Meeting APCIM, it was pointed out that the Asia/Pacific region, China and India especially, offers the best opportunities for chemicals growth.

Asia, including China, will continue to be a major importer of chemicals. The region is expected to import more than 17 million tons of petrochemicals in 2010, compared with 11 million tons in 2005. China chemicals demand has risen more than 12% /year through recent years, and is expected to be the second-largest consumer of polymers after the US by 2010.

All West companies from the rich countries have been going to China. Up to this year or last, China was called the factory of the world and India the office of the world.

India is a newcomer in the global plastics converting industry

India has a long tradition of plastics converting, probably older than China, with thousands of small and medium size plastics converters in all processes, extrusion of long and flat products, injection molding and the whole range of plastics working. All the products have been essentially made for the domestic market. Now changes have occurred.

India currently experiences a boost in the production of injection molded components. In reaction to the impact of cost increases on the markets in Taiwan, Korea and Thailand, Japanese and Korean as well as US manufacturers from the automotive, IT and domestic appliances industry have relocated their production of both plastic components and molds to India. And there is a lot of room and many skills.

For instance, Ford is now investing in India for car parts, to quadruple global automotive parts supplies from India, up to $200 millions by 2006. Ford thus expects considerable savings in shifting production from higher wage countries to India.

A test at comparisons of the two giant countries, fully open to all controversies and critics, and many additions to fill in.

Comparable advances and problems in India and China now, from the good to the bad:

• Very large population, over 1 billion, yet, growth, now or soon, tapering
• But, still, very large domestic markets, present and potential, that make each of these two countries in the class of continents, like Europe or North America. This means that domestic demand is to be more important than foreign trade, in the medium and long term.
• A large part of the population still left behind economically, and to stay behind for another 30 years
• Huge land areas still left untouched
• Logistics and transportation infrastructures still less developed, poor roads, congested ports.
• Huge needs to build modern infrastructures and transportation.
  Industrial centers far apart
• Corruption at all levels
• Not much domestic oil, slightly more in China, 3.5 million barrels/day versus < 1 million/day
• Need for research and work in renewable energies

Advantages and disadvantages of China

• Stronger image with foreign investors, better known
• Type of “Anything goes” early capitalism
• Very fast development
• Fewer global English-speaking marketing and sales people, a temporary problem though
• Poor marketing skills, bound to improve
• Poor quality image, progress with CGMP, Current Good Manufacturing Practices laboratories.
• Uncertainty about the financial system and stability
• Poor technology and patent protection
• Legal infrastructures safer in India, higher legal constraints in China
• Stronger cultural differences with the West
• Pollution, drought, development of deserts
• Food availability problems in medium range
• Non democratic government
• Problems looming with minorities

For investors, overprotection makes investing in China time-consuming and risky. Other obstacles include unresolved intellectual property issues and potential knowledge transfer problems. These cause new entrants to hesitate before installing the latest production technology capacities in China.

Advantages and disadvantages of India

• Democracy
• English speaking elites, eager and creative
• Closer cultural understanding, “Indians, the Europeans of Asia”
• Smart and highly educated expatriates returning
• Strong advances in modern IT, Information Technology
• For polymers, launching of NCDEX, National Commodities and Derivatives Exchange, before LME
• Weight of bureaucracy, both an advantage and a hurdle
• More quietly phased development
• Supposedly smaller per capita average income
• Poor society international image
• Climate uncertainty with variable summer monsoons
• Conflicts with close neighbors

Figures that could be gleaned here and there, particularly from a paper of Ashutosh Agarwal, of Jubilant Organosys Ltd, show that “inadequate infrastructure resulted in a cost disadvantage of 8-10% for Indian manufacturers. The cost of power in India was 8-12 cents/kWh compared with 2-3 cents/kWh in the Middle East. As a result, many chlor-alkali producers, as an example, were forced to set up coal-based power plants. As coal from domestic sources was inferior in quality, companies had to import coal after paying an import duty of 5%.

India has over 6000 chemical companies spread all over the country. There are many small plants using obsolete techniques. In fact, the country can boast of only a few companies that operate on a truly global scale.

When making the inevitable comparisons with China, Agarwal pointed out that, in the next 15 years, China investment in the power sector would be 20 times more than India, and spending on transportation would be 5 times more.

In comparison, India strengths are its large pool of scientific and technical manpower that could communicate in English. The country has 200 national laboratories, 1300 R&D units, and 244 universities with 200 000 scientific personnel graduating every year.

India also offers better protection of intellectual property rights and global quality standards. Many of the production facilities are either World Health Organization, WHO, certified or approved by the Food and Drug Administration FDA of the US. India already is one of the largest and most cost-effective producers of pharmaceuticals in the world.

According to Yogin Majumdar, president of the Indian Drug Manufacturers Association, 47% of the world’s bulk-drug requirement is met by India, which has 57 FDA-approved companies. Indian chemical producers are also hoping that the implementation of REACH, Registration, Evaluation and Authorization of Chemicals, in its current form in Europe will throw some business their way. REARCH is expected to be a costly exercise for European chemical manufacturers, as it will require plenty of data generation and documentation. It could result in a move in manufacturing of multi-stage products outside Europe, with only the last stage carried out locally.

China

A major obstacle for foreign chemical multinationals wishing to enter the Chinese market is the financial system. But a predicted average annual GDP growth of 7% until 2020 is the strongest of arguments in favor of China.

China chemical industry is centered on basic chemicals and commodities, diversifying fast in fine and specialty chemicals. The increase in Chinese demand for olefins and derivatives over the last decade has been phenomenal. This growth has sucked in derivative products from the rest of Asia, the Middle East, North America and even Western Europe in ever-expanding quantities.

Self-sufficiency in the key derivative, polyethylene, has fallen steadily, almost halving over the past seven years. Indeed, the rise in import volumes in most chemicals was so acute that many observers worried about China ability to continue to prosper in this manner, or even to pay for the level of imports involved.

The Chinese government recently undertook major efforts to consolidate its chemical industry, resulting in the formation of two mega-players, Sinopec and CNPC. These players account for most of China chemical market share, with a strong business focus on petrochemicals.

Both have been restructured to make them competitive with international industry standards. Sinopec and CNPC were recently listed on the stock market to improve their financing and to generate the fresh capital needed for further modernization and internationalization. Supported and protected by the Chinese government, Sinopec and CNPC will continue to grow, not only to serve the majority of Chinese demand but also to focus on new business activities abroad.

Despite all challenges, multinationals have no other alternative but to invest in China, in order to benefit from the enormous growth.

Entry into India is less obvious and more subtle, possibly more rewarding and safer in the longer run.

So, the factory and the office of the world, in the end, are both to win.

The risk of commoditization of plastics materials and products is no real problem as all is to be done, and there is room for everything. India and China are like USA and Europe in the 1950s, except ten times larger and overall growth bound to take 10 years instead of 30.

Expansion of Indian companies investing outside India

Just a few recent examples of Indian companies getting out, on the world scene, there are many more:

• The European Commission has approved the acquisition of the German specialty polyester manufacturer Trevira by Reliance. Reliance achieved this ahead of two other candidates from within Greater Europe.
• GAIL in PE investment expansion with SIDPEC, Sidi Krir Petrochemicals Co in Egypt, part of the Egyptian State group Echem, eying Egypt as a promising market for polymers.
• Jindal Polyester bought French Rexor, a PET film converter, in 2003.
• Ester Industries Ltd to set up a 24 000 ton/year PET film plant in the United Arab Emirates,  UAE, either Dubai or Sharjah Free Trade Zone, to be more present in the global market. Ester is the second Indian polyester film company to plan a production base abroad.
• Polyplex has already set up a PET film plant in Thailand.
• Engineering, procurement and construction major Engineers India Ltd, EIL, to conduct a techno-economic feasibility study on the setting up of a gas-to-liquids GTL project in Iran. EIL considers that GTL plants need to be primarily sited outside India, as the country has very few remote locations where gas reserves can be monetized through the GTL route at competitive prices.
• Moser Baer builds an optical media plant in Erfurt, Germany. Capacity of the German plant with 260 employees will be 300 million units, some 15% of Moser Baer worldwide capacity of 2 billion units. Moser Baer has 11% share of the global recordable optical media market, making it the largest player in India and third largest in the world. Over 80 % of Moser Baer production is exported to 82 countries.
• The Indian Government is proposing to help the Chennai-based Central Institute of Plastics Engineering & Technology, CIPET, to franchise regional centers in neighboring countries, the Middle-East and South Africa. The proposal to globalize CIPET operations has been mooted in the wake of growing demand for CIPET-trained technicians in Asia, Europe and North America. CIPET has played a major role in the development of new applications for polymers and in helping to set up of plastic processing units in India.

Reactions from the US and Europe to Asian competition

The US plastics industries and their counterparts in Europe are often reacting when they fear mass inroads of Asian products into their domestic markets.

At least two recent examples, the shopping bag story in early 2004, and the PET.

The United States started a temporary “punitive tariff “in January 2004. The US plastic bag industries' share of the domestic market for grocery and retail shopping bags has fallen from 80% in 2000 to 60% two years later. This fall has led a coalition of US producers, the Polyethylene Retail Carrier Bag Committee, PRCBC, to file an antidumping complaint asking the US government to limit imports. A preliminary ITC decision was made in August 2003, the final decision in early 2004. Cheap, subsidized bags from China, Malaysia and Thailand were seen as the main culprits, there was no complain about India. According to the Committee, dumping margins were 122% for Chinese imports, 78% for Malaysia imports and 117% for Thai imports.

The US PET Resin Producers Coalition, which includes DAK Americas, NanYa Plastics, Wellman and Eastman Chemical Voridian division, says Indonesia, India, Thailand and Taiwan are exporting PET to the US at unfair prices. The petition is also supported by M & G Polymers USA. The coalition also says that the governments of India and Thailand are subsidizing exports of PET to the US. The coalition filed an antidumping petition with the US Department of Commerce and the International Trade Commission ITC. Alleged dumping margins are estimated at 35.51 to 61.19% for Indian PET, 27.6% for Indonesian material, 47.97% for PET from Taiwan, and 34.47% material from Thailand.

This happens all the time; there are many more reactions, if not over reactions.

USA petrochemicals future

In the longer run, the US petrochemical industry is only moderately worried. There is little that can be done with the Middle East. Most of the strategy there is to solidify ethane in the form of polyethylene and liquefy ethane in the form of ethylene glycol, and ship it out to Asia.

China being a large petrochemical producer is not expected to have much effect. It will impact the US downstream customers more than it will affect chemical producers in the US. US petrochemicals producers know that they cannot compete with Chinese petrochemical prices. If they have lost their ability to export to China, this is mainly because of the Middle East.

China is not going to remain a major importing country. They are going to try to become self-sufficient, and many international companies are helping them to do that, including US companies, who do not see that as a threat but as an opportunity.

All in all, the US petrochemical industry is relatively serene about the future global developments. The US  industry is probably worse off than it was a few years ago because of natural gas, but the country has a huge customer base, excellent infrastructure, pipelines, logistics, rail, trucking, and a well educated workforce. “The idea that in 10 or 20 years from now petrochemicals will not be produced in America is sheer folly. This will continue to be a strong segment of the global petrochemical market.”

China is not the only competitor that U.S. business must face. India and Brazil are close behind. There is strong awareness of many economic reforms to make for more free-market. The view of the US petrochemical industry is very sanguine, certain that the superior productivity will continue to make the country more than competitive with the rest of the world.

Europe and its East

Eastern Europe is Europe, already, fully, just truck delivery distances. Many Western Europe plastics converters have created, bought, built, merged plastics plants as if it were next door, or in a close province. Europe is home to all Europeans, this took less than ten years to happen.

With ten new European Union members in 2004, the potential for growth within Central and Eastern Europe, CEE, is seen as promising, for the new 25 Europe, soon to become 27, and more.

For western producers CEE is a new market and a good base for sale and distribution worldwide.

For local CEE producers it is a chance to broaden markets and form strategic alliances with major western producers. Most importantly, many refining companies in CEE are now experiencing overcapacity, which is fuelling their interest in petrochemical production, by integrating downstream, to convert the raw materials.

The key question is whether the CEE can compete against the competitively priced materials coming from the Middle East. CEE and Western Europe will both face the same threats, but producers in Western Europe have well established and modern production facilities, whereas those in CEE are in need of modernization.

Of the ten countries joining the EU, most were from the Soviet bloc, and still require serious reorganization. The region is definitely an emerging global force in refining and petrochemicals.

Neighbor Russia and CIS remain a future enigma, but optimism prevails as time passes. Eurasia might be the obvious complement/outlet, rather than rival, to the Larger Europe, for a global standing. Tremendous feedstock availability, at competitive prices, a huge domestic potential demand as well as good access to export markets, all contribute to a potential major development. A long term dream, Eurasia, its new frontier, its riches, bridging the Northern world, from Atlantic to Pacific, is a geopolitical vision not pleasing to some. Should Europe best expand to the North East, or to the South?

Shifts in the Middle East

Middle East countries are not staying idle.

The Middle East will continue to develop its petrochemical industry, producing 25 million tons/year of ethylene by 2010 and 40 million tons/year by 2020, in two more waves of cracker construction. This is an addition of 30 million tons/year between now and 2020.

This unique petrochemical development has been driven by a number of local factors:

• Availability of ethane from the race to develop gas fields
• Generation of cash from high prices for crude oil
• High levels of profitability from steam cracking

The population of the Middle East is not a large market for plastics, comparatively, with less than 200 million people, with low and slow growing average income. Four countries, Iran, Arabia, Iraq and Afghanistan, account for 75 % of this area population. And it is an understatement to say that most of this population still has a long economic way to go.

The Iran Petrochemical Forum in May 2004 stressed the point that, in the longer term, the Middle East should consider exporting finished goods in addition to chemical intermediates. Exports of PE from the Middle East are forecast to increase from 5 million tons in 2004 to 12 million tons in 2010. The large Middle East countries aim to get more added value by converting plastics raw materials for export.

Middle Eastern governments want to use their oil resources for much needed job creation.

The increase in logistics costs, especially freight charges, from East Asia to destinations such as Europe, could offer countries with a feedstock advantage, such as Iran, a competitive edge in finished goods exports in the not-too-distant future. Iran and other Middle East countries see that future labor cost increases in China and India, parallel to GDP growth, and increasing domestic demand in these two giants, could be an opportunity to make converted plastics products with a strong international advantage. Always remember the high share of the plastics material cost in most plastics products. It will take long before the rise in labor costs in the Middle East countries erodes that advantage.

In any plastic semi finished and simply finished products, the share of the raw material is, always, at least half of the total cost, more for extruded products, with continuous converting processes, and slightly less for molded products with discontinuous converting processes. The more elaborated the finished products, the less the plastic raw materials share in total cost.

The question is raised whether it might be more cost-effective to convert polyethylene and other plastics in China or in the Middle East? In fact it is all a question of timing and comparative development speed.

Realizing the potential of the finished-goods export and domestic markets, and their importance in strengthening Iran economy, and providing jobs, Iran Petrochemical Commercial Co, IPCC, part of Iran NPC, has plans to train the 5 000 fabricators and converters in quality control and best-management practices.

IPCC has agreed to bear half the cost of any R&D activity that the fabricators and converters may undertake to achieve international standards and enhance their export competitiveness.

Another move that is being undertaken by the IPCC to meet the challenge of maintaining Iran competitive edge is encouraging partnerships with foreign companies in the end-user segments, with a view to upgrading the quality of the products.

For instance, Gulf Cooperation Council, GCC, countries are promoting downstream facilities in this sector, with petrochemical companies being encouraged to meet their packaging requirements from the domestic markets. This is limiting exports of PE bag companies into the GCC countries. Moreover, demand growth for packaging material in Iran is highest among the GCC countries, making it an important market for this sector, well over 100 000 tons of PE bags.

Although exports of finished goods may be a long-term solution to Iran and the Middle East development, in the short term, bulk petrochemicals are likely to remain the main export items. Exports of ethylene derivatives from the Middle East are forecast to increase to 10 million tons in 2006 and 18 million tons in 2010, up from 7 million tons in 2004.

The bulk of this is PE exports. Exports of PE from the Middle East are forecast to rise to 12 million tons in 2010, from 5 million tons in 2004. The expected growth in volume of PE exports will largely take care of the 11 million tons of additional PE capacity coming onstream in the Middle East, 40% of it in Saudi Arabia and 32% in Iran between 2004 and 2010.

The expected growth in global PE demand is estimated at 5% for the next ten years. Major threats to PE demand growth are unlikely, except for some inter-polymer competition, recycling, down-gauging and the emergence of new polymers in some niche markets. 

Shipping problems and cost for deep sea suppliers

A further challenge to the Middle East export competitiveness is shipping and logistics costs. These costs are more challenging for the Middle East because of the very large dependence on exports. The cost of delivering products to key markets constitutes a major proportion of the total costs. Producers have no control on these costs, leading producers in the region to establish some control over logistics and shipping costs, through investments in this sector.

The costs include packaging costs, container rentals, inland transportation costs, port handling charges, marine insurance, import tariffs and other port dues.

Developing local demand in the Middle East

A boost to the Middle East petrochemical industry will come from the domestic demand, especially in Iran, with 70 million people, of whom 70 % are less than 30 years old.

Demand in Iran is very fast growing for all the commodity plastics, particularly PP, with the fast starting car industry. The automotive sector is one of the significant contributors to the country economic growth, from 150 000 cars in 1999, to 450 000 cars in 2003. And all consumer goods and infrastructure building call for this sort of growth.

Other Asia outlook

Briefly, from random stories heard throughout Asia, neither regions nor countries are standing still.

Malaysia eyes the Chinese and Indian markets

A country report prepared by the Malaysian Petrochemical Association, noted that the accession of China into the World Trade Organization could be an opportunity for local petrochemical producers to increase their exports, as China is expected to remain a net importer of petrochemicals over the next few years.

However, the emergence of new domestic- and foreign-based producers in China could result in excess regional capacity, which is a challenge that requires Malaysian producers to strategize their production and marketing approaches.

Cost effectiveness and production efficiency will be the key for survival. The availability of natural gas resources and good infrastructure are plus factors for the Malaysian petrochemical industry, said the report. The Malaysian economy is forecast to grow by 6-6.5% in 2004, according to the Central Bank of Malaysia.

Singapore

Singapore is aware of its key position in the global logistics industry and the need to support a high quality labor force in the region. One of the state recent initiatives was to establish the Chemical Process Technology Centre, providing training for Singapore future technicians.

Singapore has for years been a global hub for the international chemicals sector, with all the major world petrochemical companies, and top players in the specialty chemicals industry, present in the city state.

Singapore is a “global location”, on a par with Houston, Rotterdam, and the main ports in the Middle East. Singapore hosted a major logistics event in February 2004, with Chemical Logistics & Supply Chain Management World Asia 2004, hailed as Asia’s leading and only logistics and supply chain conference dedicated to the chemical industry.

Africa plastics markets

With few exceptions, Africa is not a promising market for plastic development so far. To summarize, a rapid analysis shows that the total continent does not consume more than 4 million tons of plastics, almost all imported, of which over 60 % in Mediterranean Africa and in South Africa. All Africa in-between is an almost no-market, with a few scattered local production of films, bottles, pails and tubs, simple pipes, mattresses and shoes. There is new interesting nascent growth in demand for PET bottles.

However, the same rapid analysis shows that there is some spot active demand from converters, mainly in Eastern Africa, which has been a traditional area of interest for Indians over the centuries. Spot opportunities must be watched there, of interest as India is the closest supplier.

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