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Indian Oil eyes acquisition, growth to challenge Reliance

By: Steve Toloken

November 4, 2013

DÜSSELDORF, GERMANY — Indian Oil Corp. would like to close the gap in plastics production with the country’s domestic market leader, Reliance Industries Ltd., and is looking at both internal expansion and the acquisition of part of Haldia Petrochemicals Ltd. to grow its market share.

IOC has capacity to make 1.25 million metric tons of polyolefins a year, about 18 percent of India’s domestic production, but if it succeeds in acquiring the larger stake in Haldia its market share would rise to about 33 percent, IOC executives said in an interview at Germany’s K fair.

New Delhi-based Indian Oil was making only its second appearance at K, the world’s largest plastics trade show, with a 200-square meter booth. That’s small by the standards of global plastics manufacturers for K but double what the company had at the last K fair in 2010.

IOC, which has 49 percent of India’s petroleum market, is a relative newcomer in chemicals. It said it wants to send a message.

“This is to tell the world that Indian Oil is not only a petroleum company, it is a petrochemical company,” said A.M.K. Sinha, an IOC board member and director of planning and development. “It is important for us to be seen here.”

The acquisition of Calcutta-based Haldia would add 670,000 metric tons of polyethylene and 340,000 tonnes of polypropylene production each year to IOC’s production, said Sinha.

In early October, the government of West Bengal state in India, which owns 40 percent of Haldia, agreed to sell its stake to Indian Oil, according to Indian press reports. Indian Oil already owns just under 9 percent of Haldia.

But the IOC offer price can be matched by India’s Chatterjee Group, which owns 41 percent of Haldia, and has until mid-November to do so. Chatterjee had been trying to block the sale in court.

At K, IOC executives expressed confidence they could conclude the deal successfully: “We are quite optimistic we can work out management control of Haldia,” Sinha said.

Currently, the company has capacity to make 600,000 tonnes of PP, 300,000 tonnes of HDPE and 350,000 tonnes in a “swing” plant capable of making LLDPE or HDPE, all connected to the company’s naphtha cracker in Panipat, India.

It plans its own internal expansion, adding another 680,000 tonnes of PP capacity in a new plant at Paradip to come on stream in the first quarter of 2017.

It’s also bringing on stream in the fourth quarter a 120,000 tonnes per year styrene butadiene rubber facility in Panipat, about 125 km from New Delhi. That plant is a joint venture of IOC, Taiwan’s TSRC Corp. and Japan’s Marubeni Corp., with IOC owning 50 percent.

IOC has pursued a strategy of expanding into polymers to get more value from its Naphtha cracker at Panipat, which opened in 2010 and is India’s largest, with capacity for 857,000 tonnes of ethylene and 650,000 tons of propylene annually.

“Petroleum markets are under tremendous pressure,” Sinha said. “Adding value is a natural hedge against margins going down.”

The company hopes to make up ground with Reliance, which has 70 percent of India’s domestic polymers market, said S. Mitra, executive director of petrochemicals: “The intent is to grow and try to bridge that gap.”

IOC said it plans $5 billion worth of petrochemical investment in the next decade.

Like many analysts of India today, the company said it wants to tap into the large growth potential of the country, even if the current per capita use of plastics is low.

India’s per capita consumption of plastic is six to seven kilograms a year, compared with 66 kg in developed countries like the United States, IOC said in its most recent annual report.

Polymer consumption grew 10 percent in India in 2012, up from eight percent in 2011, even as structural problems in India’s macroeconomy slowed GDP growth to 5 percent, the smallest increase in a decade, IOC said. The weakening rupee also hit India’s economy.

“As far as the macro-Indian economy, the previous few years of GDP growth have not been as good as in 2006-2007 period,” Sinha said. “But the fundamentals remain strong. What we are finding is the growth in plastics is about 10 percent.”

India had a strong monsoon season this year, which is likely to help its agriculture-dependent economy, said Mitra: “India had a good monsoon, so that will lead to more growth next year.”

The company also credited an Indian government decision to raise tariffs on imported plastics from five percent to 7.5 percent as another factor that will boost its profitability.

“The recent increase in customs duty applicable on polymers… is a welcome development for domestic suppliers and is expected to sustain net margins for producers,” IOC said in its most recent annual report, for the year ending March 31.

More than 90 percent of the company’s petrochemical products are sold domestically, and its K show booth was full of products from the Indian factories of global companies using IOC polyolefins. They included washing machine parts for Haier India, a rice container for Tupperware’s India operations and a safety helmet for 3M India.

At K it was showing several new grades of polyolefins it had developed in the last year. IOC is India’s largest company and ranked 83rd on the global Fortune 500 in 2012.