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There is no way that Indian chemical companies can escape from the global financial crisis. Tough times lie ahead as companies will be hit on all fronts - high cost of credit, falling demand as the global economy slows down and increased supply once new capacities in Asia and the Middle East get commissioned.
Product prices have fallen sharply in the last month. Ethylene is close to a 3-year low and benzene has fallen to $900/tonne fob Korea, a level last seen in January 2007. With buyers holding back purchases inventories are rising across the chain.
Companies are being hit in other ways too. One executive complains of expensive credit with international banks quoting Libor plus 900 basis points, up from Libor plus 100-200 basis points six months back. Indian banks are said to be quoting 18-20%, up from 9-11%.
International business is getting more difficult and riskier to transact as companies have to also deal with volatility in foreign exchange rates.
ICIS news reports that Indian base oils buyers and sellers of base oils are worried about the high level of credit scrutiny which is making an already difficult business environment even tougher.
"LC limits are frozen and there is no credit available for the love of money", said a baseoils buyer.
In yet another blow to Dow Chemical's plans for India the company has had to halt work on its new R&D centre at Chakan, near Pune, following instructions from the Maharashtra chief minister.
The government's directive was aimed at appeasing the local population which has been strongly protesting against Dow and had even forcibly entered the site and set the centre on fire in July.
The chief concern of the locals is that the centre would pollute the area which is sacred to them. This is despite reassurances from Dow and local authorities that the company would not be carrying out any manufacturing at the site.
Dow's plan is to employ 500 Indian scientists at the centre to work on projects like purifying water for consumption, energy efficiency and the effective use of green technology.
Surely, there is no reason to protest against this type of investment.
It is finally here. After years of waiting and rumours of delays Reliance Industries has finally started pumping oil from its massive KG-D6 block of the Krishna Godavari basin.
Initially about 5,000 bbls/day of crude is being pumped out although the plan is to reach 550,000 bbls/day over the next six to eight quarters.
While the timing fits well with the company's planned commissioning of its second refinery over the next few months, Reliance has indicated that it is would be selling the oil to Indian public sector refiners such as Hindustan Petroleum which operates a refinery at Visakhapatnam.
Gas production is expected to start only in the first quarter of 2009. But how quickly Reliance will be able to sell depends on when an ongoing legal battle with Anil Ambani led Reliance Natural Resources Ltd is settled.
The dispute relates to supply and pricing of natural gas.
As for the price of gas, although the government has recommended $4.20/mmbtu Reliance appears to be looking for more.
"In the long term, we must have a road map towards market price," Mukesh Ambani, chairman of Reliance, said yesterday.
The Indian cabinet has approved a national biofuel policy that is likely set a higher blending target.
Details of the policy have not been announced but it has been reported that the government will mandate 20% ethanol or biodiesel blended petrol by 2017. Currently, the country has 5% ethanol blending which would rise to 10% from next month.
Experts have already started questioning the wisdom of the new policy. Will enough land be available for biofuel crops such as jatropha? And what implications would this policy have on India's food production?
Higher use of biofuels will intensify the debate on the use of farmland for fuel in India, and encourage farmers to reduce grain cultivation for food, says TK Bhaumik, an economist with Assocham, a leading business chamber.
"Land is not elastic. If there is more pressure to grow oilseeds or corn to derive biofuels and farmers get a good price for them, they will obviously neglect grain production," he adds.
I have yet to meet anyone who has not expressed disappointment at the drama unfolding outside Tata Motor's Nano plant site in Singur at West Bengal. They also concur that the episode will have serious implications for large investments in India.
Violent protests have forced Tata Motors to halt construction and withdraw its employees. It is now putting together a detailed plan for relocation of the plant and evaluating options of building the Nano, the world's cheapest car, at its other plants.
It is ironic that the protests are taking place in West Bengal which is led by a communist government that sees the Nano car project as being for the greater good of the community and one that will stimulate employment and attract investments to a state that suffers from a long history of militant trade unionism.
One could blame the Singur crisis on India's murky politics where an opposition party is required, almost by compulsion, to take a stand against any major industrial project proposed by a ruling party leaving companies caught in the political crossfire.
The protests at Singur are hardly an exception - an isolated incident that is unlikely to come in the way of the central government's grand vision for India's economic transformation through mega industrial projects and the creation of special economic zones (SEZ) .
While the scale of the protests at Singur is unprecedented many such scenes are being played out in different corners of the country.
Although other Indian state governments have quickly issued invitations to Tata Motors to relocate the Nano project, there is no guarantee that the company will not face similar protests at a new location.
The Singur crisis does not bode well for India's plans to develop mega integrated refining and petrochemical sites, also referred to as petroleum, chemicals and petrochemical investment regions (PCPIRs)
Each PCPIR needs about 250 sq km (61,776 acres) of land. Given the uproar in Singur for purchase of a little less than 1000 acres one can easily imagine the turmoil that a larger scale acquisition would create.
Some state government are already reconsidering their plans for PCPIRs. The Karnataka government is revaluating one at Mangalore while the Andhra Pradesh government is reported to have slowed down land acquisition for a PCPIR along the Visakhapatnam-Kakinada-Rajahmundry corridor.
An added problem for chemical investments is the environmental issue. One of the reasons behind Karnataka's decision to revaluate a PCPIR at Mangalore is because of public concern about the impact that chemical plants would have on the local environment.
Companies mounting huge investments in India will have to tread carefully, balancing the demands of politicians and the local community with their business goals. The hurdles are not insurmountable but investors will need patience, money and skill to navigate the very bumpy road to projects in India.
India and Asean are all set to implement an FTA (free trade agreement) from 1 January 2008. Both sides completed six years of negotiations yesterday and a final agreement is due to be signed in December this year.
Over 400 products are on the sensitive/negative list and some chemicals have been included. But I understand that polyethylene (PE) and polypropylene (PP) do not figure on the list. Tariffs on PE and PP imports from Asean would be phased out over the next two years, thus opening the door for product from Singapore and Thailand just when new export-oriented plants get commissioned.
With tariffs on the two products currently at 5%, Indian producers say they will not be too badly affected but they do expect increased competition in the local market.
But a bigger threat is looming as India will soon resume talks for an FTA with the GCC (Gulf Cooperation Council).
Indian petrochemical producers are once again lobbying to ensure their products figure on the negative/sensitive list. Meetings have been held with government officials but I understand the outcome has not been positive.
Essar's petrochemical plans are slowly taking shape with the company having identified technologies for its cracker and polyolefin units at Jamnagar, Gujarat.
ICIS news reported last week that the cracker would be set up in technical collaboration with Lummus And earlier this month, the company was reported to have selected technology from Ineos for its 400,000 tonnes/year hdPE and 400,000 tonnes/year swing lldPE/hdPE plants.
The company would also be using Ineos technology for a 900,000 tonnes/year PP plant downstream of an FCC unit at its Jamnagar refinery.
While the company is looking at completing the cracker and derivative units by 2012, progress will to a large extent depend on how fast Essar can complete expansion of its refinery from 10.5m tonnes/year to 34m tonnes/year. Financial closure of the expansion project is pending but the company is still holding to a 2010 completion date.
India's Foreign Investment Promotion Board (FIPB) has deferred making a decision on a proposed chloromethanes joint venture between a subsidiary of Dow Chemical and Gujarat Alkalies and Chemicals Ltd (GACL) as the government would like more time 'to examine the proposal', reports ICIS news.
The joint venture plans to build a 200,000 tonne/year chloromethanes plant at Dahej, Gujarat state. The project is scheduled for financial closure by late 2008 and commissioning in 2011.
The Dow subsidiary that would participate in the joint venture, Dow Europe, is owned by Dow Europe Holding of the Netherlands. Dow Europe Holding is, in turn, owned by Dow Chemical, which is struggling to get past the Bhopal legacy in India.
Wonder if that has influenced the government's decision on the chloromethanes joint venture?
There are more signs of an economic slowdown in India. Industrial growth in the first quarter of fiscal 2008-09 dipped to 5.2%, down from 10.3% in the previous year and a result of high interest rates and input costs plus the weaknesses in the global economy.
A new government report has forecast GDP growth for the year at 7.7%. This is down from earlier forecasts of around 8% and the average 8.8% growth recorder over the past four years.
And the panel responsible for this report said: "The downside risk to our growth expectations in 2008/09 is primarily from a further deterioration in global conditions with its attendant impact on India -- be it in the sphere of oil prices or capital markets."
India is clearly not immune to developments in the US and global economies. Now is the time to bury the much debated decoupling theory.