The immediate effect of demonetisation on the petrochemical industry is that polymers prices have dipped 3% in November and December 2016 from October and inventories have been piling up at various sale points and likely to stretch till June 2017 said Wood Mackenzie, an international commercial intelligence firm, in a recent study.
Demonetisation, however, would be beneficial for the sector in the long run but its immediate effect on automobiles, housing, cement and agriculture is likely to soften demand for petrochemical products compelling producers to try and push their products into the export market at competitive rates, increasing exports multi-fold from November 2016 to January 2017. The trend, according to the firm, has already started to show.
"Majority of transactions in petrochemical industry are carried out in cash. Inventory has been building up at three points at the trader-retailer level, at the converter processor level and chemical producers themselves," said Ashish Chitalia, senior research analyst, refining and chemicals Mahinder Singh, secretary general at Chemicals and Petrochemicals Manufacturers Association, however, said that it was a temporary phenomenon which was likely to smoothen out soon.
"When a new system of such grandeur is introduced it is bound to create temporary imbalances.This will correct itself soon, while in the long run it would have a positive impact on the industry," he said. "Polymers used in construction, automotive and agricultural sectors are likely to be impacted for a prolonged period -more than 4 months. The immediate impact is visible in the cement sector. In the sector Raffia and injection moulding applications account for more than 70% of polypropylene demand in India and polypropylene is likely to be impacted more than polyethylene markets," said Wood Mackenzie's Chitalia.
"Recently, Indian petrochemical products were offered at attractive prices compared to other Asian countries leading to a sudden increase in exports into Chinese, Vietnamese and other South Asian markets," he said. The PVC mar ket is dominated by pipe applications in India, which are tied closely to real estate and the construction industry.
Effect on PVC is likely to linger into April or beyond. Wood Mackenzie predicts extended softness in markets for polypropylene and PVC.
Non-executive director of Haldia Petrochemicals Ltd and former Coal India chairman, Partha Bhattacharyya, said "The impact won't last more than two to three months but would be beneficial in the long run as and when the cash situation normalises."
Wood Mackenzie, however, said that in the longer term, this move should recapitalise banks, which may lead to reduced cost of capital and improved tax compliance.Such an impact is likely to aid petrochemicals, processors and buyers as they obtain finances at low rates.