After hanging fire for more than 2 decades, the Haldia project has taken off. But its viability depends on growth in demand and overcoming the late-comer odds.

By Rakhi Mazumdar

It was a day which many never expected to see. But on April 2, 2000, a few days after the fire was lit, the West Bengal government's corporate new-born, Haldia Petrochemicals Ltd (HPL), belched to life. To the thousands who had gathered to witness the spectacle, it was a momentous occasion. Twenty-three years after it was conceived by the state government, HPL's dying flicker turned a bright orange, symbolised by the safety flare atop its gargantuan structure. It's also a Rs 5,170-crore gamble the state is making in the hope it will trigger a much-needed industrial revival.

But the million-dollar question is not whether or not HPL will kickstart West Bengal's dormant industrial economy. Rather, the question is whether or not the ambitious project will, coming as it does in the middle of a capacity glut, be competitive-enough to survive in a commodity industry where price-benchmarks are truly global. HPL's 62-year-old Managing Director, Ayaswamy Krishnamurthy-who did not speak to BT for the story-has, in the past, pointed to the low polymer consumption in eastern and southern India to justify the investment in HPL's 6.35-lakh tonnes per annum (TPA) plant.

Krishnamurthy-who is due to retire in September, 2000, and will be replaced by Richard Saldhana, an ex-Unilever (Peru) executive-has a point. Compared to the national per capita polymer consumption of 2.20 kg, the eastern region ratchets up a bare 700 gm. And although India trails the world in polymer usage-the world average is 18 kg per person-the market for Polypropylene (PP) and Polyethylene (PE) is growing at 18 and 15 per cent, respectively. HPL executives expect the growth rate in West Bengal to be double the national rate.

The paucity apart, HPL claims to have price competitiveness because of its geographic location. In eastern India, where HPL is located, and southern India-where the per capital polymer usage is 1.30 kg-HPL expects to win the markets on the basis of lower transportation costs. For instance, it estimates that its end-products, PP and PE, will be cheaper by about $75 per tonne (Rs 3.22 per kg) in the East, and by $15 to $20 per tonne (Rs 0.64 to Rs 0.86 per kg) in the South. In a country where polymers comprise 70 per cent of the petrochemicals output, price can be a great advantage. Concurs Tapan Mitra, 60, Chairman, HPL: ''After all, it's a commodities market.''

Dry downstream

The third-biggest petrochem plant, however, will have to contend with a virtual absence of downstream industry in West Bengal and neighbouring states. There are almost no plastic processing units, which are the primary drivers of polymer consumption in northern and western states. Says Sushanto Majumdar, 30, petrochem analyst at the Mumbai-based SSKI Securities: ''The low per capita consumption of plastics in the eastern region can be explained by the fact that there is a near absence of plastics processing units. Once HPL is fully-operational, supply-led growth in demand is expected.''

On the day of the inauguration, Chief Minister Jyoti Basu made a courting call to potential investors. In fact, HPL even ferried 236 of its potential customers on a special train to the facility, but it seems investment commitments aren't forthcoming (although Bayer AG's proposed $140-million synthetic rubber unit could be a big catch). However, it's surprising that this is the case, considering that the quantum of investment in a viable downstream unit could be as low as Rs 30 lakh. Indeed, among the few companies which have committed to invest, are the Mumbai-based Neelkamal Plastics and Supreme Electronics. Their promised investment? Rs 500 crore.

Mitra says that the state is ideally-suited for downstream development, pointing to its abundance of land and water. HPL has also set up a business-development cell to assist downstream investors and has, till date, roped in 55,000 tpa of plastics processing capacity. Apart from providing information on the market, machinery, and product technology, and helping prepare feasibility reports, the cell helps the investors assess their term loans and working capital needs.

Apparently, there is also a difference of opinion over HPL's downstream strategy. While the state administration is focusing on getting a large number of small plastic-user units, others want to attract the big fish from the international markets. Says Purnendu Chatterjee, 49, Chairman, Chatterjee Petrochem (Mauritius), which has a 22 per cent stake in HPL: ''We need to consider alternatives like inviting Chinese toy manufacturers, who have captured the global markets for toys.''

In most of the neighbouring states where HPL could have benefited from proximity, user industries are limited. For example, in Orissa, Bihar, and Assam, HPL's target states, the plastic processing capacity ranges from 12,000 to 37,000 tpa. But that's not to say that the market potential is not huge. The per capita polymer consumption in these states is just 650 gm, 160 gm, and 210 gm, respectively.

HPL is hoping that exports will take care of about a quarter of its output. Countries like Bangladesh, Nepal, Sri Lanka, and Myanmar may not be huge markets today, but they have high potential. The consumption rate ranges from 1.58 kg per person per year (in Nepal) to as low as 230 gm (Myanmar). Avers Mitra: ''In our marketing strategy, we will focus on exports as one of the options.''

However, the company's export universe is likely to be limited. In the 1990s, the demand for polymers in the developed countries grew at 3 to 4 per cent a year, with that in Asian countries outstripping these at 10 to 12 per cent a year. This led to a huge capacity build-up in Asia. But the recent Asian flu has knocked the bottom out of the market, particularly in South Korea, Indonesia, and Taiwan. On the positive side, it has prevented any fresh capacity build up. Notes Chatterjee: ''This has been something of a blessing in disguise.''

Supply glut

A bigger threat to HPL could be the dramatic growth in the industry's capacity. The Gas Authority of India Ltd (GAIL) commissioned a 2.6 lakh-tpa petrochem unit at Pata (Uttar Pradesh) in April, 1999. Reliance Industries Ltd (RIL)-the industry leader with 14 lakh tpa manufacturing capacity-and Indian Petrochemicals Ltd (IPCL) (7.3 lakh tpa) are in the process of expanding their capacities. With HPL going on stream, the total petrochem capacity in the country has risen to 30.85 lakh tpa. Notes Majumdar: ''The price stability for both fibres and polymers could be affected unless there is a commensurate increase in demand.''

Worse, in each of its product categories-lldpe, HDPE, and pp-HPL faces stiff competition from vertically-integrated behemoths such as RIL and IPCL. Of its 6.35-lakh tpa, HPL will produce 2.25 lakh tpa of LLDPE, 2 lakh tpa of HDPE, and 2.1 lakh tpa of pp. RIL, on the other hand, floods the market with 14 lakh tonnes of polymer, comprising 10 lakh tonnes of PP, and 4 lakh tonnes of LDPE. The public sector IPCL manufactures the widest range of petrochem products. In the commodity petrochem industry, economies of scale plays a key role in viability. Admits Chatterjee: ''Our main effort now has to be concentrated towards making the business commercially viable.''

That's a tall order for a venture which has taken off after 23 years of conception, and does so at a relatively-high cost of capital. To fund the project, HPL has had to borrow Rs 3,191 crore at about 15 per cent rate of interest. Which means the annual financial charges alone will amount to Rs 480 crore. In contrast, competitors like RIL have funded their projects with foreign debt borrowed at 80 to 90 basis points over libor. Given the current inflation rate of 4 per cent, the effective interest rate on foreign debt works out to less than 11 per cent. Says Rahul Dhawan, 29, Analyst, SKP Securities: ''In mega projects, even a modest interest rate differential matters.'' Moreover, HPL suffered a major setback with the devaluation of the rupee since the outgo on the $250 million worth of foreign debt went up. Says Saldhana: ''We are prepared for a bumpy ride ahead, but that's part of HPL's teething phase.''

Another reason why petrochemical prices of Indian manufacturers tend to be much higher than those of other countries is the choice of feedstock, which is determined by a range of factors including price, availability, and the desired product mix. Naphtha is the favoured feedstock in India although natural gas (the staple elsewhere) is not only 30 per cent cheaper but also more environmentally-friendly. Natural gas yields a much higher proportion of ethylene and, thus, is preferred when the polyolefins output of the cracker is sought to be maximised. Naphtha is used when a greater product variety is desired.

HPL's plant, much like the older plants of NOCIL and IPCL (Baroda), is naphtha-based. But there is an increasing shift towards natural gas. For instance, IPCL's Nagothane and Gandhar plants use natural gas, as does GAIL's new plant. RIL's plants are built to run on both naphtha and natural gas. Sourcing naphtha will not be a problem for HPL as the Indian Oil Corp. (IOC) refinery is also located at Haldia. But since10-15 per cent of the company's requirement naphtha is to be imported, HPL will be vulnerable to currency fluctuations.

Despite the odds, HPL could still emerge a winner. For one, the incremental growth in the market demand-a key determinant of end-product prices-is still significant in India, having risen from 14 per cent in the early 1990s to 18 per cent today. That's pushing prices up. From a low of $350 per tonne, polymer prices have jumped to $500-$700 a tonne. Predicts Majumdar of SSKI Securities: ''The prices are expected to rise further, and peak somewhere in 2002.''

And the fact that Chatterjee is partnerning ioc in bidding for a stake in IPCL should mean greater marketing muscle for HPL if the bid comes through. Says S.K. Chakrabarti, 51, the IDBI nominee on the HPL board: ''We are upbeat on the company.'' And being the only plant of its kind in eastern India, savvy marketing should help HPL get cracking. But for a company weighed down by both history and geography, that's easier said than done.

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