AnalysisSSESSMENTS: Detailed Analysis of COVID-19 Impact On Business, Polymers Demand in India

Summary: 

• Implementation of 21 days nationwide lockdown in India started in March
• Demand started to decrease due to manifold factors before the lockdown
• Some Indian ports imposed port restriction, declared force majeure
• Most Indian petrochemical producers also declared force majeure
• By end of Q2 2020, Indian Rupee projected to hit 80.000 per US Dollar
• Government extended lockdown to May 3 as the number of cases continue to rise
• The leading Indian petrochemical producer starts exporting PVC cargoes

COVID-19, which surfaced in China in late last year, has spread to at least 177 countries in the world, including India. On January 31, 2020, India announced the first coronavirus case. Throughout February to early March, there is still no significant impact on the polymer market except some players lamenting that the buying sentiment was going down hill. As cited by sources to SSESSMENTS.COM, the weak buying sentiment was caused by manifold factors such as the growing concern over the Coronavirus pandemic, the depreciation of Indian Rupee, as well as the traditional pattern to keep lean inventory nearing the financial year-end. 

The first attempt to prevent the spread of Coronavirus in India, some ports in the country enacted restriction; which required a 14-day quarantine for vessels coming from several countries including but not limited to China, Iran, Italy, South Korea, Japan, Singapore, Vietnam, Hong Kong, Macau, Thailand and Indonesia. Second attempt, India’s prime minister eventually decided to impose nationwide lockdown for 21 days starting from March 24. After the government announced the lockdown, some Indian ports including Dhamra, Gangavaram, Gopalpur, Karaikal, Krishnapatnam, Mundra and Tuna have declared force majeure as operations were hit badly, SSESSMENTS.COM was told. Aside from that, all polymers factories were forced to close; even if there were some concluded deals, the cargoes could not be delivered due to lack of drivers. At the same time, some other major ports are operating and customs are working, yet, transportation from ports to the warehouse will be disturbed as most logistic sectors are not operating. Therefore, most cargoes were stuck at the port. 

However, in a developing country like India, the lockdown scenario clubbed with the slow economic growth in the previous year has led to remarkably volatile market conditions. As reported, the lockdown has resulted in closure of businesses and unemployment for thousands of workers. Several businesses such as hotels and airlines are cutting salaries and laying off employees. During the lockdown, the Indian economy is expected to lose over ₹32,000 crore (US$4.5 billion) day by day. Indian Rupee has also depreciated to an all-time intraday low of 76.2088 against the greenback on Monday, March 23. By the end of June, some industry sources stated that Indian Rupee may hit 80.000 per US Dollar, citing that the selling pressure from outflows will weigh the local currency. The lockdown has left a dramatic impact on the country, especially on the business sector such as raw materials and spare parts, pharmaceuticals, tourism, as well as aviation. The COVID-19 crisis is expected to severely impact the overall consumption trend and consumer spending in India throughout Q2 and Q3 2020 stemming from loss of income for a large section of the society, therefore hurting consumer spending and reducing growth forecasts. Prior to the crisis, consumer demand was already slowing down and with lockdown in place that caused businesses to come to a halt, incomes appeared significantly hit on daily wagers workers and pay cuts across companies.

Owing to the lockdown, India's growth forecast in 2020 becomes bleak. The lockdown has caused more economic damage in the country than anticipated. At the moment, India’s GDP revised down from earlier projection of 2.5% to 0% for the year 2020 and a marginal rise of 0.8% for fiscal ending March 2021. In the global economy outlook, Fitch Ratings stated that India's GDP growth for the year April 2020 to March 2021 will dip to a 30-year-low of 0.8% from 5.1% earlier. However, in 2021-2022, the GDP is expected to rebound to 6.7%.  

On the production front, most Indian petrochemical producers in the country declared a force majeure amid the Coronavirus lockdown. First, India’s Haldia Petrochemicals (HPL) shut the company’s complex with a capacity of 345,000 tons/year HDPE and 365,000 tons/year of LLDPE in late March, but no exact date disclosed. Second, Mangalore Refinery and Petrochemicals Ltd (MRPL) also shut its 440,000 tons/year PP plant on March 26. Third, India’s Chemplast Sanmar announced force majeure on the company’s PVC plant located at Mettur Dam near Salem in Tamil Nadu. The producer confirmed that the EDC, Chlorine, Caustic Soda plants, as well as the 300,000 tons/year PVC plant, have been shut since March 26. At the same time, the producer has no delivery activities due to the lockdown, SSESSMENTS.COM noted. In the meantime, Reliance Industries Ltd initially had no plan to shut its 445,000 tons/year PVC plants, however, due to imbalance supply-demand amid the Coronavirus lockdown, the producer was compelled to shut the company’s PVC plant. Reliance shut both PVC plants located in Vadodara and Hazira, India, on March 30 with a capacity of 70,000 tons/year and 375,000 tons/year respectively as its inventory level was high amid sluggish demand due to Coronavirus pandemic. Meanwhile, another PVC plant located in Dahej with a production capacity of 335,000 tons/year remains online. From the downstream market, only manufacturers producing essential products are permitted to operate during the lockdown. Still, due to the lack of labour, most of the manufacturers were only running production at below 50% from the normal rate. In Kanpur, there were only about 10% of factories that operate. 

As the Coronavirus cases in India continue to climb, the Indian government announced an extended nationwide lockdown. Based on the government’s announcement, the lockdown which was set to end by April 14, extended to May 3 as a measure to curb the further spread of the lethal virus. Despite the extended lockdown, some sources stated to SSESSMENTS.COM that the government will allow some factories to resume production activities depending on the colour-code of the region. Further explained that the Prime Minister Narendra Modi had asked the Department of Industry (DPIIP) along with the other relevant ministers to prepare plans for re-operation of essential industries related to the lives of many people. Even though the government has granted permission to resume operation, some producers and converters that are willing to resume its production must be able to fulfil certain conditions; whereby companies need to make sure that their workers are keeping physical distance of minimal two meters away from each other and has to always provide sanitizer at their factories.

Following the government’s plan, Indian producers gradually started ramping up their production. Reliance Industries Ltd resumed PVC production at 375,000 tons/year Hazira plant on the week commencing April 20, while 70,000 tons/year PVC plant at Vadodara was brought on-stream on April 23. As of April 24, the producer reported that all PVC plants are running between 90-95%. As for DCW, the producer also restarted its PVC plant on April 23. DCM Shriram is most likely to resume production in the final week of April while Finolex may take longer. However, coupled with the brink of monsoon, a source mentioned that weak demand, particularly for PVC is expected to persist for the rest of 2020. During April, sales from the producers’ side were mostly only between 20-30% from normal. In May, the sales are predicted to remain stagnant while approaching June, the sales will probably be able to reach 50-60%. In July, the sales most likely still could not reach 100% as the monsoon season will hit the country by then. As a result, supply in the domestic market will pile up. An Indian trader expressed opinion to SSESSMENTS.COM that after the extended lockdown, the producers’ supply for PVC is expected to increase to 90,000 tons while the traders’ supply in the open market predicted to touch 250,000 tons-level. Hence, India needs to at least lower quantities of import cargoes for the entire year to balance the supply and demand. 

As expected, some overseas PVC suppliers encompassing the leading Taiwanese PVC producer and Japanese PVC producer decided to skip May shipment offers to the India market in the midst of diminished demand. Instead, the leading Indian PVC producer decided to export their cargoes to the global market. SSESSMENTS.COM was further informed that the decision to export cargoes is prominently caused by the slow demand following the nationwide lockdown imposed by the government and high inventory level. 

Crowned as the world’s largest PVC importer, India’s PVC demand is approximately 3 million tons/year; 70% of the demand coming from the agricultural and construction sector, with pipes and fittings industry. Meanwhile, the domestic capacity is only around 1.45 million tons/year, coming from Reliance, Chemplast, Finolex, DCW Ltd and DCM Shriram. Therefore, the country needs to import by around 50% to cater to domestic demand. But since the coronavirus knocked down buying sentiment in the domestic market, the global PVC market has suffered. "The bearishness in the global PVC market has been reinforced by the news that India extended its lockdown until May 3. Import prices in most Asian markets have plunged to the lowest level in more than a decade,” a source commented to SSESSMENTS.COM. Similarly for MEG, sellers from India are also looking for outlets outside the country to export cargoes while some Indian MEG producers cut production rate to 50% due to limited storage space. For all polymers in the supply chain, from producers to converters to end-users, products were not able to be delivered from factories resulting in lower operations across the board. In light of this, exports from India will likely continue in order to ease pressure on domestic supply. Adding fuel to the fire, the slump in US crude oil prices on April 20 has made the polymers market sentiment deteriorated further. In India, there are at least three refiners that have trimmed oil import from the Middle East producers for May due to sluggish demand as the impact from Coronavirus outbreak. According to market sources, this is the second consecutive month that Indian refiners have cut their long-term crude imports. 

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