PVC – A Strong Opportunity for Standalone Petrochemical Business facility

Overview

The Hydrocarbon industry across the globe has been witnessing a significant change in the recent past wherein, a combination of disruptive technologies such as electric cars, green hydrogen and the impact of pandemic has led to a lot of pressure on the distillate demand from Refinery. In fact, the extended pandemic fallout resulted in a situation where mobility fell across the globe and the distillate requirements reduced dramatically. Equally dramatically, the things have changed on account of geopolitical considerations leading to several embargoes on Russia leading to an asymptotic escalation in the prices of distillates and gas. The world at large is struggling again for completely different reasons though!

All these extraordinary developments have created a great opportunity for looking into alternatives for fossil fuel led Industry and consequently, renewable have gained a lot of momentum with wind, solar energy leading the pack. The opportunity that conversion of renewable energy to green hydrogen has apparently, paved way for a strong and potentially disrupting phenomena to unfold.  Incidentally, India which is gifted with bounteous solar energy is already up and running with the green hydrogen initiative to provide a panacea for the energy deficit of the country, to emphatically reduce the burgeoning import bills for obviating its negative fallout on the economy.

While renewable energy, and through it, green hydrogen is gaining momentum, most of the refineries are beginning to, or are likely to feel the pressure of negative demands of distillates in the times to come. Consequently, alternative avenues have to be looked into, to ensure that the investments towards refineries etc are protected for continued and sustained revenue returns. Incidentally, while distillate demand from the refineries are more likely to be under pressure, the petrochemical demand has been robust and is soaring consistently. In India, while a consistent growth in Petrochemicals has been observed in almost all the segments of first generation and niche petrochemicals, the demand for some of the products seems to be increasing at an asymptotic pace. One such petrochemical, which is closely linked with infrastructural growth of the country, is PVC which in many ways, is growing at a pace somewhat similar to the  tremendous impetus that is being provided to infrastructure segment.

Demand Supply

It is observed that PVC has been indicating a phenomenal growth profile. In 2021, the total demand of PVC was close to 1.8 MMT of which, considerable quantity had to be imported. The current name plate capacity of PVC in the country is close to 1.6 MMT with growth indications of this demand increasing up to 5.1 MT by 2025 and 6.5 MT by 2030 indicating therefore, that there is considerable opportunity available to set up PVC plants in the country, to bridge the burgeoning demand supply gap to avoid imports of PVC. Incidentally in 2021, the total PVC imports indicated a CAGR of 10.3% with derivative import content more than 50% in a basket of total imports of Petrochemicals to the tune of Rs.85,000 Crores ($11.5 bn) odd.

PVC Plants

PVC is a niche Petrochemical which requires several facilities to be created for its production. Typically chlorine and ethylene is required to make ethylene dichloride, which is cracked to produce VCM for subsequent polymerization to produce PVC. In the process HCL is produced as a by-product.

VCM/PVC Plants are extremely hazardous as the constituents involved therein are associated with significant health hazardous. Environmental concerns therefore, are always a major issue with VCM/PVC Plants. The other important issue is availability of ethylene and chlorine. Typically ethylene could be sourced from an Olefin Complex and Chlorine could be derived through electrolysis process wherein brine could be electrolyzed to produce chlorine. Both these plants are highly capital intensive and therefore, most of the PVC Plants are typically located in close proximity of Olefin Complexes where chlorine could be generated either from sea water or from salts.

Given the fact, that Olefin Complexes themselves are a high cost facility and are always governed by economies of scale and captive consumption of the intermediates, availability of ethylene as a traded commodity is an issue. Additionally, significant facilities are to be created to handle Ethylene import and export, where if volumes are to be handled cryogenics is the only solution.  Consequently in India, in particular, inspite of PVC showing an extremely encouraging growth trend, the PVC plants per se have not come up with the sale and speed that were required. Reliance is the only dominant player while others have tried to build some capacity through the transplant route and sourcing of VCM.  

Additionally, chlorine production through the electrolysis process too is a highly energy consuming process where enormous huge quantum of electricity is required for its production. This again is highly capital intensive and is governed by economies of scale. 

Worldwide therefore, the major producers of ethylene and chlorine either trade lot of VCM or Ethylene Dichloride or set up their own facilities of production of PVC. While VCM is traded freely, it is observed that VCM trade is somewhat restricted in volumes, and is generally subjected to high volatility of prices and is   hazardous in handling. This could make the facilities setup on VCM import consequently, a little vulnerable.  On the contrary, it is observed that ethylene dichloride is traded in larger volumes and the prices for the same are fairly stable over a reasonable period of time. Companies engaged in the business of PVC manufacture would perhaps therefore, prefer to  import ethylene dichloride and crack the same to produce VCM for conversion to PVC for higher value add, rather than set up facilities through importing higher quantities of VCM. Notwithstanding this, VCM has been a fairly actively traded commodity even while its availability and prices remain volatile. The price differential between VCM and PVC is about 1.5 to 1.6 times while the corresponding differential between EDC and PVC is about 3 and 3.5 times. This is where the opportunity lies.

 Proposition

Based on the above, it is evident that PVC is a strong niche petrochemical priced attractively and with a robust demand in the midterm and long term horizon. Consequently, any new capacity which is created in PVC segment in the country is expected to be sold quickly as demand supply gap is huge and is consistently being bridged through import.

EDC which is freely traded could potentially offer possibility of long term contracts with the suppliers through which, sustained supplies in large quantity could be ensured. Also since EDC prices have remained fairly consistent over a longish period of time, its predictability and variation can be assessed a lot better. Possibly a formula for future price variation could also be arrived at to secure the feedstock availability and prices in mutual win – win interest between the EDC supplier and the Project promoter.

Somewhat similar to most of the Petrochemical plants and facilities, economies of scale are of significant importance in the case of PVC plants. Currently, the single train minimum economy size of a PVC plant is 300 KTPA. For larger plants to be set up multiple trains would have to be considered.

Project

A PVC Plant based on imported EDC around the coastal region can be a great opportunity. While smaller capacity plants are already installed in the country in phases, it would be opportune to look at something big and significant to derive the benefits of Economies of scale and higher off take from a single facility. A 600 KTPA PVC Plant, divided into two trains with stand long EDC cracking complex is foreseen along with its dedicated utilities and offsite facilities.

Since electric grids have matured fairly in the country and are sufficiently reliable power could be sourced from grid for major capex in the complex to be minimized. A fuel gas connect however, to support the EDC cracker would be essential. Similarly, since the plant is expected to be located along the coastal region sea water could be utilized to produce DM water through membrane process. Alternatively for rationalization of Capex treated water from local municipal bodies could be sourced which can be usefully converted into DM water to cater to the PVC complex process requirements.  

EDC storage is not a challenge, as the same can be sourced in typical fixed roof tanks wherein fairly large capacities could be created for ensuring large consignments of EDC to be unloaded from cargo vessels in these tanks at regular frequency. EDC would be cracked in the EDC furnaces to produce VCM as feedstock to the PVC polymerization section with HCL as a by-product. Since the PVC demand is robust PVC product movement from the complex is expected to be brisk.

Economics

Typically economics reveals that for a PVC complex of 2 trains of 300 KTPA capacity with common EDC would cost to the tune of Rs.2400 crores including land and licensing cost. Considering the landed all inclusive price of PVC within a band of Rs.1,15,000/ton to Rs.1,60,000/Ton and EDC prices between Rs.35,000/Ton to Rs.60,000/Ton, the typical margins could range to 55 - 125,000 /ton.

Since the Project returns are extremely attractive there is strong business case for setting up PVC complexes along the coastal belt of the country. These Projects could be fast tracked and set up between 24 to 28 months from initiation.

Strategy

The Licensors for the PVC technology are somewhat limited, and some of them are also active PVC producers of their own. As a measure of incentive, it would be prudent to rope in the Licensor for equity participation if they recognize a strong business case. For a typical project up to 26% equity could be sourced from the Licensors and the balance could be supported by the promoter(s). With the Licensor being an equity partner best possible technology and start up assistance can be foreseen. A strong consultant could be engaged to set up the plant on EPCM route for maximization of indigenous supplies and therefore exercise larger control over the capex.

With the business case being as attractive as above, the Indian Hydrocarbon industry needs to ensure that positive steps are taken to install PVC plants to cater to the strong and rising demands of PV in the country. In fact, with the overall investment not being very significant, players could also come forward in partnership or otherwise, to take up this business proposition for ensuring that the demand of PVC is served through domestic projects and the import content is gradually minimized.