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Distressed HOCL Kochi unit for phenol gets a boon of life – 3 Jan 2014

Jan 03, 2014

Despite gloomy market conditions for domestic manufacturers of phenol and acetone last year, HOCL’s Kochi unit is on track to commence full scale production, after being shut for the past couple of months. In addition to this, the Cabinet Committee headed by Prime Minister Manmohan Singh has given approval to the Central Government’s plans to expand the production capacity of phenol in Kochi.
 
Since 1989, HOCL has been operating its Kochi unit in Ambalamugal, which is located 15 km away from Ernakulam city. The facility in Kochi produces acetone and phenol, having installed production capacity of 40,000 and 24,640 metric tonne per annum, respectively. These products are manufactured from cumene, which in turn requires feedstock of benzene and propylene. 
 
Things haven’t been rosy for HOCL’s Kochi unit ever since the government lifted the anti-dumping duty on imports of phenol and acetone in July last year.  
 
The Kochi unit, which has been making year-on-year  profits for the last 10 year, had for the first time (in the span of the 10 year), incurred a loss of Rs. 36 cores in FY 13, based on the company’s annual report. The main cause for the loss was due to the removal of the anti – dumping duty on imported phenol and acetone, which had forced HOCL to reduce its prices to maintain competitiveness in the Indian market.  To add to this, the raw material cost of the unit had skyrocketed last year; this has drastically squeezed the margins for the company. As a consequence of all these factors, HOCL had shut down its Kochi plant in the last couple of months. 
 
However, things are expected to shape up for HOCL, where the company plans to not only ressume full operation at Abalamugal, but expand exisiting production capacity for phenol. 
 
A delegation comprising of Union minister KV Thomas and KP Dhanapalan MP along with senior officials at HOCL held talks with the Minister of Petroleum and Natural gas, M Veerappa Moily. In conclusion, the delegation announced that a joint venture between BPCL and HOCL for plant expansion at Kochi will take place within one or two years. This expansion will increase the phenol production capacity to 200,000 metric tonne. The venture is being planned such that, the manpower and land for the project would be provided by HOCL, while BPCL will provide the funds for the investment. A detailed expansion plan is expected in the future, once the Kochi unit resumes full- fledged functioning. 
 
A company official told Indianpetrochem, “These expansions are based on strong demand for phenol in the Indian economy. As a consequence of this expansion, the company will benefit from the economies of scale, which will help HOCL hedge against rising feedstock prices and cheaper imports. Ultimately, the company hopes to gain a significant market share in India and reduce the influence of imported goods”. 
 
Phenol is a significant organic chemical used in backbone, end-user industries like construction and automobiles. 
 
As a result, phenol is an important chemical for a developing economy like India. Having stated this, it’s interesting to note that the market dynamics for expansion of phenol production capacity has been sluggish in the country, whereby Hindustan Organics Chemical Limited (HOCL) and the SI group are the only two manufacturing companies in the country with installed capacity of 40,000 tones per annum, respectively. 
 
According to FICCI’s Chemical and Petrochemical Handbook, 2012, more than 70% of the demand for phenol is met through imports and no fresh addition of capacity expansion has been seen within India.  According to the report, the consumption of phenol has grown from 0.15 million metric tonne in FY 06 to 0.18 million metric tonne in FY 11, while at the same time the imports have grown at a higher CAGR of 10%, to meet the rising demand. In the future, FICCI estimates the demand for phenol to grow at the CAGR of 4-6% from FY 11 to FY 16, backed by the growing construction and housing sector.  
 
At an international conference, Mr. Debashish Nandi, vice president of Reliance Industries Ltd, concurred with this trend, when he stated that the Indian phenol market is expected to grow at 6.5% annually from FY 2012-2015.  
 
Despite such a strong demand for phenol in India, the domestic manufactures have been affected by the high feedstock price, which is much higher in India than countries like China, Middle East and other South East Asian countries. Additionally, lack of infrastructure facilities at ports and railway terminals makes it challenging for domestic manufacturers to procure raw materials at a competitive cost. 
 
In order to counteract this situation, where the domestic manufactures have limited market share and high raw material cost, the Government of India has provided duty protection to the domestic manufacturers via the anti-dumping duty of phenol and acetone. This duty has protected manufacturers from cheaper imports in the past. Since October, 2008, anti- dumping duty was levied on imports from Singapore, South Africa , EU, South Korea, Taiwan and US for a period of 5 years.  However, the anti-dumping duty for all these countries has been removed since June 2013. 
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