Indian chemical producers hope for demand boost after auto sales boost post GST reform

Petrochemical producers in India -- mainly in the polymer and polyurethane segments -- hope that strong on-year sales growth in the local automobile industry in September will translate to better demand for plastics and foam used in automotive production.

The Indian automobile industry's sales grew 5.22% on the year in September, led by a 34% surge in retail demand over Sept. 22-30, following the implementation of lower Goods and Services Tax on automobiles on Sept. 22, according to the data from the Federation of Automobile Dealers Association, published on Oct. 7. Before the tax cut was implemented, demand in the sector was muted, the Association said.

Retail sales of passenger vehicles rose almost 35% on the year over Sept. 22-30 and 6% across the whole month, the data showed.

The near-term outlook was upbeat for auto sales on the back of an above-normal monsoon season, a strong kharif harvest, and steady central bank rates that could boost purchasing power, the Association said.

The country's GST council approved a revised two-tier tax structure of 5% and 18% on Sept. 3 to go into effect on Sept. 22. Prior to the change, all products fell under the previous "four-slab" system of 5%, 12%, 18% and 28% tax rates.

Under the change, the tax rate on passenger vehicles in the 1,200-1,500 cc segment was cut to 18% from 28%.

Polymer producers welcome auto sales numbers

Manufacturers of polypropylene, polyethylene and purified terephthalic acid -- the upstream of polyethylene terephthalate -- are hopeful the demand boost seen in an end-use product like an automobile would bode well for PP, PE and PET demand, as these are used to manufacture various parts of a vehicle, including interiors, headliners, seat fabrics and other components.

"The petrochemicals industry has been reeling under pressured margins for a while now," an India-based polymer producer said. "Partly due to capacity additions and higher supply, and partly due to moderate consumer demand."

An individual car consumes around 20-30 kg of man-made fibers, an India-based PTA producer said. The tax on such yarn was cut to 5% from 12%, which should reduce ex-mill prices of man-made textile and spur fewer classification disputes, he added.

"Auto tailwind intensifies polyester pull; a lower end-price will stimulate car sales, which will lead to higher automotive-textile demand," the second producer said. "This would lead to a stronger draw on polyester staple/filament."

PP is another major polymer used in passenger cars -- mainly the COPOL grade of PP -- specifically for interior trims, bumpers, and engine and battery covers. It constitutes about 37% of the total plastic content, or around 5%-7% of a car's total weight, an India-based PP producer said.

"This can translate to 60-100 kg of PP components," the third producer said.

"Our margins are under pressure, and the downtrend in prices is a result of various factors, including inventory buildup and subdued demand," the third producer said. "However, the GST cut should boost consumer demand for end-products, and in turn help with easing the stock glut and prop up restocking demand from buyers."

Slabstock polyol, primarily in the form of flexible polyurethane foam, is used in carpet underlay and headliners, dashboards, armrests and door panels, insulation for noise reduction, coatings and adhesives, and for improving thermal insulation in electric vehicle batteries.

"There will be an impact of automobile sales pickup on the market, however, the extent of the reaction will be less than the polymer industry," an India-based slabstock trader said. "Foam weight in a car would be around 2.5 kg, of which 1.3 kg is polyol."

Buyers' concerns remain

The new GST structure has led to some concern among polymer buyers, as tax rates on fiber and yarn finished products were cut to 5%, while rates on the purchase of upstream PTA, monoethylene glycol, PP and PE remained at 18%.

An India-based PTA buyer said this has created an inverted tax structure, which would likely impact capital expenses for PET producers.

However, the GST rules allow buyers to claim a refund on any extra tax paid, but the process is a time-consuming one, the buyer added.

"Currently, it takes at least three months for the tax refund to be credited from the government," another India-based PTA market source said.

However, the sell-side sources said that the reform in the refund cycle should offset the inverted structure.

"Post-September, inverted-duty refunds are likely within seven days, which would be credited directly to bank accounts," one of the producers said. "This should preserve liquidity with faster working-capital cycles."

Platts, part of S&P Global Commodity Insights, assessed the weekly CFR South Asia block copolymer grade PP at $895/mt and assessed the weekly CFR South Asia HDPE blowmolding at $900/mt on Oct. 1.

Platts assessed the weekly CFR India slabstock polyol at $1,145/mt on Oct. 3 and assessed the daily PTA CFR India price at $670/mt on Oct. 7.