Competitiveness of Indian producers v/s world
producers
The cost of
production of Indian companies is higher as compared to the cost of
their counterparts in the world. The higher cost of production is
due to the choice of feedstock and high cost of capital.
The feedstock used
by most of the crackers in India is naphtha, even when natural gas
(which is used by majority of the world petrochemical producers) is
a cheaper and less polluting raw material. The problem lies in the
availability of gas, which is very limited in India and is
distributed to other sectors like fertilizers on priority
basis.
Petrochemical
industry is a highly capital intensive industry and therefore, cost
of capital plays an important role in the cost of production.
Domestic manufacturers have borrowed funds at the rate which is
three times more than the cost of the other World / Asian
producers. This makes the domestic producers highly uncompetitive.
Big companies like Reliance, are suffering a little less on this
front, as they had access to international funds and at the same
time they have managed to get funds at just 80-90 basis points
above the LIBOR.
Indian industry,
therefore, is highly dependant on the protection given by the
government in the form of high import duties. Indian producers also
suffer because of the fall in international petrochemical prices as
domestic prices move in tandem with the landed prices of
petrochemicals.
The big players of
India, Reliance and IPCL, have an advantage of low overheads. India
has cheap labor. Reliance and IPCL have low employee cost as
compared to their peers. (see table below)
Employee cost as %
of sales
|
Company
|
%
|
|
Reliance
|
2.3
|
|
IPCL
|
9.2
|
|
Dow
Chemicals
|
5.0
|
|
Formosa
Plastics
|
10.0
|
|
ICI
|
17.0
|
|
BASF
|
23.0
|
|
Hoechst
|
29.0
|
Indian industry has
an advantage of local presence in such a huge, scattered, and
fragmented market. It becomes very difficult for foreign country
producers to supply materials to small manufacturers in small
quantities. Indian companies, with their large and wide
distribution network in the Indian market, have an edge over the
international producers.
