The Hindu Business Line : LAB market may see price slump on excess capacity

CLOSE on the heels of the price war that was recently unleashed in the detergents segment, it may now be time for a similar slugfest somewhat lower down the value chain.

This time round, the price war is brewing in the domestic market for linear alkyl benzene (LAB), the raw material with the highest formulation cost for the Indian detergents industry. Prices of LAB that now rule around Rs 54,000 per tonne, may witness a fall, on account of excess domestic capacity creation this year.

The domestic LAB market, already facing a glut with a 3.5 lakh tpa installed capacity as against consumption of 3.2 lakh tpa, is soon set to be swamped by excess capacity to the tune of 1.5 lakh tpa.

Manufacturers would be forced to find buyers for additional LAB worth Rs 650 crore per annum that would be available in a few months' time.

Sparking this 25 per cent additional capacity would be the Rs 700-crore, 1.2 lakh tpa LAB plant to be commissioned by Indian Oil Corporation at its Gujarat Refinery in Vadodara by July . The current manufacturers of LAB in India- Reliance Industries Ltd, TamilNadu Petroproducts, Nirma Ltd (one lakh tpa each) and Indian Petrochemicals Corporation Ltd (50,000 tpa) - are already forced to sell their excess produce in the low-margin Chinese and European markets.

With the entry of IOC into this crowded market, the manufacturers would have to go in for a mixture of further reduction of domestic prices and probe newer overseas markets. IOCis understood to have thrashed out an agreement to supply LAB to Hindustan Lever Ltd at a lower cost. It has already indicated that it would not be in a position to supply kerosene to either IPCL or Nirma. While IPCL is not too perturbed as it can source kerosene from RIL's Jamnagar refinery, Nirma would soon have to look at alternative sources of raw material for its LAB plant. Nirma would also have to cope with lower realisation on the 35 per cent that it sells outside after captive consumption.

Meanwhile, one may not have heard the last word in the detergent price war as a 25 per cent margin exists between the price of pouches and kilo packs of some of the leading players like P&G and HLL. Surely, the detergent manufacturers are not going to easily let go an opportunity to bargain a lower purchase price for LAB that constitutes some 30 per cent of the detergent formulation cost.

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