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Judicious tinkering

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Balanced tinkering
Integrated producers unlikely to be affected
Drop in epichlorohydrin duties can affect TPL

DUTY CHANGES across the petrochemical chain will reduce impact on producers.
DUTY CHANGES across the petrochemical chain will reduce impact on producers.

Raghuvir Srinivasan

Petrochemicals are back in the limelight in a Budget after several years.

The notable aspect this time, though, is that the Finance Minister, Mr P. Chidambaram has taken care to maintain the duty differential between raw material and finished products.

This should protect the margins of producers such as Reliance Industries, IPCL and Gail.

Though the drop in duties on polymers such as HDPE, LDPE, LLDPE, PVC and polypropylene is sharp from 10 to 5 per cent, the protection for domestic producers has been ensured by dropping the duty on naphtha to nil and that on intermediates, such as ethylene dichloride and vinyl chloride monomer to 2 per cent from 5 per cent.

While producers of PVC, such as Reliance and IPCL, also produce the inputs, those such as Chemplast Sanmar and DCW source their requirements of the raw material outside.

However, their margins are unlikely to be exposed as the duties on the inputs have also been proportionately reduced. Similarly, though the import duty on man-made fibre, filament yarn and spun yarns has been reduced to 10 per cent from 15 per cent, Mr Chidambaram has taken care to simultaneously drop the duties on the inputs such as DMT, PTA and MEG to a similar level and that on paraxylene to 2 per cent from 5 per cent. By halving the excise duty on all man-made yarn to 8 per cent the Finance Minister has also given a leg up to the synthetic fibre industry.

This should enthuse producers such as Reliance Industries, Indo Rama and others.

The nuanced reduction in input duties together with the special additional customs duty of 4 per cent that has been extended to all imports now, should ensure that the domestic producers' interests are protected.

While integrated producers such as Reliance, IPCL, Haldia Petrochemicals and Gail, which are present across the value chain, are not likely to be impacted significantly given the drop in input duties too, independent producers may suffer a marginal negative impact given their smaller capacities.

The sole manufacturer of epichlorohydrin in the country, Tamil Nadu Petroproducts, could be hit by the reduction in import duty on the product by half to 5 per cent.

Mr Chidambaram has also reduced duties on polymers of styrene such as acrylonitrile butadiene styrene and high impact polystyrene but again he has protected the interests of domestic producers of the products such as Bayer ABS and Greaves Ltd, by correspondingly dropping the duty on styrene to 2 per cent from 5 per cent.

Interestingly, Mr Chidamabaram has maintained the differential rates on naphtha used for petrochemical production (which has been reduced from 5 per cent to nil) and for other uses (reduced from 10 per cent to 5 per cent).

(This article was published in the Business Line print edition dated March 1, 2006)
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