Till a few weeks’ back the plastic pipes industry had everything going in its favour. But in this globalised world, tides can change their direction anytime and anywhere and that is what is happening with pipes industry too. So, in the globalised world opportunities are aplenty but chances of disruptions, many of which are unexpected, are also too many and too frequent.
American storm disrupts market
Recently, operations of refineries and petrochemical plants on the US Gulf coast were disrupted due to a major storm Polar that hit the US in the second week of February 2021. According to Chemistry World, the polar storm that descended into the US Gulf Coast on 14 February brought unprecedented prolonged freezing temperatures to many parts of Texas (considered to be the petrochemical hub of USA), dramatically disrupting petrochemical supplies. Approximately 75% of total US ethylene capacity remained offline as at the beginning of this week. Ethylene and EDC are the key raw materials for PVC resin and the US is the largest supplier of PVC resin globally. Until US resin supplies normalize, PVC resin prices may remain elevated at already record high levels or may further inch upwards. It should be noted that disruption in supply chain and lockdown of plants due to the pandemic have already led the surge in PVC resin (+82%) prices since Q1FY21.
Some plants are ready to become operational
Good news is that some of the plants are ready to become operational and their operations may restart anytime in next few days. However, many chemical plants (including public utilities) in the area are not designed to operate in such extreme conditions, so equipment failures and frozen process lines can decrease operational reliability in the coming days.
Unorganised sector in India is the greatest loser
However, such disruptions have two sided effects. PVC pipe manufacturers in the organised sector may not be impacted as much as those who operate in unorganised sectors. In other words, this disruption may also hasten the process of market share shift from unorganised to organised sector in the coming days, provided the effects of disruption is prolonged.
Shift from PVC to CPVC is also active
However, this disruption caused by natural calamities in USA may not have any impact on the gradual shift towards CPVC pipes that has been taking place in recent years. It should be noted that over the past decade, the CPVC pipes segment has penetrated at a fast pace in India as it grew at almost double the rate of PVC piping growth. There has been a largescale shift from metal pipes to CPVC pipes in case of plumbing, hot & cold-water distribution and construction industry. With the required technology posing a major barrier to entry (vs PVC pipes), the organised players (controlling 80% of the CPVC market currently), have grown at a much faster pace. Interestingly, CPVC pipes sell at 15-20% higher price vs PVC pipes, thereby generating higher margin by 300-500bps vs the latter.
Meanwhile, in 2019, the Indian government imposed anti-dumping duty on CPVC resins originating from China and Korea, which were major suppliers to India. This hit the small unorganised players while helping bigger players like ASTRAL, which have been sourcing the resins from Japan.
On the performance front, leading pipe manufacturers have posted double digit growth in revenue during the third quarter and the trend is continuing in the fourth quarter as well. However, most of the revenue growth is coming from increased realisation rather than increased volume which has grown at slower pace than the realisation. Also, the channel partners have reportedly lightened their inventories hoping for a price correction. With price correction nowhere on the horizon and American disruptions causing further price escalation, channel partners will be facing a tricky situation and their reactions too may have some impact on the price going forward.