India's domestic polymer demand has crashed since the government's demonetization policy sparked a drop in retail goods sales, impacting polymer converters and the traders who supply them, industry sources said Thursday.
The country's Prime Minister Narendra Modi announced November 8 that Rupee 500 and 1,000 notes would not be recognized as legal currency from midnight, and would be need to exchanged for new notes distributed by banks.
The sudden move to curb tax evasion resulted in widespread cash shortages across the country.
"85% of notes in circulation were affected by the rupee [note] change, causing a severe cash crunch in the general economy," a Mumbai-based polymer trader said Wednesday. "The finished goods market has come to a standstill as consumers focus on absolute necessities," he added.
The slump in retail demand has hit India's polymer end-users, along with the packaging, trucking and logistics sectors and inevitably polymer producers directly, said a senior manager at Vinmar International, a global petrochemical marketing and distribution company.
Small and medium-sized Indian domestic converters are currently operating hand-to-mouth, with some factories closing a few days a week to cut operating costs, and credit is in short supply across the polymer supply chain, a trader said, adding the cash crunch may take until mid-January to resolve.
Demonetization has also directly impacted converter productivity.
"As a [converter], I can't operate my plant at [full rates] due to manpower issues," a polypropylene and linear low density polyethylene end-user said, adding his workers had been standing in long queues to complete banking transactions since the announcement.
Larger corporate polymer customers, who rely less on cash transactions, are less impacted.
"[PP] raffia and bi-axially oriented PP sales to the cement industry or the FMGC [fast-moving consumer goods] sector are not [as affected]," a major producer said Thursday. "However, textiles, where there is lots of cash sales, is impacted," he added.
AGRICULTURAL PVC DEMAND HIT
Polyvinyl chloride demand has been impacted by the cash crunch, especially in the agricultural sector, which represents 74% of India's total demand, sources said.
"The agricultural sector [trades] mostly on a cash basis, as it is exempt from tax. Buyers of agricultural pipes -- farmers -- are in a fix now, [as] banks are allowing only Rupee 10,000-24,000 to be drawn per week. This is barely enough for basic necessities, let alone business needs," a trader said.
"[PVC] offers of $1,010/mt CFR India would have been snapped up normally, but even if I offer at $950/mt, no one is willing to buy -- they just don't have the money," he said, adding he expected the cash flow issue will be resolved by January.
India imported around 1.6 million mt/year of PVC in fiscal 2015-16, up a robust 10% year on year, industry sources said.
The domestic demand slump is forcing major Indian producers to look abroad for customers.
"Indian Oil Corp, Gail, Haldia Petrochemicals, Reliance Industries are all heard selling polymers into China at a heavy discount," a trader said.
India-origin high density PE-film and LLDPE were heard offered at $1,080-$1,100/mt to China Wednesday, while PP raffia was heard traded at $1,010/mt Monday, $10-$20/mt below market prices at the time, sources said.
"We are exporting more PE volumes this week, partially because of demonetization," said a major Indian producer, estimating exports to be about double normal volumes.
"In the long term, the real economy will thrive as transactions move away from the shadow economy; I feel very bullish about India's future," he added.
The CFR Far East Asia HDPE film marker was assessed flat week on week at $1,140/mt Wednesday, and LLDPE at $1,160/mt, down $10/mt. PP raffia was assessed at $1,020/mt CFR Far East Asia, down $10/mt week on week, according to S&P Global Platts data.
India's net PE deficit in calendar 2016 is estimated at 291,000 mt for HDPE, 357,000 mt for LDPE and 908,000 mt for LLDPE, according to S&P Global Platts Analytics, with overall demand growing at 11% year on year to more than 4.8 million in the year.
Its net PP surplus is estimated at 180,000 mt in 2016 and demand estimated at 4 million mt, up 10% year on year.
