Plastic Takes A Profitable Turn
Even if activists around the world would rather put a complete ban on plastic products, several triggers such as the pandemic-driven change in work and lifestyle, increasing urbanisation, growth in infrastructure and demand from the agriculture industry, among other factors, have boosted production in the plastic pipe and packaging sectors. In this report, Armaan Madhani highlights the salient growth drivers while also pointing out the key challenges
Market growth and diversification – these are the two factors that have contributed to the rapid strides taken by the Indian plastic industry in recent years. Latest reports indicate that the industry is likely to see increasing demand in the post-pandem-ic era. In fact, among the very few industries to have done so, the Indian plastic industry has shown resilience by staging healthy recovery from the pandemic-induced slowdown in the first two quarters of FY21. In this special feature, we delve deeper to understand the plastic piping and plastic packaging sectors.
Plastic Piping Sector
The global plastic piping market is valued at USD 55.96 billion and expected to grow at a CAGR of 2.8 per cent from 2021 to 2025 to reach USD 62.41 billion by 2025. In terms of volume, the global PVC pipe market has reached 24.51 million tonnes in 2020 and is expected to reach a volume of 30.25 million tonnes by 2025. The Indian plastic pipe and fittings industry is expected to reach Rs500-550 billion by 2025, growing at a CAGR of 10 per cent from the current level of Rs290-300 billion. The primary driver of growth in the piping and fitting industry is the rapid pace of urbanisation and infrastructure development. Increasing urbanisation calls for larger and cost-effective sewage lines, among other applications.
This has also led to demand in the chemical as well as the oil and natural gas sectors. Other industries such as automotive and mining are also likely to boost the demand for plastic pipes. The growth drivers are as follows:
• Low Per Capita Consumption : Globally, the average per capita consumption of plastic is around 30 kg while that of India is only about 11 kg, which is relatively very low. Tradi-tional materials dominate the applications of plastic. However, over the past 3-4 years, low crude oil prices and superior properties of plastic have increased the usage of plastic in India. Hence, it is expected that the per capita consumption will inch closer to the global average. CRISIL Research expects demand for polymers to grow at a healthy 7-9 per cent CAGR from 2019-2024.
• Substitution and Replacement Demand : Superior real estate properties and low prices have led to the substitution of metal pipes by plastic pipes. The increase in the availability of raw materials such as PVC, PE and PPR followed by the commissioning of new petrochemical facilities in India will further support the plastic pipe industry. Also replacement of older pipes with plastic pipes will help in driving the demand.
• Sectoral Consolidation : In recent times, several smaller players in the PVC pipe sector have been impacted by volatility in PVC prices, liquidity crisis and working capital constraints, which has led them to close their operations. It has been observed that the market share of top players has increased due to the shutdown of operations by the smaller unorganised players. This creates an opportunity for sectoral consolidation.
• Focus on Irrigation : The irrigation sector is the key end-user for plastic pipes, accounting for 45-50 per cent share of the industry. India has 142 million hectares of cultivated land but only around 50 per cent of the land is irrigated. Hence, in FY16 the central government converged irrigation schemes under the Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) to expand the area under cultivation by 2.85 million hectares in FY17 and 8 million hectares by FY20, outlining a spending target of Rs500 billion until 2020. The key schemes converged are Accelerated Irrigation Benefits Programme, Integrated Watershed Manage-ment Programme, On Farm Water Management and Per Drop More Crop. Investment in the sector is expected to rise in the next five years owing to the push from state governments to ncrease irrigation penetration in the states.
Healthy growth in government investments towards water supply and sanitation (WSS) and plumbing are the second-largest segments for plastic pipes, accounting for 35-40 per cent share of the plastic pipe market. In the past five fiscal years i.e. from FY14 to FY19, the government expenditure on the sector rose at 22 per cent CAGR to about Rs624 billion in FY 2019. This was led by several central government schemes, coupled with rising emphasis by municipal authorities. The government has also proposed a ‘Nal se Jal’ scheme, a component of the Jal Jivan Mission, which promises to provide piped drinking water to every household in the country by 2024.
• Real Estate Development: Real estate is a key end-user sector for plastic pipes and fittings in India. Housing for All 2022 – National Mission for Urban Housing will also provide a boost to the industry. The Government of India has increased the allocation for the Pradhan Mantri Awas Yojana (PMAY) to Rs260 billion for FY21 from Rs80 billion to boost the housing sector and has also relaxed an Income Tax provision to enable developers to reduce property rates by up to 20 per cent compared to the existing circle rates. The Indian government will infuse Rs60 billion as equity in the National Investment and Infrastructure Fund’s debt platform as India readies for a massive Rs111 trillion infrastructure pipeline.
• Government Push for Infrastructure : The Indian govern-ment and large private sector companies have planned capex over the next 3-5 years with meaningful spending on applica-tions such as plumbing, insulation, sewage drainage, fire sprinklers and urban infrastructure. Plastic pipes account for 5-10 per cent of the total project capex and implies sustainable demand for PVC pipes going forward. Given the country’s ambition to modernise infrastructure, advance its cities with smart development and boost employment, India is expected to become the third-largest construction market in the world by 2025.
Key Concerns or Threats
Some of the key concerns that affect the plastic pipe industry are as follows:
• Volatility in Raw Material Prices: The primary raw materials comprise UPVC, CPVC, PPR and HDPE resins, which are derived from crude oil by-products. Crude oil prices are volatile and any fluctuations in the prices of crude oil would lead to fluctuations in the prices of the raw materials required to manufacture its products. India is a net importer of PVC and PE as demand growth has outpaced capacity addition. Although capacity expansion plans are in action by major domestic manufacturers, growth in domestic output won’t be evidenced in the near term. Thus, companies are not only vulnerable to the exchange rate but demand supply mismatch also is a key risk faced by players in the pipe and fittings industry.
• Softening of Agriculture Pipe Demand: Commodity prices skyrocketed in FY20-21 and this resulted in inflation and a consequential hike in PVC prices. There is an imminent threat of a decline in pipe volumes’ demand due to farmers deferring agriculture pipe purchases in the hope of a price correction. The first quarter of FY22, which is typically a busy season for agriculture pipes, has been impacted by both the second wave of the pandemic and higher PVC prices. However, this segment is expected to do well in terms of volumes in H2FY22 as the prices have slowly started to narrow down.
• Lower Spending by Consumers: In FY 2020-21, there was a drastic shift of consumer spending towards more modest levels, especially due to a lot of job losses and wage reductions during the pandemic. The ongoing uncertainty will certainly play on the minds of consumers and investors. In commercial real estate, there is also some concern about the impact of wide-spread ‘work from home’ policies adopted by Indian corporates during the lockdowns. Spending on construction is projected to be more cautious.
Future Outlook of Piping Sector
The plastic pipe sector has shown resilience by recovering from the pandemic-induced slowdown in the first two quarters of FY21. In the second half of FY 2020-21, plastic pipes and fittings witnessed a sharp recovery in their volumes, mainly on the back of a sustained rise in demand. The Indian PVC pipe industry has witnessed greater realisation supported by a sharp rise in PVC prices in FY21. However, PVC prices have now started easing and may stabilise in the near future. The Government of India’s initiative for affordable housing, irrigation sector and focus on rural water management along with higher capex for infrastructure growth continue to be the major drivers for the growth of the PVC pipe industry in the country, particularly for organised players.
It is likely that going forward, market consolidation, steadiness in higher PVC prices, opportunities in the infrastructure pipe segment that is expected to pick up with the government’s strong emphasis on infrastructure in the budget and the full-fledged resumption of construction and development activities will help post growth. In the coming years, different end-user applications, value-added products, a shift from metal to plastic pipes, ongoing consolidation and infrastructure demand will help the large domestic plastic pipe manufacturers to post healthy double-digit volume growth. It is believed that large organised manufacturers with pan-India facilities will take advantage of this opportunity to increase market share over the coming years.
Plastic Packaging Sector
The global packaging market is projected to grow to USD 1,012.6 billion by 2021. It was estimated to be valued at USD 909.2 billion in 2019. People are now more than ever conscious about food packaging worldwide amidst this pandemic, due to which demand for packaging is set to increase. The Indian packaging market was valued at USD 75 billion in 2020 and is expected to reach USD 204.81 billion by 2025, registering a CAGR of 26.7 per cent during the period of 2020-25. Packag-ing is amongst the high growth industries in India and the country is becoming a preferred hub for the packaging industry.
With the arrival of the pandemic, people have become more conscious of the food products they consume. The food industry has increased its focus towards better and safer packaging for its consumers, resulting in robust demand for packaging material. It has also helped in prolonging the shelf life of many products. In fact, this validates the increasing demand for packaged consumer goods.
Moreover, in India, one can find a large base of raw materials to manufacture packaging products. Besides, there is an increasing trend of using eco-friendly or recyclable materials in packaging. The com-paratively low manufacturing costs open opportunities to foreign companies and technology too.
The packaging industry has experienced rapid growth globally as a result of greater innovation and customer preferences for global brands. Packaging sales in the emerging markets are expected to continue to show strong momentum as both increased consumption and demand for consumer goods drive the need for more sophisticated packaging. Currently the fifth-largest sector of India’s economy, the industry has reported steady growth over past several years and shows high potential for much expansion, particularly in the export markets. Costs of processing and packaging food can be substantially lower than parts of Europe which, combined with India’s resources of skilled labour, make it an attractive venue for investment.
A high degree of potential exists for almost all user segments which are expanding appreciably – processed foods, hard and soft drinks, fruit and marine products. In India, the fastest growing packaging segments are laminates and flexible packaging. PET is produced in India in huge volumes and majority of the demand in the country is satisfied by domestic production. PET resin demand is projected to grow at a CAGR of 6.75 per cent in 2022-2030, according to a report by ChemAnalyst. India’s demand for PET in the packaging of food and beverages has witnessed a further increase during the pandemic, boosted by the higher awareness of hygiene and enhanced procurement of disposable and packaged items for reducing the chances of viral infection.
Growth Drivers
There are certain well-defined triggers to help the plastic packaging industry move forward. These include:
• E-Commerce: The already fast rise in e-commerce has got a big boost due to the pandemic with consumers opting to buy products online and with hygienic packaging. The rise in e-commerce could place an intense focus on increased packaging requirements, including new products, along with last-mile delivery innovations.
• Digitalisation and Internet of Things (IoT): Digital efforts are being used both to simultaneously drive down costs and gain a competitive edge with consumers, as for example, generating greater customer value and service by integrating technology in packaging. With Internet of Things (IoT) already ruling the roost, packaging as an enabler will be far more intuitive and help provide instantaneous information to the consumers about the packed products.
• Innovative Packaging: Brands are well-personified assets and enjoy an image that the marketers are very conscious and sensitive about. Several FMCG companies world over are opting to give their packaging designs a fresher look in line with the attributes that their brand stands tall for. The mantra is: ‘good packaging protects your product, while great packag-ing protects your brand’. Domestic players in the sector are geared towards developing innovative packages that are aimed at attracting customers to drive sales.
• Sustainability Requirements: Sustainability is ubiquitously on the rise at every step of the value chain with rising activists’ scrutiny. Notably, while the use of plastic has soared, the ecological burden is provoking heavier restrictions with the demand for sustainable solutions becoming more vociferous. Leading Indian companies in the segment are witnessing escalating awareness on sustainable packaging requirements as an opportunity and are developing capabilities to cater to the impending demand.
Future Outlook of Packaging Sector
In the course of the pandemic consumers stocked up as governments announced quarantines and stay-at-home measures. This boosted packaging consumption – and thus the demand for rigid plastics increased in many markets, including Europe. Over the last few years, the packaging industry has been an important sector driving technology and innovation growth in the country and adding value to the various manu-facturing sectors, including agriculture and FMCG. Change in consumption patterns and lifestyle, consumer awareness surrounding packaged food, and a boom in e-commerce and organised retail is expected to enhance the growth of the plastic packaging industry and per capita consumption in the near future. Rising purchasing power due to the growth in the per capita income of the Indian middle-class is fuelling the Indian packaging market in adopting better packaging methods, mate-rials and machinery to ensure quality factors for Indian businesses.