Reliance Industries, India's most valuable company, is set to benefit further from backward integration that would maximise margins at its petrochemicals operations.
With the commissioning of the ethane substitution project, which entails importing 1.6 million tonnes of ethane from the US every year, RIL would lower its dependence on feedstock such as propane and naphtha that are used in ethylene production.
RIL is the first company in the world that has started large-scale ethane import to supply feedstock to its petrochemical unit.
The move could add up to $300-400 million (Rs 2,000-2,500 crore) to FY18 operating profits at the petrochemical segment, translating into about a fifth of the total operating profits of Rs 12,990 crore in the previous fiscal. The petrochemical segment accounts for nearly one-third of standalone revenues and operating profits at RIL.
Vipul Shah, COO petrochemical at RIL, said: "The ethane import project could add $300-400 million to the operating profit of the company based on the current crude oil prices. However, the potential benefit could expand if crude oil heads north."
The cost arbitrage of imported ethane, as compared with naphtha, is around 30% at current prices: Hence, the move could translate into sizeable savings for RIL.
Due to the booming shale gas production in the US and limited cracker demand, ethane is becoming surplus in the US.
Imported ethane will lower the need for feedstock at RIL's crackers in Dahej, Hazira and Nagathone, which currently have feedstock requirements of 900 ktpa, 2.5 mtpa, and 900 ktpa, respectively. This means that imported ethane will cater to a third of the total requirement at the three facilities.
The comparative prices of ethane, propane, and naphtha show that imports will allow RIL to optimise the feedstock portfolio in a volatile market, helping shore up margins.In the June quarter, the petrochemical segment margins stood at 15.8%, a record for the business. Besides, the new project will also increase ethylene production capacity by 200 KTPA from 1.9 MTPA.
The payback on the project is attractive. RIL will invest around $1.6 billion on the project. With incremental savings of $400 million a year, the investment implies an attractive payback of four years.
In the past four years, the company has invested around $15 billion on downstream projects such as paraxyelene expansion, ethane imports, refinery off-gas cracker and petcoke gasification plant, and these investments are expected to stabilise in the next few months.
The Street expects investments in downstream products to add $2.5-2.7 billion to the operating profits: RIL has said incremental EBITDA would be in the region of $3-3.5 billion.