‘Naptha cracker to be set up in Pakistan in the next 5 years’

Interview with Chairman FPCCI, and Chairman Tufail Chemical Industries Limited

Zubair Tufail is the Chairman of FPCCI and was elected the Chairman of Pakistan Chemicals Manufacturers Association this year. In the industry since 1972, he also is the Chairman of Tufail Chemical Industries Limited and Tufail Group of Companies.

Recently, BR Research got the opportunity to discuss the country’s chemical sector with Mr. Tufail. Following are the edited excerpt.

BR Research: How big is the chemical sector in Pakistan?

Zubair Tufail: The chemical industry is not that big. There are about 7 to 8 major chemical manufacturers and about 40 to 50 medium to small sized chemical manufacturers. My company, Tufail Chemical Industries is a medium sized company that does import substitution. Our turnover is about $100 million. You can gauge the size of the market by that. Hardly 10 percent of the chemicals consumed within Pakistan are manufactured here, 90 percent are being imported.

BRR: What is the volume of imports within Pakistan?

ZT: Our current imports of chemicals, including petrochemicals is about $1.6 billion. And it is likely to go up to $2 billion within two years’ time.

BRR: Why do you expect the chemical imports to rise?

ZT: Many new applications of chemicals are coming up. New automobile industries are coming to Pakistan, such as KIA, Hyundai, and Renault. Every car that is produced requires 40 to 50 kg of polymer. Among other chemicals, the dashboards are made of polyurethane, bumpers are made of polypropylene, fuel tanks are made of resin. All these polymers are branches of petrochemicals.

Other applications include washing machines. The outside and the inside of all washing machines require polymers. By adding additives, these polymers can be made as strong as steel. In Europe, there are many car industries that manufacture the outer front of the car using polymers. We are doing this in Pakistan as well.

BRR: Why is the volume of imports so high? Why are we not manufacturing chemicals within Pakistan?

ZT: One reason is the lack of a naphtha cracker. Another reason is that the size of the market is small. Also, the instability in the country has prevented new investment from coming in.

BRR: How important is the naphtha cracker and are there any plans for its investment? 

ZT:  Most chemicals are downstream from naphtha cracker. There are also mineral based chemicals, but these are not in demand much. I think if the naphtha cracker comes, we have enormous possibilities. One naphtha cracker will set up a lot of downstream industries.

The Chinese are willing to invest for the cracker. There have been talks for its investment, and Pakistani companies are ready to invest too. The plan is that they will set up downstream industries, which will partly supply to Pakistan and the rest will be exported. A naphtha cracker will allow exports of chemicals that are being imported currently. Other than PTA, no chemicals are exported.

BRR: The government says that though the chemical association clamours for the naphtha cracker, it has not made a feasibility report as yet nor done any ground work. What are your views on this?

ZT: The investment required for a naphtha cracker is enormous, about $3-$4 billion. We are working on a feasibility report, but it will take another 3 months to finalise. There are some engineering companies in Saudi Arabia dominated by Pakistani engineers, and there is a Japanese company working on the feasibility report. Ultimately, the chemical association will pay for the feasibility report, but the bulk of the cost will be shared by the major chemical producers.

BRR: By when do you expect Pakistan to have a naphtha cracker?

ZT: It will take 3 to 5 years for the naphtha cracker to be set up in Pakistan. Other than the Chinese, there are also some private companies in GCC countries interested in setting up a naphtha cracker. By mid next year we will know from which country the investment for naphtha cracker is flowing in.

BRR: Where do you expect the naphtha cracker to be set up?

ZT: It will be set up by the sea. Balochistan is the most likely recipient of the naphtha cracker. It will be a Greenfield project away from the major cities. There are two possibilities in Balochistan; one is near Gwadar and the other is near Gadani. We will have to make two berths for it, but that should not pose a problem. It can also be set up in Sindh, near Port Qasim.

BRR: As per the recent SBP report, the chemical sector is declining. Is that true? 

ZT: I don’t think it is declining. I think it is stable at the moment. However, since the textile sector dwindled, it adversely impacted the chemical sector as many chemicals are used by the textile sector. And in the textile sector, unfortunately 145 spinning and weaving factories have closed down. They are closed because of the high cost of production. They cannot compete in the international market if they continue to manufacture at the current rate of energy.

BRR: Which sectors consume the bulk of the chemicals manufactured within Pakistan?

ZT: Well, all the companies involved in dyes and printing chemicals supply to the textile sector. Some chemicals are used by other sectors such as the paper industry and the leather industry.

BRR: You mentioned the auto sector. With more auto companies coming into the market, do you think the chemical sector will receive a boost?

ZT: The auto sector is growing. The current players of the auto sector, Suzuki, Honda, and Toyota are producing at their maximum capacity. The new car import policy is encouraging new players to come in. This is giving scope for expansion. I expect many new chemical companies to come into Pakistan in the next 2 to 3 years.

BRR: Other than the auto sector, what other avenues of growth do you see for the chemical sector?

ZT: We expect new companies to come in from China because chemical factories are being closed there. They have lost their competitiveness as their wages are quiet high. On average, we pay our worker $150; they pay their workers $600. $600 is the minimum salary in their major cities and the East Coast. Their engineers with 5 years of experience get a salary of at least $1000. On the other hand, in Pakistan engineers get $400 - $500.

BRR: Given the various industries within the chemical sector, which industry do you think will get Chinese investment?

ZT: It could be the petrochemical sector. We are in talks with some companies for this purpose. I have visited China and businessmen from China have visited Pakistan to discuss investment in the chemical sector. The potential is there, but we have to hope for political calmness for the possibilities to materialise. Having said that, the Chinese are willing to invest irrespective of the political landscape.

BBR: Is this CPEC related?

ZT: No, it is independent of CPEC. CPEC or no CPEC, those chemical industries will come and set up manufacturing in Pakistan. This should boost our exports to China as well and address the trade imbalance. Pakistan’s bilateral trade deficit with China is a matter of concern for them as well. They would also like the trade gap to decrease.

BRR: Does the chemical industry have a large informal sector?

ZT: There is no informal trade in the chemical sector as far as manufacturing is concerned. While the companies do pay sales tax, a lot of customers refuse to accept invoices for their purchases. This caused a lot of problems, but now the government has provided a provision that for such customers, we can show revenue as sales to unregistered customers and pay extra 2 percent tax, from 17 percent to 19 percent.

Other than that, there is a lot of smuggling from Iran because the border is very porous. The volume of smuggling is in millions of dollars with truckloads of chemical transported illegally. Banking restrictions on Iran has made formal trade difficult; what used to be traded formally is now being smuggled in, chemicals included.

BRR: Why do a lot of companies within the chemical sector complain of foreign competition?

ZT: Smuggling is one aspect of it, the other is dumping. There is also under invoicing by importers. India imposes anti-dumping duty as soon as there is a complaint made by a local manufacturer. Then the exporter has to prove that he is not dumping. Pakistan used to export hydrogen peroxide to India but exports declined after anti-dumping duty was imposed.

In Pakistan, the National Tariff Commission’s working is very slow. They impose anti-dumping duties more than a year after the complaint is made. Till then the company that has made a complaint is operating in losses.

BRR: Does Pakistan have the key factor inputs required for the chemical industry?

ZT: The only thing we are missing is capital; otherwise Pakistan has everything else required for a strong chemical sector, including skilled labour. A large number of Pakistani engineers are working in petrochemicals plants in the Middle Eastern countries.

BRR: What would you recommend as the way forward?

ZT: We cannot depend on the government since the government says that the sector has the resources and does not need support. Even without government support, if a couple of strong Pakistani companies such as Engro meet with foreign companies, they can start joint ventures in Pakistan. My company is too small to participate in a venture as large as a naphtha cracker alone. We need the bigger companies to work together to get a foreign investor to set up a naphtha cracker.

I know a few Chinese companies that have a lot of resources. 25 percent of the financing will come from Chinese companies; the rest will come from the Chinese banks. Among the top 10 banks globally, 5 are Chinese - so they are flushed with money.