I have no doubt that the Dahej project will be “completed”. I use “” here because there are several issues that need to be examined before reaching any conclusion regarding the continuity of the project.
The rationale given behind the project is to save costs. I believe the management has highlighted the cost savings due to the cheaper labour and fuel costs. At the same time the management has ignored or rather not given enough information about the most important cost - the cost of phenol. The ecosystem around phenol is still being established in India and Deepak is the only major phenol player. Deepak has filed for safeguard and now even anti-dumping duties for imports of phenols.
All over the world, phenol is available via pipeline for di-phenol plants and local availability is generally plenty.
A simple sensitivity analysis is sufficient to calculate the impact of phenol
- yield of phenol to 1 kg HQ+ 1 Kg CAT = 2.15 as given by the management in a previous conference call.
- India is a net importer of phenol and hence CFS will have to rely on Deepak as well as imports. I believe that CFS has already procured Phenol for the Dahej project (as mentioned in their investors presentation). As far as my understanding goes, phenol is expensive in India compared to other countries due to the lack of the ecosystem.
- If CFS manufactures 10,000 MT of HQ + CAT it will require 10,750 MT of phenol as per the above calculation (please check my math!!)
Please do your own sensitivity analysis - a $ 50 per MT extra cost results in huge expenditures overall! Add to this the cost of opening L/C, interest costs, storage costs and the cost of melting the material … keep guessing!
What is most confusing is that CFS is drowning in Catechol. Since obtaining funding from IFC, CFS has been running all their plants to full capacity and building up a massive inventory as given in their financials. Trade data of imports of catechol versus exports of downstream products indicates that either CFS has a huge inventory of Catechol or of finished goods. Essentially it is not able to consume the Catechol that is being manufactured in Italy. With this massive inventory build up, CFS can generate paper profits - by valuing the inventory appropriately to suit the requirements of investors.
So, what is the real rationale of starting another plant in Dahej? What will happen to the catechol / downstream inventory already. In Jan 2020 CFS imported ~ 850 MT of Catechol from Italy. With China being closed and likely to be going slow for a while, what happens to all this inventory?
Rejection of Application : This is a serious matter. Normally, GPCB would never reject a consent application unless there is a major flaw. Most equipment is fabricated or constructed for such plants and you can assume anything from 1 month to a quarter. FYI, CFS had applied for the consent in December, and the visit was in March. They will have to reapply after complying - so I really cannot say how long this process will take.
HQ from Dahej : In the last conference call, the management indicated that they will make MEHQ to compete against Solvay and Cleanscience. I cannot imagine a better way to make more losses. Cleanscience has a process that starts from anisole and therefore more competitive than the HQ route. Competing on price against Cleanscience is sure shot way of running up losses. I do not know what calculations the management has made to make them change their strategy regarding HQ. Let’ hope some serious thought has given to it.
Lastly, di-phenol plants are notoriously difficult to stabilise. One can expect this plant to have a gestation period of at least 2-3 quarters.
Where is the cash going to come from to absorb the losses during the gestation period?