The flurry of activity at the Mukesh Ambani controlled Reliance Industries Ltd (RIL) - the quick decision to merge IPCL (a RIL company) with itself (the only surprise is why it wasn't done earlier), the audacious Rs 17,000 crore equity investment by Mukesh Ambani and his associates to up their promoters' stake in RIL to 54.53% and reports of a war chest of $ 18 billion being readied for acquisitions - all point to something very big on the way. With Reliance, people expect endeavours of stupendous size and scale. True to form if various reports are to be believed, Reliance is close to clinch a $ 20 billion joint venture deal with Dow Chemicals, the world's second largest chemical company in the world.
Reports are that the $ 20 billion RIL is in parleys with the $ 49 billion Dow Chemicals for a 51% stake in a joint venture, which will take over the under-performing commodity plastics and chemicals business of Dow Chemicals. Due to high feedstock costs and heavy competition from feedstock rich Middle East, and cost competitive producers like China, Dow Chemicals has seen eroding margins in their commodities business. For Dow Chemicals, in particular, most of its facilities are located in the US and Europe, where gas and naphtha prices are quite high. Commodity plastics make up 24% of Dows' $ 49 billion turnover while basic chemicals make up 11% of the turnover. However, the performance chemicals and plastics business of Dow has been performing very well.
If Dow's basic chemicals and plastics manufacture can be infused with low cost feedstocks, then these underperforming assets can be turned around to obtain higher value. So if these assets could be hived off as a separate company in a strategic partnership with RIL, who could provide the cheaper raw materials, then it's a win-win situation. Dow CEO, Andrew Liveris had announced last September that Dow would look to transfer its commodity assets to a JV with strategic partner, who has access to low cost raw materials. The rationale is to use RIL's low cost feedstocks from its manufacturing operations at Jamnagar. For Reliance, which has been pursuing this for a year now, it would give the company access to a suite of advanced technologies and international customers, particularly, in developed countries. Interestingly, Reliance Industries itself has been using Dow Chemicals technologies and already has an understanding of Dow's functioning. Dow has one of the most diversified portfolio of product applications based on polyethylene, polypropylene and polystyrene, apart from a wide range of basic chemicals.
Dow's forte is in innovation, in technology intensive, high value, high attribute, chemical products and by hiving off its sluggish commodities segment, Dow can concentrate more effectively on its specialities business.
It is unclear at the moment the kind of management control the joint venture partners would opt for. Reliance would probably prefer back end control in manufacturing and supply chain management, which it is good at, leaving the front end marketing and customer interphase to Dow which is more experienced in international marketing and customer relations.
However, how the joint venture will achieve lower cost manufacture is difficult to understand as the locational disadvantages remain. Relocation of Dow's manufacturing facilities to Jamnagar is not an easy option. As most of the high costs are due to feedstocks, only if geographical advantages in manufacturing are leveraged, the JV can become successful. No doubt, RIL is one of the best cost manufacturers of refinery and petrochemical products and is hoping that RIL produced feedstocks from Jamnagar will help the joint venture initially. RIL is looking forward to Jamnagar being a global outsourcing destination for its refinery products. This joint venture would provide a ready market for RIL. However, in the long run the joint venture would have to look at putting up plants in third countries, including India. Jamnagar itself could be one of the sites for such venture, apart from expansions at RIL's Jamnagar refinery, to feed the joint venture.
Not withstanding these issues, if the deal goes thru, it will rocket RIL to be the world's second largest petrochemical company in the world, a new petrochemical powerhouse next only to DuPont.