Final Report

Sponsored By

ENGINEERING DEVELOPMENT BOARDMinistry of Industries & ProductionSEDC Avenue

Government Pakistan Building (STP) 5-A,

ofConstitution

Islamabad

Tele: (051) 9205595, 9223734 Fax: (051) 9206161

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Technology Management International (Pvt) Ltd (TECHMA)31/11-A, Abu Bakr Block New Garden Town, Lahore Tele: (042) 5881460 Fax-Cum-Tel: (042) 5881718 E-Mail: techma@Brain.net.pk

2010

TABLE OF CONTENTS

Description Acknowledgement Team of Experts Executive Summary. CHAPTER 1 Scope Of The Worlds Chemical Industry 1.1 Scope of the chemical industry. 1.2 Category wise breakdown of the chemical industry. 1 1.3 Research and development in the chemical industry. 4 1.4 Classification of the chemical industry development of Pakistan Vision 2030. CHAPTER 2 Potential for the development of secondary chemical industries based on feedstocks derived from primary industries. 2.1 Feedstocks derived from primary industries for the potential development of secondary chemical industries. Crude oil based petroleum and petrochemical refineries. 1 Olefin petrochemical complex. 3 Aromatic petrochemical complex. 5 2.2 Natural gas based chemicals. 2.3 Alternative feedstocks for the production of commodity chemicals. 10 2.4. Feedstocks derived from metallurgical plants and polymers, materials technology and metallurgical processes. 2.5 Other mineral based projects consisting of acid and alkali industries, cement and glass plants based on limestone, gypsum, rock salt, sulphur and silica. 2.6 Agro based feed stocks. 2.7 Sources of raw materials and process technologies for chemical industry development in Pakistan. 2.8 Categorization of secondary chemical industries in Pakistan. 21 CHAPTER 3 The present status of the chemical industry in Pakistan. 3.1 General 3.2 The structure of Pakistans imports and exports. 3 3.3 The role of government in industrial development. 8 3.4 Limitations of Pakistans industrial policies for chemical industry development.

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i-vii 1 1 5 1 1

7 13 17 17 20

1 1 12 Continued.

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CHAPTER 4 4.1 Modernization of the national innovation system for chemical industry development in Pakistan. Limitations of Pakistans N.I.S. 2 The scope of Engineering Development Board with additional responsibility for technology development and proposed structure of Technology Development Board. 4.2 The role of the national committee in research and technology development. 4.2.1 The current status of R&D in Pakistan. 6 4.2.2 National committee for research and technology development. 4.3 National committee for the development of software and hardware for the commercialization of technologies. 4.4 National committee for the development of technology policy and investment planning. 4.5 Human resource development. 4.6 Integrated plan for the development of a national innovation system. 4.7 Industrial master plan. CHAPTER 5 Profiles of Present Secondary Chemical Industries of Pakistan. (Section 1) Caustic soda (Section 2) Soda ash & sodium bicarbonate 12-19 Section -3) Petrochemicals CHAPTER 6 Proposal For The Future Development Of Secondary Industries In Pakistan 1-5 CHAPTER 7 Industrial Trade Policies 7.1 Imports, tariff and custom duties. 7.2 Tariff escalation, description and peaks. 2 7.3 Other imports duties/taxes. 7.4 Competitiveness of exports from Pakistan. 4 CHAPTER 8 Conclusions and Recommendations. Attachments Annexure A References

1 4&5 5 7 10 13 15 16 20

1-11 20-37

1 3 1-5 1-3

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ACKNOWLEDGEMENTS

I am grateful to Mr Asad Ilahi, Chief Executive Officer of the Engineering Development Board, and his dedicated staff, Mr. M. Farooq Khan, General Manager (Policy); and Mr Yasir Qurban, Project Engineer. They gave their full support in the conception of the project for Chemical Industry Development Vision 2030 and provided invaluable information and data, which were essential for the successful development of the project. My thanks to my colleagues and associated consultants: Mr Muhammad Sadiq Chaudhry, Dr M. Khalid Farooq and Mr Pervaiz A. Khan. They were a source of inspiration and played an active role in discussions for the development of the strategy. Thank you to my daughter, Leila Butt, for editing this report. Dr Waheed M. Butt

EXECUTIVE SUMMARYThe global chemical industry forms the fabric of the modern world. It converts basic raw materials into more than 70,000 different products, not only for industry, but also for all the consumer goods that people rely on in their daily life. The modern chemical industry is divided into four broad categories, comprising basic chemicals, life sciences, specialty chemicals and consumer products. Its outstanding success is largely due to unceasing scientific and technological breakthroughs and advances, which have led to the development of new products and processes. Chemical industry development in Pakistan has been classified into (i) the primary sector chemical industry and (ii) the secondary sector chemical industry. Primary sector industries are large-scale, capital intensive industries comprising refineries, petrochemicals, natural gas, metallurgical and mineral based projects. They also provide feedstocks for the secondary chemical industry. Secondary industries are based on feedstocks either derived from primary sector industries, or other alternative sources of raw materials. These are less capital intensive and are based on high, medium or less sophisticated technologies. The secondary sector industries form the basis for the proposed Chemical Industry Development - Vision 2030. Primary sector industries which provide feedstocks for the development of secondary sector chemical industries, as well as other alternative sources of feedstocks consist of: (i) Petroleum and petrochemical refineries. These provide petrochemical intermediate chemicals, which form the building blocks for the production of a very large number of secondary chemicals, such as polymers, fibers, pharmaceuticals, drugs, dyes and colours, insecticides, pesticides, resins, paints, pigments, specialty chemicals, and a very large number of consumer and construction materials and products. (ii) Natural gas based chemicals, which consist of methanol and ammonia. These can also be used for the production of a large number of secondary chemicals. (iii) Metallurgical metals and non-metals based secondary chemicals and products.

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(iv) Alternative renewable feedstocks for the production of secondary chemicals consist of bio-mass, agricultural wastes, oils and fats, molasses and power alcohol. (v) Unconventional natural gas. (vi) Mineral based secondary chemical industries derived from coal, limestone, gypsum, rocksalt, silica sand and sulphur. (vii) Vegetable and herbal plants used in the production of secondary chemicals, such as dyes, medicines, drugs, cosmetics and associated products. The development of secondary chemical industries are divided between projects based on sophisticated technologies, and those based on medium and less sophisticated technologies. Development of the chemical industry in Pakistan is lagging behind those of other emerging markets. The various factors which have hampered the development of this industry in Pakistan are: (i) An underdeveloped industrial infrastructure. (ii) Reliance on foreign engineering and construction companies for the commercialization of locally developed or imported technologies. (iii) Imports of second-hand highly energy intensive plants based on antiquated technologies. (iv) Reliance on the development of resource based, low technology, labour intensive products for export. The objective of Chemical Industry Development - Vision 2030 is for: (i) Pakistan to create its own capability and achieve self-reliance in project design, engineering and the construction management required for the commercialization of technologies. (ii) To develop capability in the production of medium and high technology based chemicals for export, alongside to the present industrial structure based on low technology resource based products. (iii) To provide suitable incentives to entrepreneurs for the development of an exportoriented chemical industry.

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The development of the chemical industry in Pakistan started in the 1950s and is based on five year plans, with the first plan covering the 1955-60 period. Economic growth was based on a policy of import substitution, resulting in varying rates of growth of between 3.1-6.8% over 1950-70. However, this masks a highly variable performance: the rate of growth slowed in the early 1970s to an annual average of 4.4%, but the economy was revitalized in the late 1970s and 1980s, before weakening again. However, in view of the inconsistencies in the development of trade policies geared towards export-led growth, Pakistan has failed to boost exports of its manufactured goods. By comparison, economic growth in Southeast Asian countries from the 1960s onwards, and in India, China and other late comers from the 1980s, was driven by their exportoriented industrialization policies. All these countries introduced market reforms and provided various incentives and subsidies in order to enhance their exports of manufactured goods. In addition, these countries also developed their own technology and engineering infrastructure by virtue of which they achieved self-sufficiency in the utilization and commercialization of their technologies. As a result, they have achieved strong annual average growth rates of between 8-11% over the past three decades. Traditionally, exports from Pakistan have been dominated by goods produced with low technology, resource based feed stocks, such as textiles, cotton, readymade garments and leather. These comprise about 60% of total exports. The composition and share in exports of medium and high technology based products, comprising chemicals, petrochemicals and other manufactured products is very small and has fluctuated between 8-10% of total exports from Pakistan. Conversely, Pakistan has a very high dependence of imports of high value-added goods, which are more expensive. Chemicals, drugs, medicines and dyes, as well as capital plant, equipment and machinery, together account for about 40% of total imports with an estimated value of US$16.3 billion for the year 2007/08. As a result, the trade balance has been continually increasing and stood at US$20.9 billion in 2007/08. Present trends in Pakistans exports of lower technology goods indicate that it is facing increasing competition from India, China and Bangladesh. In addition, global demand for

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these products is declining, and the need for higher technology products is rapidly growing. This situation calls for a concerted effort towards the development of a chemical industry based on medium and highly sophisticated technologies. Pakistan has only developed its basic industries, consisting of refineries, fertilizers, cement, sugar, polyester fibers and some other petrochemical based polymer industries, to fulfill local demand. These industries have been predominantly developed by foreign engineering corporations, which were awarded contracts on turnkey basis. However, Pakistan has failed to assimilate these imported technologies, or use them either for the replication of these plants or in the development of associated chemical projects. This dependence on the production and exports of low-valued added goods has held back Pakistans economic performance and revenue-earning potential. By comparison, South and Southeast Asian countries put special emphasis on the development of high technology goods for export. They achieved this through trade liberalization, but their governments also introduced industrial policies that focused on the maintenance of macroeconomic stability, the provision of industrial and technology infrastructure, improvements to market institutions and high levels of public investment. These countries established public organizations which supported production activities, but they also relied on private firms for the success of their industrial policies. For example, China, which retains its socialist form of governance, introduced market reforms and advocated the so-called Open Door Policy. It also created two large public sector corporations: China National Petroleum Corporation (CNPC), for the production and exploration of oil and gas; and China Petrochemical Corporation (SINOPEC) for the development of its petrochemical industry. China also created Petro-China as a Holding Company, which offered its shares on international markets. The value of this company was estimated at US$100 billion in 1999, but has since risen to US$1.1 trillion in 2008. The salient features of Chinas public private partnerships (PPPs) is that the public sector is the major shareholder in the development of its capital intensive industries, whereas the private sector is the majority equity partner in the development of secondary projects.

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Rapid industrialization in Japan and South Korea was driven by multinational conglomeratesKeiretsus and Chaebolswhich created vertical and horizontal diversification of their businesses, with the active support of their respective governments. This pattern, in many cases has been followed by newly industrialized countries (NICs). Pakistans industrial infrastructure is limited and it relies primarily on foreign design and engineering companies for the commercialization of local and imported technologies. Therefore, there is immediate need for enhancing and modernizing its national innovation system (NIS). This is the framework by which a country brings about technological change, and consists of research and development (R&D) institutions, the infrastructure for commercialization of technologies, the structure of educational and technical institutions, regulatory agencies, information networks, financial institutions and marketing. Process science and engineering technology (PS&ET) is an important component of a NIS and is the foundation for the development of the chemical industry. It integrates various elements of the processes of commercialization, from R&D to process design, project engineering, construction, operations and marketing management. Taken together, these provide the basis for manufacturing excellence and sustainable competitive advantage. In order to meet the goals of Chemical Industry Development - Vision 2030, it is essential for Pakistan to enhance its PS&ET capability. We propose that the scope of the Engineering Development Board should be enhanced and given the additional responsibility to modernize and strengthen the NIS as the basis for technology development. In order to achieve this objective, three committees should be established under the direction of a Technology Development Board (which will be an enhanced Engineering Development Board): (i) A National Committee for research and technology development, (ii) A National Committee for the development of software and hardware for the commercialization of technologies.

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(iii) A National Committee for the development of technology policy and investment planning. The role of the National Committee for research and technology development will be to foster linkages between universities, R&D institutions and the chemical industry. Various tasks to be undertaken by this committee will include the formation of sub-committees for different sectors of the chemical industry; identification of problems of each sector; selection of R&D teams from universities, industry and R&D institutes for multidisciplinary research; continual appraisal and economic evaluation of laboratory and pilot scale work; and selection and adoption of technologies for commercialization. The processes of commercialization of local or imported technologies depends on the application of science, engineering, design, instrumentation and control, safety and environment, and many other aspects of capital plant manufacturing, construction, operations and marketing management. In order to develop local capability in various areas of project management, we propose the formation of a National Committee for the development of software and hardware as PPP projects. The functions of this Committee will be to support the development of existing or new engineering companies for various tasks. These include the identification of new projects; the preparation of investment studies on international criteria; the formation of financial packages; the development of software and hardware and its application in design and engineering; the development of engineering specifications for capital plant manufacturing; construction; management; and many other functions such as revamping and modernization of old plants, and facilities for reverse engineering. The successful utilization of various components of technology will depend on the ability of the government to foster PPPs with the involvement of industrial and venture capital institutions and a vibrant entrepreneurial class. We suggest that a National Committee for the development of technology policy and investment Planning should be established for: (i) The provision of suitable incentives to potential investors, in order to accelerate the processes of chemical industry development and the revision of industrial policies on continual basis. Executive Summary Page vi of vii

(ii) The development of investment policies and infrastructure for capital formation. In order to facilitate the formation of investment, we recommend that a Holding Company should be established with the participation of the financial sector, international donors, friends of Pakistan, overseas Pakistanis and other investors, who would be invited to subscribe as share holders in this company. Profiles of various sectors of existing chemical industries in Pakistan have been prepared. These consist of Worlds present and projected production, World trade, local production in Pakistan, local market size, local demand, imports, future prospects for each sector of industry, SWOT analysis with special references to weaknesses, threats and opportunities as well as present tariff structure on Pakistan. Proposals for the future developments of Secondary Industries in Pakistan have been prepared and suggestions for the development of secondary chemical projects based on locally available as well as imported materials have been made. The proposed industries have been divided into various sectors consisting of minerals, metallurgical, agro-based alternate sources of energy, oils and fats and petrochemicals based projects. A number of potential projects in each sector have been proposed and it is suggested that EDB initiate the development of feasibility studies on each of these projects for their future implementation.

An integrated plan for development of NIS has been proposed and various other requirements consisting of the application of computational technologies, human resource requirements, and the development of coherent industrial policy are also considered necessary. An Industrial Master Plan must be prepared for the implementation of various elements of the NIS, which should identify Pakistans capabilities and limitations in various priority sub-sectors of the chemical industry. It should develop policy measures and provide fiscal incentives in order to promote investment in various sectors of chemical industry. The development of a NIS on international standards will provide tens of thousands of job to Pakistans highly qualified manpower.

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CHAPTER 11. SCOPE OF THE WORLDS CHEMICAL INDUSTRY

1.1Scope of the Chemical Industry The chemical industry comprises the companies that produce industrial chemicals. It is central to the modern world economy, as it converts raw materials into more than 70,000 different products. The chemical industry is more diverse than virtually any other industry in the world. Its products are omnipresent. Chemicals are the building blocks for products that meet our most fundamental needs for food, shelter and health, as well as products vital to the high technology world of computing, telecommunications and biotechnology. They are used to make a wide variety of consumer goods, and are also inputs in agriculture, manufacturing, construction and services industries. In particular, chemicals are a keystone of world manufacturing, as they are an integral component of all manufacturing sub-sectors, including pharmaceuticals, automobiles, textiles, furniture, paint, paper, electronics, construction and appliances. It is difficult to fully enumerate the uses of chemical products and processes, but the following nomenclature gives some indication of the level of diversity: Polymers and plastics--especially polyethylene, polypropylene, polyvinyl chloride, polyethylene terephthalate, polystyrene and polycarbonate--comprise about 80% of the chemical industrys output worldwide. The chemical industry itself consumes 26% of its own output. Major industrial products include rubber and plastics, textiles, apparel, polymers, pulp and paper, and primary metals. Chemicals are nearly a US$3 trillion global enterprise, with chemical companies in the EU, US and Japan being the worlds largest producers. 1.2 Category Breakdown of the Chemical Industry

The marketing of the chemical business can be divided into a few broad categories, including basic chemicals (about 35-37% of US dollar output), life sciences (30%), specialty chemicals (20-25%) and consumer products (about 10%). ___________________________________________________________________________ Chapter 1 Page 1 of 1

BASIC CHEMICALS

or commodity chemicals are a broad chemical category,

which include polymers, bulk petrochemicals and intermediates, other derivatives and basic industrials, inorganic chemicals and fertilizers. Polymers--the largest revenue segment, at about 33% of the basic chemicals US dollar value--include all categories of plastics and man-made fibers. The major markets for plastics are packaging, followed by home construction, containers, appliances, pipe, transportation, toys and games. The largest volume polymer product, polyethylene (PE), is used mainly in packaging films and other products, such as milk bottles, containers and pipes. Polyvinyl chloride (PVC), another large volume product, is principally used to make pipes for construction markets, as well as siding and, to a much smaller extent, transport and packaging materials. Polypropylene (PP), which is similar in volume to PVC, is used in markets ranging from packaging, appliances and containers, to clothing and carpeting. Polystyrene (PS), another large-volume plastic, is used principally for appliances and packaging, as well as toys and recreation. The leading man-made fibers include polyester, nylon, polypropylene and acrylics, with applications including apparel, home furnishings, and other industrial and consumer use. The principal raw materials for polymers are bulk petrochemicals. Chemicals in the bulk petrochemicals and intermediates category are primarily made from liquefied petroleum gas (LPG), natural gas and naphtha. Their sales volume is close to 30% of total basic chemicals. Typical large-volume products include ethylene, propylene, benzene, toluene, xylenes, methanol, vinyl chloride monomer (VCM), styrene, butadiene and ethylene oxide. These chemicals are the starting materials for most polymers and other organic chemicals, as well as much of the specialty chemicals category. Other derivatives and basic industrials include synthetic rubber, surfactants, dyes and pigments, resins, carbon black, explosives and rubber products. They contribute about 20% to basic chemicals external sales. ___________________________________________________________________________ Chapter 1 Page 2 of 2

Inorganic chemicals (about 12% of revenue output) are the oldest of the chemical categories. Products include salt, chlorine, caustic soda, soda ash, acids (such as nitric, phosphoric and sulfuric), titanium dioxide and hydrogen peroxide. Fertilizers are the smallest category (about 6%) and include phosphates, ammonia, urea and potash chemicals. LIFE SCIENCES (about 30% of the dollar output of the chemical business), include differentiated chemical and biological substances, pharmaceuticals, diagnostics, animal health products, vitamins and crop protection chemicals. While much smaller in volume than other chemical sectors, their products tend to have very high prices--over US$10 per pound--with research and development (R&D) spending at 15-25% of sales. Life science products are usually produced to very high specifications and are closely scrutinized by government agencies such as the US Food and Drug Administration (FDA). Crop protection chemicals, about 10% of this category, include herbicides, insecticides and fungicides. SPECIALTY CHEMICALS are a category of relatively high value-added, rapidly growing, chemicals with diverse end-product markets. They are generally characterized by their innovative aspects--products are sold for what they can do rather than for what chemicals they contain. Products include electronic chemicals, industrial gases, adhesives and sealants, as well as coatings, industrial and institutional cleaning chemicals, and catalysts. Coatings comprise about 15% of specialty chemicals sales, with other products ranging from 10-13%. Specialty Chemicals are sometimes referred to as fine chemicals. CONSUMER PRODUCTS include direct product sales of chemicals such as soaps, detergents, and cosmetics. The chemical industry has shown rapid growth for more than fifty years. The fastest growing areas have been in the manufacture of synthetic organic polymers used as plastics, fibres and elastomers. Historically and currently the chemical industry has been concentrated in three areas of the world: Western Europe, North America and Japan (the so-called Triad). The EU remains the largest producer, followed by the US and Japan. ___________________________________________________________________________ Chapter 1 Page 3 of 3

The traditional dominance of chemical production by the Triad is now being challenged by changes in feedstock availability and price, labour and energy costs, differential rates of economic growth and environmental pressures. Instrumental in the changing structure of the global chemical industry has been recent rapid economic growth in China, India, Korea, the Middle East, Southeast Asia, Nigeria, Trinidad, Thailand, Brazil, Venezuela, and Indonesia. 1.3 Research and Development in the Chemical Industry The outstanding success of the global chemical industry is largely due to scientific and technological breakthroughs and advances, facilitating the development of new products and processes. The US chemical industry now spends about US$17.6 billion annually on R&D. In fact, according to study by the Institute for the Future (IFTF), the chemical industry is one of the eight most research-intensive industries. The scientific and technical research of these industries makes our lives safer, longer, easier and more productive. When one reviews the contributions of the chemical industry to our civilization, it becomes clear that rather than any single individual invention or technological breakthrough, it has been the industrys overall commitment to R&D that has been its most significant legacy. Investment in R&D is the single greatest driver of productivity increases, accounting for half or more of all increases in output per person. R&D is the source of new products that improve our quality of life, and new processes that enable firms to reduce costs and increase competitiveness. As we look to the future, it is apparent that continued investment in technology is necessary for industry to meet the needs and expectations of future generations. Reaching the goals of Chemical Industry Development - Vision 2030 will require Pakistan to build its technology infrastructure, consisting of investment in technology development, computer aided design, engineering, plant and equipment manufacturing, construction and marketing management. These areas of development have been grossly neglected in the past and are the major reasons for the present plight of the chemical industry in the country. ___________________________________________________________________________ Chapter 1 Page 4 of 4

The industrial sector drives the global economy, collectively transacting almost US$3 trillion per annum. An industry is a collection of companies that perfor m similar functions. Industry can be used to refer to all company groups, or as being a set of entities that utilize productive forces to convert a simple input into a processed final product. The size of various industries varies by country, level of development and external demand. 1.4 Classification of the Chemical Industry Development of Pakistan Vision 2030 For the purpose of the Chemical Industry Development Vision 2030, this industry is divided into: Primary sector industries and Secondary sector industries. Primary Sector Industries The Primary sector industry generally involves the conversion of natural resources into primary products. These are large, highly sophisticated, technology-based, capital intensive projects consisting of: (i) Petroleum refining and petrochemical industries for the production of petrochemical intermediates, olefins (ethylene, propylene, butylenes) and BTX (benzene, toluene, xylene), all of which form the basis for the development of monomers, polymers and plastic industries. (ii) Natural gas based projects for the production of ammonia, methanol, fertilizers and associated products. (iii) Mineral based industries consisting of cement, limestone, gypsum, sand and salt. (iv) Smelting and refining of ferrous and non-ferrous metals.

They also produce raw materials for Secondary industries. (v) Agriculture and Farming Industries

These constitute naturally occurring, renewable sources of raw materials, such as cotton, oils and fats, sugar, agricultural wastes (bio-mass) and raw materials for a large number of downstream industries.

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Secondary Sector Industries The principal objective of Secondary sector industries is to provide the connective link between products and materials produced by Primary industries, which are of practical use to the national economy. This implies that the Secondary industries rely on the Primary industries for feedstocks and raw materials for use in manufacturing, processing, blending, fabricating plants for petrochemical intermediates, polymers, plastics, steel, non-ferrous metals, minerals, agricultural and miscellaneous products. These industries use medium- to high-sophisticated technology, and range from light to medium categories. THE SECONDARY SECTOR INDUSTRIES WILL FORM THE BASIS FOR CHEMICAL INDUSTRY DEVELOPMENT IN PAKISTAN - VISION 2030.

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CHAPTER 22.POTENTIAL FOR THE DEVELOPMENT OF SECONDARY CHEMICAL INDUSTRIES BASED ON FEEDSTOCKS DERIVED FROM PRIMARY INDUSTRIES 2.1Feedstocks Derived from Primary Industries for the Potential Development of Secondary Chemical Industries Primary chemical industries, which are manufactured through the utilization of various feedstocks, consist of large-scale, highly capital intensive plants, based on sophisticated technologies. These projects also provide raw materials for the development of secondary chemical industries and consist of: Crude oil based refineries and petrochemical complexes. Natural gas based chemicals and fertilizer projects. Alternative renewable feedstocks for the production of commodity chemicals Metallurgical plants for the production of iron, steel, and non-ferrous metals. Other mineral projects consisting of acid and alkali industries, and cement and glass plants based on limestone, gypsum, rock salt, sulphur and silica. Projects based on agro feedstocks. Crude Oil Based Petroleum and Petrochemical Refineries Petroleum refineries are designed to produce a limited number of products, which are primarily used as a source of energy in road, rail and air transport; power plants; steam generation; and heating media in the chemical industry. They do not produce high value-added chemicals unless they are integrated with petrochemical plants--generally designated as Petrochemical Refineries--which are highly energy efficient and produce diversified feedstocks and raw materials for a large number of secondary chemicals. A petrochemical is any chemical compound obtained from petroleum or natural gas, or derived from petroleum or natural gas hydrocarbons and utilized in the production of a large variety of secondary chemicals and products. The definition has been broadened to include the whole range of aliphatic, aromatic and organic________________________________________________________________________________________

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chemicals, as well as carbon black and such inorganic materials as sulphur and ammonia. In many instances, a specific chemical included among the petrochemicals may also be obtained from other sources, such as coal, coke or bio-mass. Petrochemical based secondary chemicals include such items as plastics, soaps and detergents, solvents, drugs, fertilizers, pesticides, explosives, synthetic fibers and rubbers, paints, epoxy resins, and flooring and insulating materials. Petrochemicals are found in products as diverse as aspirin, boats, automobiles, aircraft, polyester and acrylic fibers, recording discs and tapes. Natural gas and crude oil are referred to collectively as petroleum. Crude oil consists of the heavier constituents that naturally occur in liquid form. Natural gas refers to the lighter constituents of petroleum that naturally occur in gaseous form, either on its own as free gas, or in association with crude oil. The production of petrochemical based intermediate chemicals form the feedstocks for secondary industries as part of a two stage process. In the first stage, crude oil is distilled and fractionated to produce a number of products consisting of gasoline, naphthas, and light and heavy gas oils, which are used as a source of energy for road and air transport, and power generation. Simultaneously the off gases, light and heavy naphthas, and gas oils are predominantly used as the starting materials for petrochemical projects. This is illustrated in Fig 2.1. In the second stage the off gases and naphthas are further processed into two separate operations to produce Petrochemical intermediate chemicals or monomers as follows:

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Petrochemical FeedstocksCrude Oil To Petroleum Refinery Atmospheric Distillation Gasoline And Motor Spirit Light and Heavy Naphtha

Methane & Off Gases

Light and Heavy Gas Oil

Residue

Petrochemical Feedstock Off Gases/Naphtha/Gas OilCatalyst Cracking

Steam Cracking

Aromatics Olefins

Fig 2.1 Olefin Petrochemical Complex Refinery off gases, naphthas or gas oils are reformed at high temperatures in the presence of steam to produce monomers (ethylene, propylene and butylenes). These are gases at ordinary temperatures and pressures and can only be transported at high pressures and low temperatures as liquids under refrigerated condition. These are preferably processed further at site to produce secondary petrochemical products or polymerized into polymers, such as polyethylene, polyvinylchloride, polystyrene, ethylene glycol and many other secondary chemicals as illustrated in Fig 2.2 and 2.3.

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STEAM CRACKING OF NAPHTHA / GAS OIL NAPHTHA / GAS OILNAPHTHA / ASSOCIATED GAS / GAS OIL Ethylene REACTOR Steam to Feed ratio 0.25 to 0.9 Temperatures 820 to 840 o C

Propylene

STEAM

Butylenes

Fig 2.2

OLEFINS AND PETROCHEMICAL INTERMEDIATES BASED SECONDARY CHEMICAL INDUSTRIESASSOCIATED GASES OR NAPHTH A ETHYLEN E PROPYLEN E UTYLENE B S POLYETHYLENES LDPE,HDPE POLYPROPYLEN E POLY VINYL CHLORIDE POLYSTYREN E SBR ETHYLENE GLYCOL POLY VINYL ACETATE PLASTICS FILMS CONTAINER S PIPES,CABLES, BAGS SYNTHETIC RUBBER PRODUCTS TYRES TOYS ELECTRICAL EQUIPMENT TV, RADIO, AIR REFRIGERATORS FURNITURE, TABLEWAREST AG E I T H ERMAL C RAC KIN G O F N APHT H A F OR TH E PR O DUC T IO N O F PR IMAR Y C HEM IC ALS (H IG H LY SO PHI ST IC AT ED, C API TAL IN TEN SI VE PR O CESS)

ST AG E I I PO LYM ERI ZA TI O N O F PR IMAR Y CHE MIC ALS F OR TH E PRO DU CT IO N O F SECO ND ARY CH EMI CALS AN D PO LYMER S. (MEDI UM T ECH NO LO G Y BA SED PRO C ESSES).

ST AG E II I F ABRI CAT I O N O F SEC ON DAR Y C HEMI CAL S FO R T HE PR O DUC TI O N O F C ON SUMER PRO DU CT S. (L OW / MED IU M TEC HN OL OG Y BA SED PRO D UCT S)

&

LEATHER

CONDITIONERS,

Fig 2.3

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Other Olefins Based SecondaryChemicalsNaphtha Steam Cracker (Olefins)

Ethylene & Derivatives Ethylene EDC Ethylene Glycol Ethylene Oxide HDPE LDPE LLDPE EPDM Ethanol Alpha Olefins Vinyl Acetate Ethyl Chloride / Ethyl Benzene

Propylene & Derivates Propylene Acrylonitrile Cumene Polypropylene Acrylic Acid Butanol 2-Ethyl Hexanol Iso-Propanol Nonene Dodecene Propylene Oxide Acetone Acrylic Fiber

Butadiene & Derivatives Butadiene ABS Adiponitrile /HMDA Nitrile Rubber Poly-Butadiene Poly chloroprene SB Latex SB Rubber

Fig- 2.3(a) Aromatic Petrochemical Complex Naphtha and gas oil is also catalytically reformed at high temperatures in the presence of catalysts to yield aromatic intermediate chemicals, such as benzene, toluene and xylenes (Fig 2.4). These are liquids at ordinary temperatures and pressures and can be easily transported to desired locations where they are used as raw materials in the production of a variety of secondary chemical products as shown in Fig. 2.5.

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CATALYTIC REFORMING OF NAPHTHA (AROMATIZATION REACTION) (AROMATIZATION REACTION)NAPHTHA / ASSOCIATED GAS / GAS OIL CATALYTIC REACTOR STEA M

Benzene Toluene Xylenes

Fig-2.4

` Aromatics Based Secondary ChemicalsNaphtha Catalytic Reformer (Aromatics)

Toluene & DerivativesBenzene TDI Caprolactam Benzoic Acid TNT

Xylenes & DerivatesOrthoxylene Paraxylene Metaxylene DMT TPA Bottle Resin Polyester Fiber Fiber Chip Film Resin Phthalic Anhydride PET

Benzene & DerivativesBenzene Cumene ) Phenol Cyclo Hexane Ethyl Benzene Adiplc Acid Alkyl Benzene Aniline Alkyl Phenol Chloro Benzene ) Maleic Anhydride ) Nylon Fiber/Resin ) ) ) ) ) ) ) ) ) Productio n of Secondar y Chemical s edium / M High Technolog y Chemical s and Product s Production of Primary/Inter mediat e Chemical s (Highl y Sophisticat ed Capital Intensive )

Fig 2.5

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2.2

Natural Gas Based Chemicals Natural gas is a very valuable resource, not only for use as energy, but also for the production of chemicals. It has been used commercially as a fuel for hundreds of years. The production, processing and distribution of natural gas has become an important segment of the world economy and is a major factor in the production of chemicals in global markets.

The composition of natural gas depends on its source. It predominantly consists of methane, but in many cases contains higher hydrocarbons such as ethane and propane. Natural gas processing plants are designed to produce certain valuable products over and above those needed to make the gas marketable. Plants are also designed to recover elemental sulphur which is the starting raw material for the production of many secondary chemicals. Natural gas has created multifarious opportunities and challenges as it is now utilized in the production of fertilizers and petrochemicals, in addition to its earlier use as a source of energy. This is illustrated in Fig 2.6.

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Household Gas

Fig -2. 6

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FIG-2.7

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2.3

Alternative Feedstocks for the Production of Commodity Chemicals

The uncertainties about the peaking of available reserves of fossil fuels, and rising prices of petroleum and natural gas, have spurred the chemical industry to examine alternative feedstocks for the production of commodity chemicals. Over the last two decades alternatives to conventional petroleum and natural gas feedstocks have been developed. These feedstocks include coal based gasification and liquefaction processes; and renewable resources such as bio-mass, stranded natural gas from unconventional reserves, heavy oil from Tar sands or oil shale. These sources of alternative feedstocks are in the process of development for highest volume production of commodity chemicals in Europe and the US. The technology for their utilization is in the process of development, in order to make these processes more efficient and economically compatible with petroleum based technologies. The status of various available feedstocks and the technological development for their exploitation for the production of secondary chemicals is as follows: Coal Substantial world coal reserves make it an attractive alternative to natural gas and petroleum. The technologies for large scale processing of coal are at present available in South Africa and China. However, a major concern about the utilization of these technologies is the variability in feedstock composition and the presence of impurities which poison the catalysts used in the processing of coal. Coal Gasification Commodity chemicals can be produced through the gasification of coal. Because of the large domestic reserves of coal in Pakistan, this feedstock option needs to be exploited. Coal gasification for application, including the production of chemical feedstocks, is already widely practiced worldwide. These plants generate feedstocks for chemical pr oduction, closely followed by the Fischer Tropsch process for the production of organic chemicals.

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The gasification process starts with the production of synthesis gas in a gasifier, followed by the production of a mixture of carbon oxides and hydrogen. Ammonia, methanol, alcohols and aldehydes are produced by Oxo Synthesis. The Fisher Tropsch process is used to produce a variety of secondary chemicals. Different coal types (lignite, bituminous, sub-bituminous) affect the efficiencies and economies of the gasification process, since gasification efficiencies are lower for sub-bituminous coals due to higher moisture and ash content. However, since essentially any organic material can be gasified, existing gasifier designs can be adopted to use different types of coal as gasifier feed. Coal Liquefaction Coal can also be liquefied directly, without going through a Syngas step. This process is called the Coal to Liquid or CTL process and is well proven. Liquefaction uses liquid distillation and hydrogenation, where hydrogen is added to coal and water slurry. The slurry increases the Hydrogen/Carbon (H/C) ratio to a crude oil level and removes impurities such as sulphur. Coal Liquefaction technology is of particular interest for the utilization of Thar Coal, which has a high moisture content. A full scale production facility is being built in China for the direct liquefaction of coal into transportation fuels to produce 50,000 bbl/day of fuel oil. A similar project could be developed for Thar Coal with the participation of Chinese Process Licensors. Bio-Refinery A major thrust towards the development of renewable feedstocks as a resource for energy and secondary chemicals is by a process called bio-refining. Bio-refining feedstocks consist of crops residues; waste plants or animal material and recycled fibers; municipal sewage sludge; agricultural and forest residues; household waste; agro-feed effluents; and residues of paper and wood working industry. These plants absorb solar energy from the sun through photosynthesis, and the energy stored within it is recovered by bio-refining processes. Chapter 2________________________________________________________________________________________

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The bio-refining concept generally involves feeding bio-feedstocks into steam or catalyst crackers to produce chemicals. Some technologies are in the process of development for the processing of carbohydrates, oils, lignin and fuels. In addition to their utilization for energy production, some bio based chemicals that have potential for large scale manufacture include carboxylic acids and glycols. Other areas of development include fermentation of sugars, decomposition of cellulose, high temperature pyrolysis, and bio-refining of wood and waste materials. However widespread use of feedstocks will require sustained research and development(R&D) in a variety of fields such as plant science, microbiology, genomics and catalysis. In view of the impurities, variability of feedstock composition, distributed supply, scalability and pathways for the breakdown of cellulose, the development of process technology will have to be undertaken and / or adapted to local conditions by each country, in order to exploit the utilization of bio-mass feedstocks for economic advantage. Unconventional Natural Gas Methane from anaerobic fermentation can be generated from animal manure and sewage treatment, as well as from landfills. The potential for anaerobic fermentation as a source for useable methane, rather than a source of pollution, will require development work leading to improvements in process control, operating efficiencies and rate of digestion, targeting small scale technologies. Renewable energy sources are indigenous and can, therefore, contribute to reducing dependence on energy imports, such as crude oil, resulting in increasing security of supply as well as resources for the production of commodity chemicals. Developments in renewable energy resources can actively contribute to job creation, predominantly in small- and medium-sized industries which are so central to economic performance. The deployment of renewable resources can be a key feature in regional development, with the aim of achieving greater social and economic cohesion, largely for environmental reasons.

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2.4.

Feedstocks Derived from Metallurgical Plants and Polymers, Materials Technology and Metallurgical Processes Materials technology is one of the many areas targeted by the chemical industry. Materials play a critical role in the economic development and growth of chemical process industries. New materials technology is an essential part of the industrys strategy for achieving its vision. Materials contribute a large amount to industry revenue, and represent a high growth potential for industry. Ferrous and non-ferrous metallurgical processes consisting of iron, steel, copper, aluminium, magnesium and associated alloys have been used traditionally as feedstocks for the development of secondary chemical industries. Tremendous advances in the twentieth century in the development of new synthetic materials have also fueled the growth of the chemical industry. Replacement of traditional materials with synthetic polymers and composite materials has resulted in products with lower weight, better energy efficiency, higher performance and durability, and increased design and manufacturing flexibility. Metallurgical Industry The traditional iron, steel and non-ferrous metallurgical industries produce valuable primary products which are important starting materials for the production of secondary chemical products. They are used by almost every manufacturing industry for the fabrication of capital plants and equipment; the manufacture of automobiles, railways, agricultural and construction equipment; and components and spare parts for operating plants in the chemical and allied industries.

The iron and steel industry is classified into three important primary products according to the order of processing from iron ore to the finished products. The iron ore is calcined and mixed with limestone and coke and introduced into a Blast furnace. The preheated air is fed to the bottom of the furnace. The ore is reduced to iron to produce Pig iron.

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Pig iron is refined by different processes to produce iron castings or billets, rolled wrought iron and rolled/forged steel by three different processes as illustrated in Fig 2.8.

Fig-2.8 The primary products of the iron and steel industry, which consist of iron castings, rolled wrought iron, and rolled and forged steel, are the feedstock for a very large number of downstream secondary industries.

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Non-Ferrous Metals Non-ferrous metals are produced through two basic operations. In the first operation, the ores are subjected to metallurgical processes to produce basic metals consisting of large blocs or bars. In the second operation, the metal is smelted and refined. The secondary smelting and refining of nonferrous metals lead to the production of aluminium, copper, lead, nickel, silver, gold, tin and zinc. These metals are used in wide variety of secondary chemical manufacturing industries, such as ammunition, beverage cans, coins, automobiles and household appliances. Copper possesses superior electrical conductivity, and is a strong, durable metal used in a variety of structural applications, as well as for power, lighting and communication transmissions. Domestically, the major markets for copper are construction, electronics, and industrial machinery and equipment. Aluminium, the most widely used nonferrous metal, possesses several positive attributes, such as a light weight, corrosion resistance, and high electrical and thermal conductivity, which makes the metal suitable for a variety of applications. Container and packaging manufacturers use aluminium, while other major enduse products include the transportation sector, the building and construction sector, and the electrical sector. Lead is primarily used for the manufacture of storage batteries, which in turn are incorporated into automobile ignition starters, un-interruptible power supplies for computer systems, and standby power supplies for emergency lighting systems and telephones. Other market sectors that purchase lead include paint and glass manufacturers, and building products manufacturers. Zinc is primarily used to galvanize products found in the automobile, steel and construction industries, but a greater percentage of secondary zinc is used to produce brass and bronze, as well as assorted chemicals. Additional applications include the blending of zinc-based die-cast and brass alloys.

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Composite Materials Over the past few years, advances in the production of composite materials, including mixtures of polymers, fibers, metals and ceramics, have extended the range, performance and applications of these materials. These are made up of individual materials referred to as constituent materials. There are two categories of constituent materials designated as matrix and reinforcement. The matrix surrounds and supports the reinforcement materials by maintaining their relative positions. The reinforcements impart their special mechanical and physical properties to enhance the matrix properties. A synergism produces material properties unavailable from the individual constituent materials. A wide variety of matrix and strengthening materials allows the designer of the product or structure to choose any optimum combination. Most commercially produced composites use a polymer matrix material often called a resin solution. There are many different polymers available depending upon the starting ingredients. The most common are known as polyesters, vinyl ester, epoxy, phenol, poly amides, amongst others. The reinforcement materials are often fibers and fiber glass, but also commonly ground materials. The average composition in a product contains 60% resin and 40% fiber. Various process technologies consisting of vacuum moulding, pressure moulding, autoclave moulding and resin transfer moulding are employed in order to give the required properties and strength to the relevant final product. Composite materials have gained popularity in high performance products that need to be lightweight, yet strong enough to take harsh loading conditions. Examples of these include aerospace components, boat and scull hulls, and car bodies. The new Boeing 787 aircraft, including its wings and fuselage, is composed largely of composite materials.

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2.5

Other Mineral Based Projects Consisting of Acid and Alkali Industries, Cement and Glass Plants Based on Limestone, Gypsum, Rock Salt, Sulphur and Silica The mineral potential of Pakistan, although considered excellent, is not adequately exploited as its contribution to GNP at present stands at only 2.4%. The main sources of locally available feedstocks for the production of the acid and alkali industry (soda ash, sodium bicarbonate, caustic soda, chlorine), sulphur and other inorganic acids, glass and cement, consist of rocksalt, sulphur, limestone, gypsum and silica sand. The manufactured products are predominantly marketed for local use, although there are some exports to Afghanistan and the Central Asian states. In view of the long history of development of industries in this sector, the process technologies are well-known locally. However, the design, engineering and procurement of critical plant and equipment are predominantly carried out by foreign engineering companies.

2.6.

Agro Based Feedstocks Cotton and Other Natural Fibers Agriculture is the largest sector of the economy and is the source of livelihood of almost 45% of the total employed labour force in the country. Cotton is the most important non-food crop and feedstock for the production of natural fiber for the manufacture of textile products. Cotton fiber is also blended with polyester and viscose fibers. The textile and clothing industry has been the main driver of Pakistani exports for the last sixty years, in terms of both foreign currency earnings and job creation. The textile industry flourished under official patronage, but lost its advantages in the post quota regime. Its share in exports has declined from 66% in 2005 to 53.7% in the current 2008-09 financial year. The textile industry is based on relatively low to medium technology, but in spite of this Pakistan has spent US$7.5 billion on the import of textile machinery over the past ten years (1999-2009). Pakistan did not make any effort to adopt

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imported technologies for the manufacture of textile machinery by reverse engineering. In view of these shortcomings, the textile industry has continuously suffered productivity losses due to machinery breakdowns and its inability to cope with operational problems. Pakistan is now facing competition from China, India and Bangladesh, in view of their better quality products, higher productivity and other economic advantages. Sugarcane, Molasses, Power Alcohol and Associated Industries Sugarcane is an important cash crop and is a valuable feedstock for the production of sugar and other downstream industries, such as industrial alcohol, chip board and paper. Molasses is a by product of the sugar industry and is the starting raw material for the production of industrial alcohol, which is used as a source of energy for automobiles, as well as the production of organic chemicals, such as aldehydes, acetone, acetic acid, acetic anhydride, isophoron, citric acid, glycerol, yeast and many other derivatives for pharmaceutical and plastic industries. Fruit and Vegetables The various varieties of fruit produced in Pakistan consist of citrus, mango, apples, banana, apricot, guava, grapes and tomatoes. Annual production is estimated at 5.6 million tons per year. The fruit industry is very diversified and consist of juices, soups and sauces, baby food, bakery products, confectionary and tomato products. The technology for the processing of fruit is becoming more sophisticated because of the high demand for quality products. The industry is required to produce food products both economically and profitably, and this depends upon efficient processes. At the same time, these processes must handle the material in such a way that the final product is attractive to the consumer. The fruit industry and its downstream products have considerable export potential. Chapter 2________________________________________________________________________________________

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Natural Dyes Vegetable dyes are eco-friendly and their use is increasing, especially for dyeing wool, carpets, silk and cotton. The common sources of vegetable dyes are parts of plants, such as leaves, flowers, fruit, seeds, barks, and the roots of dye yielding plants. The cultivation of certain trees also yield dye material. Therefore, the utilization of dye yielding plants and trees will boost the agro-based industry especially in rural areas, leading to rural development and employment creation. Pakistan imports vegetable dyes from India despite the fact that the raw materials for their production are available in Pakistan. Dyes and pigments constitute the largest segment of the industry, with the worlds present value estimated at about US$16 billion per year. Herbal Medicines and Associated products The Indian / Pakistani system of medicines--generally known as the Ayurvedic System of Medicine--is considered a perfect science of life which has evolved from wisdom, experience and logic. Based on scientific observations, it has its origin in the Vedas--the oldest recorded wisdom circa 6000 BC. Ayurvedic herbal medicines are considered ideal treatments, as they cure the diseases without causing any side effects. Herbal medicines and products now include medicines, health supplements, herbal beauty and toiletry products. Major developments in herbal medicines and beauty products are now taking place in China, South Korea, Canada and the US, in addition to India. It is estimated that the global market for herbal products now stands at US$62 billion per annum. Pakistan has a vast variety of flora and fauna especially in the northern areas, Azad Kashmir and the foothills of the Himalayas, which need to be explored for beneficial exploitation of these resources. Chapter 2________________________________________________________________________________________

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India has established a Technology Development Board which provides financial assistance to R&D establishments concerned with the development and commercialization of indigenous technology for herbal products for wider domestic applications. There is considerable potential for the development of this sector and collaboration with well known companies such as Hamdard and Qarshi can be sought for joint partnerships for the development of herbal projects. Oils and Fats Industry Conventional oils derived from cotton seed, rapeseed and corn are now processed and utilized for the production of bio-fuels in the US and other countries. An alternative source of vegetable oil called Jetropha is now widely cultivated in South and Southeast Asia, especially in Japan, Thailand, China and India. It is a woody and hardy plant, and grows to a height of 3-8 meters. It grows quickly even in poor soils and is not affected by drought and disease. The Macro engineering society of Pakistan, in collaboration with Big Bird (Pvt.) Ltd. has initiated a project for the plantation of Jatropha in Layyah, West Punjab. The Jetropha oil seed contains about 40% of vegetable fat/oil and some toxic materials, which makes it inedible for human and livestock consumption. The process technology for the conversion of Jetropha oil into bio-fuels is well proven and can be adopted in Pakistan. 2.7 Sources of Raw Materials and Process Technologies for Chemical Industry Development in Pakistan

The sector wise classification of chemical industry in Pakistan is as follows: PRIMARY INDUSTRIES SOURCES OF RAW MATERIAL i) Petroleum Refineries Imported Crude Oil ii) Fertilizers Local Natural Gas, iii) Cement Local Materials, Limestone, Clay iv) Iron & Steel Imported/Local Ore v) Copper Locally available ore vi) Textiles Local Agricultural Raw Material Chapter 2________________________________________________________________________________________

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SECONDARY INDUSTRIES Petrochemical Intermediates Based Industries i) Synthetic Fibers ii) Polyvinyl chloride iii) Various Polymers iv) Pesticides v) Pure phthalic acid vi) Plastics and Resins vii) Paints and Varnishes viii) Organic Chemicals ix) Dyes and Pigments x) Textiles and Tannery Chemicals xi) Drugs, pharmaceutical chemicals, fine and specialty chemicals 2.2.3 OTHER SECONDARY INDSTRIES Acids and Alkali Industries. Soda Ash and Sodium Bicarbonate Caustic Soda and Chlorine Sulphuric and Other Inorganic Acids.

Sources of Raw Materials

Imported Petrochemical Intermediates, Locally available Coal, and Renewable Feedstocks consisting of Biomass and molasses.

Sources of Raw Materials Local Raw Materials.

Paper and Paper Board Part local/part imported. Glass and Ceramics Local Raw Materials

Crude Oil and Natural Gas are the feedstocks for the primary industries, consisting of petroleum refining; fertilizers; iron, steel, and other metallurgical projects; cement; and textile industries. The development of these industries is predominantly based on imported technologies. The design and detailed engineering, and supply of critical plant and equipment, is carried out by foreign engineering corporations, which also assist in the construction of facilities, training of operating staff, and the commissioning of process plant and equipment. 2.8 Categorization of Secondary Chemical Industries in Pakistan

The secondary industries may be divided into two categories:

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Projects based on high / medium sophisticated technologies These consist of polyesters, polyvinylchloride, polymers, pure phthalic acid (PTA), plastics, organic chemicals, dyes and pigments etc. These projects are based on imported technologies and the process and engineering of these projects are predominantly carried out by foreign engineering corporations. The critical plant and equipment is mostly supplied by foreign plant manufacturing companies, which were also responsible for the commissioning and fulfillment of performance guarantees. Projects based on Medium and Less Sophisticated Technologies Projects based on medium or less sophisticated technologies consist of the acid and alkali industry, hydrogen peroxide, paper, board and packaging plants, glass and ceramics and many downstream small consumer projects based on polymers, ferrous, non-ferrous and allied fields. There have been some process technology inputs, as well as engineering support from foreign consulting and engineering companies, in the development of these projects. In many cases second-hand plant and equipment has been imported by industrialists. These plants were highly energy intensive and based on antiquated technologies. As a result, these plants were uneconomic to operate, and required government support in terms of subsidies and exemption from import duties and taxes. In spite of these facilities/concessions many of these plants failed to operate and were ultimately shut down, resulting in colossal losses to the country. Many plants have also been shut down because of competition from China and other countries, which have flooded the Pakistani market with cheap and better quality products, especially in the fields of construction materials and household consumer goods. Pakistan has not been able to create its own capability for technological and engineering infrastructure for the exploitation and commercialization of local or imported technologies.

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The face and scope of the worlds chemical industry is changing. There is continual emphasis on the development of new materials and processes based on cheap, renewable feedstocks, consisting of coal, bio-mass and composite materials, in addition to conventional feedstocks. The objective of the Development of Chemical Industry - Vision 2030 is for Pakistan to create its own technological and engineering capability in order to make itself selfsufficient by progressively reducing its dependence on foreign engineering corporations, which are at present involved in the commercialization of chemical and industrial projects. Such strategies were pursued by ASEAN, India and China during the initial stages of their development, by virtue of which these countries have already achieved the status of newly developed economies (NIC). It should also be acknowledged that the creation of these facilities will create employment opportunities for highly qualified manpower (engineers, scientists, technologists, economists etc.). Currently, the lack of such opportunities is responsible for the continual brain drain from Pakistan to other countries.

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CHAPTER 3THE PRESENT STATUS OF THE CHEMICAL INDUSTRY 3.1 Pakistan Scenario Historical Background The development of the chemical industry in Pakistan started in the early 1950s. Since Pakistan did not have an industrial base, governments gave preference to import substitution over export-oriented policies in their strategic plans for future development. In spite of rather poor available resources, Pakistan made a significant start and was considered a promising developing country in 1960s. Pakistan continued to follow an inward-oriented import-substitution policy until the end of 1990s, which hampered the development of export-oriented industries. Pakistan did not appreciate the advantages associated with trade liberalization until late in 1990s and supported highly protectionist trade policies. It delayed trade liberalization and tariff rationalization until the end of 1990s. The chemical and the manufacturing sectors have also been adversely affected by various factors, such as acute energy shortages and poor structural policies. Their present share in 2008/09 GDP is estimated at 18.4%, compared with a contribution of 23% in 2006-07. Existing Status Chemical industry in Pakistan is widespread, in organized & unorganized sector. It is not possible to have an exact figure for investment in this sector; however a close approximation of investment in chemical sectors ranges between Rs. 550 600 billion. The chemical related imports constitute about 17% of the total import bill. There are three general classes of products in this Sector: Basic chemicals both inorganic and organic such as acids, alkalies, salts, ethylene, propylene, benzene, toluene, xylene etc.; Chapter 3 Page 1 of 1

Chemical products used in further manufacturing i.e. intermediates such as pure Terephthalic acid, phthalic anhydride, Finished chemical products for end use or ultimate consumption; synthetic fibers i.e. polyester, PVC, polyethylene, polypropylene, polystyrene etc. Pakistan made a considerable progress in basic inorganic chemicals like Soda Ash, Caustic Soda, Sulphuric Acid & Chlorine and sufficient production capacity of these chemicals is available not only to cater the needs of the local industry while surplus is being exported, imports of these products are negligible. However Pakistans organic chemical industry could not flourish due to unavailability of basic building blocks such as Ethylene, Propylene, Butylenes & BTX (Benzene, Toluene, Xylene) used for the production of most of the organic chemicals that are employed as a raw material for a number of chemical subsectors such as; Pharmaceuticals Pesticides Dyes & Pigments Soaps & Detergents Paints & Varnishes Synthetic Fiber Plastics & Resins Rubber Tyres & Tubes Textiles Auxiliaries Essential Oils & Perfumes These petrochemical building blocks can be derived from a Petrochemical complex, which generally consist of a Naphtha Cracker, whereas naphtha is a product of oil refineries and currently its production in the country is around 1,000, 000 M.Ton per annum which is being exported. The investors have remained shy away from this project due to the following reasons;

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Highly Cost Intensive project Sophisticated technology involved Export market limitations Insufficient current tariff spread Pakistan Industrial Development Company (PIDC) has recently developed feasibility study of this mega project through an international firm of Singapore. However there are some alternate routes to produce basic petrochemical building blocks, these are; Gasification of Coal Dehydrogenation of Associated Gases Cracking of Natural Gas Each route has its own limitation, however recently some developments are taking place to produce synthesis gas and ethylene from natural gas cracking. This project surely opens the gateway for the development of Petrochemical industry in Pakistan, which will support the local chemical & allied products industries in meeting their raw materials requirements and to save the valuable foreign exchange. Besides the imports of most of the raw material & intermediate for these sectors, Pakistan succeeded to develop the downstream allied chemical industries to meet most of the local demands. The example of this development is obvious in synthetic fibres, soaps & detergent, dyes & pigments, Paints & Varnishes, while amongst intermediates Pakistan has sufficient capacity for Pure Terephathalic Acid (PTA) and Poly Vinyl Chloride (PVC). However still the imports of chemicals and allied industries stood around 20%, which is significant for a small economy of Pakistan.

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3.2

Regional Scenario By comparison, economic growth in Southeast Asia started in Japan in the 1960s and was followed by newly developing countries, such as South Korea, Singapore, Hong Kong and Taiwan. The four little dragons grew rapidly, owing to their export-orientated industrialization policies. These countries provided export incentives, such as subsidized export credits, duty free imports for feedstocks of manufactured export products, encouraged foreign direct investment (FDI), and also developed their science, technology and engineering infrastructure to support their industrial base. Trailing behind the four little dragons are four ASEAN countries--Indonesia, Malaysia, Thailand and the Philippines. These four countries have also been successfully increased their exports of high value-added goods by following a policy of trade liberalization and technology development. However, the most spectacular developments in the production and export of manufactured products consisting of primary as well secondary chemicals have taken place in China and India. Chinas GDP has grown at an annual average rate of 9-11% over the past two decades. China simultaneously developed a technology and engineering infrastructure, by virtue of which it is now exporting its chemical and manufactured products to developed countries, as well as its process and project engineering systems to Asia and Africa. There is widespread understanding that economies with liberal trade policies and openness have higher economic growth rates. Trade liberalization, together with complimentary policies and structural reforms, results in substantial improvements to the business environment, fosters market competition and helps technology improvement and upgrading. These strategies boost productivity and the optimum utilization of resources which are absolutely essential for increasing exports and supporting economic performance.

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3.3

The Structure of Pakistans Trade

Import & export of chemicals of Pakistan is depicted below:Chemicals Trade (Million US $) 6000 5000 4,133 4000 3000 2000 1000 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Imports Exports 768 118 253 400 472 367 538 411 2,788 3,599 4,362 5,718 5,166

Above graph shows the consolidated figures for imports & exports such as chemicals, fertilizers, plastics, rubber, medicines, dyes & pigments, soaps & detergents, and specialty chemicals for the period from 2002-03 to 2008-09. Imports have increased from 768 Million US $ in 2002-03 to 5,166 Million US $ in 2008-09 and on the other hand our exports also showed an increase from 118 Million US $ in 2002-03 to 411 Million US $. Share of chemicals in our total imports is about 15% while its share in exports is about 2.3%. The total imports of plants and equipment used for the manufacture of chemicals contributes about 23% of overall imports of Pakistan. Collective share of these two categories i.e. plants/equipments and chemicals is about 38% of countrys overall imports and among major contributors of countrys imports. Pakistans trade deficit was about ---- Billion US $ which has been increased to 17 Billion US $ in the year 2008-09. Chapter 3 Page 5 of 5

The structure/composition of Pakistans exports of chemicals for the year 2008-09 is depicted below:

Chemi cal Exports of Pakistan - 2008-09 Total Exports = 513 Million US $Perfumes & Cosmet ics 2.6% Othe r Specialty Chemicals 10.7% Petrochemicals 4.0% Pharmaceutical s 28.3%

Inorganic Chemicals 4.5% Fertilizers 0.1% Dyes & Pigments 1.4% Coatings & Inks 3.5% Soaps & Detergents 3.4%

Plastics 41.6%

Plastics stand top export with a share of 41.6%. Second is pharmaceutical with a healthy share of 28.3%. Third largest one is of specialty chemicals contributes about 18.2% of which perfumes & cosmetics 2.6%, coatings & inks 3.5%, dyes & pigments 1.4% and other specialty chemicals share is around 10.7%. Inorganic chemicals have comparatively very low exports of 4.5% while Pakistan have significant surplus available for exports most promising products in this sub-sector are soda ash, caustic soda, chlorine, calcium chloride, bleaching powder etc. need be encouraged. Petrochemicals share is about 4% in which major contributors are phthalic anhydride, dioctyl orthophthalate etc. soap & detergents contributing about 3.4% while share of fertilizers is negligibly small i.e. 0.1%. Traditionally, exports from Pakistan have been dominated by textiles, cotton, ready-made garments and leather products. These comprise about 60% of total exports from Pakistan, and are predominantly manufactured by low technology and labour intensive processes. Chapter 3 Page 6 of 6

The share of medium- to-high value-added products--such as chemicals, petroleum, petrochemical intermediates and manufacturingin exports is very small. In terms of the composition by technology classification, the share of exports of raw materials, and resource-based as well as labour intensive and low technology products in 1985-2005 did not show any improvement. These products contributed about 90% to total exports in revenue terms from Pakistan. The share of exports of medium- to-high technology manufactured products over the same period has declined from about 10% in 1985 to about 8.3% in 2005. This indicates that despite following a policy of trade liberalization in the late 1990s and early 2000s, Pakistan has failed to make any headway in diversifying its exports, or enhancing its capability in the production of medium and high technology export based products. By comparison, the global share of exports of raw materials, and labour intensive and low technology products was estimated at about 37% in 2005, while the global share of medium and high technology products has risen to about 63%. These figures are recorded in Table 3.2. Table 3.2 Comparison of Pakistans exports by technology classification (1985 & 2005) Technology level Pakistans exports World Share in 1985 Raw Material (Primary Products) 33.06 10.99 8.86 Resource-based (RB) 4.09 8.00 14.05 Low-tech (LT) 52.98 72.70 13.88 Medium-tech(MT) 8.57 6.94 32.27 High-tech(HT) 0.30 1.21 22.43 Others 0.99 0.13 8.51 Share in 2005 exports Share in 2005

Source of Data UN Comtrade Database 2008, definition of technological classification.

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Imports The structure/composition of Pakistans imports of chemicals for the year 2008-09 is given in the graph. Petrochemicals are among the top imports of Pakistan with a share of 29.2% major petrochemicals being imported are o- xylene, pure terephthalic acid, MEG, DEG, solvents etc. Second largest import is plastics have a contribution of about 19%.

Chemical Imports of Pakistan - 2008-09 6,436 Million US $Other Specialty Chemicals 10.2% Coatings & Inks 1.1% Dyes & Pigments 4.3% Pesticides 2.2% Petrochemicals 29.2% Fertilizers 10.4% Synthetic Rubber 1.2% Plastics 19.0% Pharmaceuticals 8.5% Perfumes & Cosmetics 1.4% Soaps & Detergents 1.7% Inorganic Che micals 10.8%

The data for major imports in the period 2002-08 is recorded in Table 3.3. This table also gives the consolidated figures for imports, such as chemicals, drugs, medicines, dyes and colours for the same period. Their share of imports increased from US$1,921 million in 2002-03 to US$4,955 million in 2007/08, or about 12.3% of total imports. Similarly, the total imports of capital plants; agricultural, transportation and communication machinery and equipment; and manufactured products, increased from US$2,825 million in 2002/03 to US$11,283 million in 2007/08, or about 28.3% of total imports. These two categories of imports together add up to more than 40% of total imports.

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Table 3.3 MAJOR IMPORTS OF PAKISTANUS$ (Million) 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Chemicals & Related 1,555 2,078 2,709 2,990 3,194 4,181 1 Product 222 275 292 331 354 463 2 Drugs and Medicines 3 Dyes & Colours 144 160 187 223 238 311 240 285 417 652 696 912 4 Chemical Fertilizers 5 Electrical goods 217 258 356 502 536 702 2,224 3,309 4,494 6,245 6,673 8,732 6 Machinery 7 Transport Equipments 501 653 1,069 1,602 1,712 2,240 8 Iron and Steel 402 512 890 1,373 1,467 1,920 9 Iron and Steel Scrap 48 94 222 424 453 593 100 124 175 223 238 311 10 Manufacture of Metal 11 Tea 173 193 223 225 240 315 Synthetic & Artificial -Silk 12 yarn 92 118 130 546 583 763 13 Non-ferrous metal 30 34 40 123 131 172 14 Crude Petroleum 1,367 1,765 2,149 3,804 4,065 5,320 15 Petroleum Products 1,700 1,401 1,851 2,848 3,043 3,982 16 Edible Oils 539 613 703 746 797 1,043 17 Grains, Pulses & Flours 116 75 123 164 175 229 18 Other Imports 2,551 3,646 4,569 5,560 5,941 7,775 Total Imports 12,221 15,593 20,599 28,581 30,536 39,964 Source : Export Promotion Bureau 2,161 2,798 3,605 4,196 4,482 5,867 Chemicals (1+2+3+4) Percentage of 17.7% 17.9% 17.5% 14.7% 14.7% 14.7% Chemicals Group to Total Imports Capital Plant & Equipment (6+10) Percentage of Machinery Group to Total Imports 2,324 3,433 4,669 6,468 6,911 9,043 19.0% 22.0% 22.7% 22.6% 22.6% 22.6%

There have been major increases in the imports of chemicals, pharmaceuticals, drugs, dyes and colors, as well as manufactured products, such as capital plants, equipment and associated machinery. These products have been responsible for the widening gap between imports and exports, indicating that Pakistan has not been able to diversify its production of consumer and industrial products in spite of the adoption of liberal policies by governments. Domestic production of consumer goods is based on labour intensive, low value-added products.

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In the past, medium and high intensive technology based chemical plants, such as petroleum, cement, sugar, polyester fibers and other petrochemical based polymer products were developed in Pakistan with the help of foreign engineering and construction companies. However, Pakistan has failed to assimilate these technologies, and use these either for the replication of these plants or in the development of associated projects. 3.4 The Role of the Government in Industrial Development

Rapid industrial development in Japan and the newly industrialized economics (NICs) of South and Southeast Asia has resulted in these countries recording very high economic growth rates since the 1960s. This was made facilitated by the development of industrial policies designed to shift the industrial structure away from primary economic activities, such as agriculture and textile manufacturing, to advanced chemical and manufacturing industries. Economists in the late 1970s and 1980s portrayed the industrial policies of NICs as a new perspective on development and defined the role of the state to maintain macroeconomic stability, provide industrial and technology infrastructure, improve market institutions to enhance development, and redistribute the generated wealth. One of the major reasons for the success of industrial policies in NICs was productive investment--which formed a large percentage of GDP--with much of this investment funding made by the public sector. The introduction of incentives and subsidies were also used as an effective tool for resource allocation. The governments of NICs established public organizations to support production activities, but relied primarily on private firms for the success of their industrial policies. These governments, however, realized that the industries whose development were deemed necessary for rapid industrialization could only be nurtured with the intervention of the public sector. This is because most of the industries they were developingsuch as chemicals, petrochemicals and polymers etc-required large scale investments which the private sector could not afford.

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In China, market reforms were introduced by Deng Xiaoping in 1978, along with its Open Door Policy. Deng stated that if capitalism had something positive to offer, then China should accept and exploit it to the best of its advantage.

T he structure of Chinas petroleum and petrochemical industry is shown in Fig 3.1. China created two Public Sector Corporations: China National Petroleum Corporation (CNPC) for the production and exploration of Oil and Gas; and the China Petrochemical Corporation (SINOPEC) for the development of its petrochemical industry. China created Petro-China as a Holding Company which offered shares on the international market, with its value estimated at US$100 million in 1999. Petro-Chinas value has now reached US$1.1 trillion over a ten-year period. CNPC is now ranked one of the top petroleum companies globally, as shown in Table 3.5.

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CNPC ranked as Worlds Top 50 Petroleum CompaniesTotal assets US Dollars 1.1 trillion. 13 Giant Oil and Gas Fields 16 Large Scale Refining and Petrochemical Companies 19 Marketing Companies. Large Group of R&D Units For Technical Services. Capital Plant Manufacturing Enterprises in Northeast, Northwest, North and Southwest China. 30 Oil and Gas exploration, development and production projects in Middle East, North Africa, Middle Asia, Russia and South America.

The salient feature of Chinas industrial policy is that the public sector has a large share holding, while the private sector is given a small share in the equity, when developing primary large-scale projects. Conversely, in the downstream secondary industries the public sector has a minor shareholding, while private companies have a large equity share. This is a good example of the importance and success of public-private partnerships (PPAs) in the successful industrialization of the country. This is illustrated in Table 3.6.

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Table 3.6

Production distribution of major petrochemicals in China -2003Ethylene Total (mt/y) Sinopec CNP C Others 6.12 51.8% 29.7% 18.5% Synthetic resin 15.94 29.4% 16.5% 54.1% Synthetic fibre 10.69 11.97% 2.70% 85.33% Synthetic rubber 1.272 39.5% 23.4% 37.1% Other Products 15.1758 13.4% 23.6% 63.0%

3.2

Limitations of Pakistans Industrial Policies for Chemical Industry Development The industrialization of Japan and South Korea was facilitated by the development of multinational conglomerates, called Keiretsus and Chaebols. These corporate business groups played a decisive role in the economies of their countries. The major contribution of these conglomerates relate to their ability to create powerful vertical and horizontal diversification of their businesses with the active participation of their respective governments. Vertical diversification relates to the expansion of businesses in related and unrelated fields of their operations, as either one corporate entity or by breaking down into loosely connected groups of separate companies sharing a common name. Even in the latter case, the same family group almost always owned, controlled and managed each smaller conglomerate. In horizontal diversification these conglomerates expanded their activities Chapter 3 Page 13 of 13

into banking, investment and other related ventures. This pattern, in many cases, was also followed later by NICs. Under the present political climate in Pakistan, it is very difficult to attract foreign direct investment, from not only developed countries, such as the US, Japan and Europe, but also from the Middle-East. In view of these constraints, it is necessary for the government of Pakistan to devise suitable policies to develop PPPs, in order to spur the development of the chemical industry, which will cater to both domestic demand and exports. In this endeavour large industrial groups such as Fauji Foundation, Dawoods, Engro and other well known textile, cement and sugar groups should be invited to reinvest their proceeds for the vertical or horizontal diversification of their businesses.

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CHAPTER 44.1 Modernization of the National Innovation System for Chemical Industry Development in Pakistan Pakistans industry is facing pressures from globally competitive markets. It has become extremely difficult for Pakistans economy to sustain growth by continually relying on cheap labour, limited technological infrastructure and the high cost of imported technologies. In view of these limitations the challenges of enhancing, as well as modernizing, a National Innovation System (NIS) has become very important. The NIS of any country is defined as the framework by which a country brings about technological change. It includes many diversified elements and participants involved in the development of the chemical industry. These consist of research and development (R&D) and technology development institutions; the infrastructure responsible for the commercialization of locally developed and imported technologies; the structure of universities and educational and technical instit