Indian Chemical Industry Formulated For Growth
In the wake of the government’s proactive stand toward the chemical sector in India coupled with the influx of large orders from other countries, join Anthony Fernandes as he looks at why chemical manufacturers can now set their sights on progressing ahead with the right chemistry
The Indian chemical industry is widely regarded as a key component of the Indian economy, accounting for approximately 2 per cent of the GDP and 15 per cent of the manufacturing GDP in India. It is one of the fastest-growing industries in the world and currently ranked the fourthlargest in Asia and sixth in the world in terms of output after the US, China, Germany, Japan and Korea. This industry forms a significant part of the overall trade flow in India as well, ranking fourth in imports, after mineral fuels and oils, precious stones and metals, and electrical machinery. India's share in global chemical trade by value is 3 per cent.
The chemical sector in India is broadly classified into bulk chemicals, specialty chemicals, agrochemicals, petrochemicals, polymers and fertilisers. The diversification within the chemical industry is large and covers more than 80,000 commercial products. So much so that it is widely regarded as the backbone of the industrial and agricultural development of the country, providing the building blocks to many other industries such as textile, paper, paints, soaps, pharmaceuticals, detergents, etc.
The Growth Curve
India is largely driven by consumption growth and the per capita consumption of chemicals in the country is one of the lowest in the world, even when compared to other developing countries. This makes India a very attractive destination for the chemical industry to flourish in.
Among petrochemicals, the growth of this category of products in India is mainly derived from import substitution, with India importing more than USD 14 billion worth of petrochemicals. Thus, there exists an opportunity to manufacture petrochemical intermediates in India given better supply chain logistics and technology.
The production of major chemicals and petrochemicals during the last five years is indicated in the table. On the whole, the total production of major chemicals and petrochemicals in 2018-19 was 27,847 thousand MT as compared to 26,738 thousand MT in 2017-18, recording a growth of 4.15 per cent. The CAGR in production of major chemicals and petrochemicals has increased by 4.77 per cent in the period from 2014-15 to 2018-19.
On the whole, we see that alkali chemicals account for a lion share of 69 per cent of the total production of basic major chemicals and grew by 4.97 per cent on a CAGR basis during this period. Meanwhile, basic chemicals grew by 4.63 per cent to 11,578 thousand MT in 2018-19 from 9,659 thousand MT in 2014-15. The production of polymers accounted for around 61 per cent of the total production of basic major petrochemicals for the year 2018-19. The production of basic major petrochemicals in 2018-19 was 16,286 thousand MT, increasing by 4.87 per cent on a CAGR basis from 13,449 thousand MT in 2014-15.
Government Initiatives
To support the growth of this industry, the government has taken several steps to improve both the physical and social infrastructure of the country. Some of these initiatives and reforms undertaken by the government include Make in India, Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Smart City Mission and Swachh Bharat. The most prominent of these, however, is the government’s Make in India initiative which encourages local production entailing the potential to spark huge investments in India. Chemical manufacturing is one of the 25 areas focused on under this program. The Government of India has allowed 100 per cent FDI through the direct route into this sector.
In addition to encouraging research and development inside the division, the government has also rationalised the import duty on some of the raw materials like ethane, propane, butane and reformate to 2.5 per cent from 5 per cent to support the margins of the chemical companies. Moreover, the manufacturing of chemical products is largely delicensed except for a few hazardous chemicals. Through the Swachh Bharat Abhiyan, the government is focusing on cleanliness of the streets, roads and infrastructure of India’s cities, towns and rural areas, which is thereby supporting the chemical industry, especially companies dealing in surfactants and water treatment chemical manufacturing.
Factors Favouring Burgeoning Domestic Growth
1. Ease of Doing Business and Regulations: The Ease of Doing Business Rank (EODB) is a measure of an economy's position to the best regulatory practices. It tries to capture the experience of small and mid-sized companies in a country with their regulators by measuring the time, costs and red tape they deal with. India has been one of the biggest improvers in recent years, with its rank shooting up from 142 to 63 among 190 countries since 2015. With its current rank of 63, the World Bank deems India as an easier place to do business in than other BRICS peers such as Brazil (109) or South Africa (84). However, only China has a better rank (31).
2. Abundance of Cheap Skilled Workforce: India is one of the leading countries generating skilled workforce. Each year more than 10 million people enter the job market with varying levels of skill. Out of the total workforce in the country, 16 per cent are classified as highly skilled i.e. managers, professionals and technicians and 58 per cent are classified as mediumskilled i.e. clerical, skilled agriculture, trade workers, plant assemblers, etc. The minimum wage in the country is far below the world average. The chemical industry employs more than 2 million people in India and the wage paid to unskilled workers averages out to at USD 6 per man-day and skilled workers are paid in the range of USD 9 per man-day, which is one of the lowest among the major chemical producing countries. Hence, the availability of cheap and skilled workforce presents an attractive opportunity for global players to set up shop in the country.
3. Strategic Geographic Location: The Indian subcontinent is strategically located between the east and west of Asia which is the centre of many trans-Indian Ocean routes which connect European countries in the west with Asian countries in the east. As a result, India is able to establish close contacts with West Asia, Africa and Europe from its western coast and East Asia from its eastern coast. The close proximity to the Middle East, on the other hand, provides access to petrochemical feedstock at a relatively low cost. It is estimated that the centre of global maritime trade is expected to move from the Pacific to the Indian Ocean as India and China become manufacturing hubs of the world by 2030.
4. Improving Infrastructure: Through the Make in India initiative, the government has taken steps to improve the infrastructure in the country to make it an attractive destination for foreign investors. In the next two decades, almost USD 1.5 trillion of investments have been planned for infrastructure across the sub-sectors, such as highways, railways, ports and waterways, airports, industrial corridors and smart cities.
To support and develop downstream industries, the government has also set up four petroleum, chemical and petrochemical investment regions (PCPIRs) in the country. These regions are expected to operate as clusters aimed towards reducing overall the capital expenditure by building a common infrastructure of utilities, pipelines and effluent treatment plants (ETPs). Government sources have estimated that these PCPIRs will attract investment of approximately Rs. 8 lakh crore and are expected to generate employment for around 40 lakh people.
Diminishing Chinese Influence
After the global recession of 2008, the core of the chemical industry shifted from the West to Asia, with China being the key benefactor. Owing to the low labour cost, relatively relaxed environmental norms and government subsidies, the share of China in global chemical sales surged from 24 per cent in 2010 to 37 per cent in 2018. During this stage, the Chinese government started filling the huge and rapidly growing domestic demand. However, since then, the chemicals industry in China has been losing momentum due to various factors, the most prominent being the introduction of strict environmental norms which has led to the shutdown of several chemical plants.
In 2017, around 40 per cent of the chemical manufacturing capacity in the country was temporarily shut down for safety inspections with over 80,000 facilities fined for breaking emission limits. Moreover, the Chinese government has mandated the construction of effluent treatment plants and has imposed a ‘green tax’ on the industry to combat pollution. As a result, the overall cost of production for many companies has increased. This has brought about plenty of opportunities for the Indian chemical industry to step up and fill in for the vacated market space.
Indian Speciality Chemical: Poised for Strong Growth
The Indian speciality chemical segment, in particular, appears to stand out in the current economic scenario. There has been a notable rise in orders and expansion of capacities in this segment. In addition to the regular order flows, trends in the global chemical space are likely to lead to several near-term opportunities for Indian companies. In view of the level of expansion, tie-ups with foreign players, new product launches and the low penetration of speciality chemicals in India as compared to the global average, many believe that there is further upside from the current levels.
Owing to an improvement in operational performance, led by revenue growth and margin expansion, listed speciality chemical players have consistently generated wealth for investors. The quarter ended in December 2019 was no different. Speciality chemical companies like SRF, Deepak Nitrite, Navin Fluorine and Neogen have fared better. Even though revenue growth was slower due to falling chemical prices, operating profit growth remained in double digits. Returns on a one-year basis and threemonth basis averaged at 78.98 per cent and 34.96 per cent respectively.
The market sentiment for speciality chemical companies got a boost recently from a Rs. 2,900 crore order for Navin Fluorine from a multinational company for the manufacture and supply of a high-performance product in the fluorochemicals space. These plans further reaffirm the view that India is a favoured destination for supply contracts related to niche chemicals. The prospects of the sector are also seen through the aggressive capex plans announced by various key players which should act as a base for future growth. Navin Fluorine has planned expansion worth Rs. 450 crore given the large order received. Whereas, other players such as Aarti Industry, SRF, PI Industries, Vinati Organics, Deepak Nitrate and Alkyl Amines have also announced plans to take up capital expenditure.
Conclusion
India was always looked upon by international buyers as an alternative to China and is likely to be one of the biggest beneficiaries in case of a loss in Chinese market share. The Indian chemical industry offers quality products, albeit at a higher cost as compared to China, but the recent reduction of cost efficiencies in Chinese companies as a result of the environmental compliance issues has opened up a huge opportunity for India in the export market. Moreover, the coronavirus crisis in China, which has brought about a standstill in supplies from China, has forced global companies to diversify their supplier base. Many global agro and speciality chemical companies are now eyeing India as a reliable partner. A 5-10 per cent business shift to India could more than double the opportunity size for many chemical companies.