It is a no brainer. In 2010, the largest chemical market was China, controlling 25 per cent of the global sales at $763 billion, followed by Europe with 21 per cent at $651 billion. The US was the third with 17 per cent at $524 billion. The rest of the nations, including India, controlled 23 per cent of global chemicals sales at around $720 billion.
By 2050, the ‘rest of the nations group’ is slated to become the largest market for chemicals. Though China will continue to be the single-largest market, Europe and the US will see their global presence shift in favour of India.
India is expected to become the second-largest individual market after China, excluding the rest of the nations group, cornering 20 per cent of the global chemical sales by 2050, according to a report.
A new dawn
If the chemical industry is to have a new ‘Sun’ in the form of India rising on the horizon soon, could the specialty chemical industry be far behind?
Specialty chemicals are manufactured on the basis of their performance or function. They can be single chemical entities or formulations whose composition influences the performance and processing of the end product. Though the specialty chemicals business is referred to as a knowledge-based industry, given that it caters to different applications, it makes the business more complex.
Specialty and fine chemicals are low-volume, high-margin in nature. It is estimated that nearly 70 per cent of fine chemicals produced in India are used by the pharmaceutical and agrochemical industries. Specialty chemicals include adhesives, additives, antioxidants, biocides, corrosion inhibitors, cutting fluids, dyes, lubricants and pigments.
Moreover, Indian specialty chemical manufacturers have a strong presence in the export market, too. Active pharmaceutical ingredients and colourants, including dyes and pigments, are some of the key products exported. India exports speciality chemicals to Asia-Pacific countries and also to Europe and US, where it leverages its low cost of production and quality talent pool.
The spotlight is firmly focussed on the Indian specialty chemical industry, characterised by a substantially low penetration against a growing user base, despite the fact that the industry is beset by several problems.
With a potential to grow to $70-$100 billion by 2020 from the present $23 billion, the specialty chemicals market has plotted a strong growth at 14 per cent per annum over the last five years. But consumption levels are very low in India compared to other countries.
For instance, compared to China, which overtook the US to become the world’s largest chemical market in 2010, India has tended to be in China’s shadow for several decades. In 2010, India was ranked eighth.
Not only is China already a much larger market than India, it also offers similar growth rates and the same order of capital expenditure and labour cost advantages. Major international chemical players keen to invest in the region, are also making a beeline to the nation. Other statistics are also daunting. In terms of petrochemicals, India has no feedstock advantage compared to the production in West Asia, which is conveniently located to serve the Indian market. Juxtapose India’s 4 million tonnes per year of ethylene capacity to US’ 27 million tonnes/year or China’s 16 million tonnes/year, to get a clearer picture.
Moreover, if one takes into account the global capacity of ethylene at 147 million tonnes/year, India’s production is a mere dot on the horizon.
Moreover, in the case of surfactants based on ethoxylates, most Indian ethylene oxide output is dedicated to monoethylene glycol production, with only the Reliance Industries’ plant at Hazira, Gujarat, having substantial ethylene oxide volumes. However, the scene is very different with naphtha. India is a naphtha-surplus country and exports most of its naphtha because of lack of crackers. A recent report by the Tata Strategic Management Group has suggested that if the scenario continues to prevail, then there would be a lack of basic building blocks for the specialty chemical industry, with the dependence on imports for intermediates soaring to new heights.
Recognising the inherent drawbacks ailing the sector, the Indian Government announced five petroleum, chemicals and petrochemical investment regions in 2007. However, only one of the five - Dahej in Gujarat - has made progress.
Silver lining
Despite the fact that the industry has been marred by a turbulent past, and foreign competition has been nipping at its heels, the domestic specialty chemical industry has accomplished a small measure of growth, bravely battling each hurdle.
According to Tata Strategic Management Group’s report, the Indian specialty chemicals market is estimated to reach $60 to $70 billion by 2020, from the current $23 billion.
“The idea is to deliver growth through capitalising on opportunities and addressing imminent challenges,” said Manish Panchal, Practice Head, Chemical and Energy, Tata Strategic Management Group, who has authored the report. Stating that the specialty chemical industry is a knowledge-driven industry, Panchal said domestic demand of specialty chemicals is expected to follow an accelerated growth path. “Demand is mostly driven by the strong growth outlook for the end-use industries. Along with increased adoption of specialty chemicals, newer applications are set to propel growth further,” he added.
The report notes that the growth of the Indian specialty chemicals market is encouraging, given the small base and adds that the base case growth rate is expected to be slightly lower than the XIIth five-year Plan target, with an expected growth of around 13 per cent per annum, which could shoot up to 17 per cent per annum over the next decade.
Given the increased dependence on raw material output, India could also develop into a major manufacturing hub with the global industry shifting away from developed economies, with its higher cost of production, to developing economies such as India. Creation of chemical clusters by the Government dedicated to specific segments of the chemical industry will also ensure that optimum safety, logistics and infrastructure are provided for making the infrastructure and manufacturing environment truly world-class at a low cost.
As Naina Lal Kidwai, Country Head, HSBC India, and President of FICCI noted, even as the chemical industry is critical for the economic development of any country, specialty chemicals are the fastest-growing segment in the chemical industry. Specialty chemicals are high value, low volume chemicals known for their end-use applications. While there is immense potential for increasing consumption within the country, most corporates believe it is time for India to become a reliable supplier of such quality chemicals to the world.
B. B. Swain, MD, Gujarat Industrial Development Corporation, noted that specialty chemicals is a knowledge-driven segment which facilitates different segments of the economy. Stating that Gujarat is the hub of the Indian chemical industry and that over the past two decades the State has become one of the preferred locations for industrial investment in India, Swain said it accounts for over 50 per cent of national chemical production.
Multinationals keen
Multinational chemical companies have also shown interest in the burgeoning specialty chemicals market in India, with most of these companies looking to strengthen their presence in the country through further investments in manufacturing capacity and research and development.
A McKinsey report has stated that the intensity of usage of specialty chemicals in India is at a much earlier stage of development than in Western markets and China, creating significant scope for growth. For example, as India’s construction and real estate industries see how concrete admixtures can help reduce maintenance and repair costs, there is potential to at least double the intensity of admixture use in the country.
The adoption of new product specifications and environmental standards also have the potential to boost specialty chemicals usage.
In water treatment, for example, expected tightening of India’s municipal water pollution norms is likely to increase water treatment chemicals usage substantially.
The McKinsey report puts it succinctly, “If India’s specialty chemicals industry can capture the potential of these sectors, it could become the most attractive specialty chemicals growth market in the world over the next decade.” Is the sector listening?