Market Research

An Opportunity for Specialty Chemical Industry in India

Today, we’ll look at Specialty Chemical Industry in India. We start by looking at the global chemical industry figures vs that of India, we then head on to understand the importance of the specialty chemical segment, the outlook, key features and finally the growth opportunities for India.

Let’s jump right into the piece!

Global Chemical Industry

The chemical industry has always been a catalyst for a variety of industries to function. It forms an integral part of the value chain in numerous industries converting raw materials such as minerals, oil, natural gas into commercial end-use products ranging from agriculture to electronics to FMCG products. It is key towards a healthy economy and quality of life of its people.

As of 2019, the global chemical industry revenue stood at some 3.94 trillion U.S. dollars, of which commodity chemicals formed the bulk (80%), with the balance 20% being constituted by specialty chemicals. While commodity chemicals form the majority of the business, they usually have lower margins, thanks to lower value and influence in end-product, as opposed to specialty chemicals, which, albeit used in smaller amounts, whose chemical composition adds a significant value to the end product. This enables specialty chemical companies to charge a high premium on their products to counter the higher amount of R&D and innovation involved in developing the same.

While the specialty chemicals industry has grown at around 5.7% CAGR over the last 5 years, it is estimated to grow at 6.4% up to 2025 to a USD 1.2 Trillion industry. The biggest benefactors of this growth have undoubtedly been emerging Asian countries like China and India thanks to sharp growth in end-user industries. China, especially, has grown leaps and bounds from a 6% market share in the global chemicals industry in 2000 to around 36% in 2019, making it the global leader in the industry, with significantly higher production capacity than any other country.

Global Specialty Chemicals Industry - Chemical Industry in India
Specialty Chemical Industry - By Segment- Chemical Industry in India
International Trade flow of Specialty Chemicals

As a result of this increased manufacturing and consumption trends in the Asian markets, the international trade flow has seen a gradual reversal in paradigm. Gone are the days when Asian countries had to depend on chemical flows from North America and EU countries. Asia has now transformed itself into a new exporter, with China accounting for 18% of the total export business valued at 200 Bn. India’s specialty chemicals export, in contrast, stands at around 9 Bn.

Rapid industrialization, large scale manufacturing capabilities, and low production costs have driven China’s growth to become the foremost supplier for numerous chemical intermediates, even being the sole supplier for some. With numerous geopolitical disruptions arising lately, the supply chain faces substantial re-alignment in the long run. The sector is also seeing increased M&A activity with an aim of product portfolio enhancement, access to know-how as well as newer markets, or just consolidation of market position.

Related: Take a look at the influence of Chinese Investments on Indian startups
Chemical Industry in India

Coming to the Indian chemicals industry – standing strong at USD 180 Bn – represents a bright spot in an otherwise gloomy outlook of the Indian manufacturing sector. Specialty chemicals makeup USD 32 Bn of this industry and is growing at a very healthy 11% CAGR thanks to strong domestic demand and export growth.

The Indian market is largely fragmented, with unorganized players accounting for 30% of the market share. Scale is a huge issue in the Indian market with United Phosphorus Limited being the only player with a revenue of more than USD 1 Bn and a global manufacturing network. Scale, especially across sub-segments of the chemicals market, can enable gaining of a larger fraction of the customer spend as well as generate opportunities of scale.

Gujarat and Maharashtra are currently the most preferred manufacturing destinations for leading chemical manufacturer thanks to their excellent connectivity by sea, availability of skilled manpower, business-enabling policies and infrastructure. However, East Indian states like Odisha and West Bengal are also earmarked as future centers of production by way of demarcation as a Petroleum, Chemicals & Petrochemicals Investment Region (PCPIR) by the Ministry of Chemicals and Fertilizers, Govt. of India.

Key features of the Specialty Chemicals Industry in India
  1. Growing Exports: India has gained an edge over peer countries in terms of being a preferred manufacturing hub for global players thanks to its low-cost manufacturing capabilities, an abundance of manpower and engineering skill. Exports of India’s top 10 players have cumulatively grown at a CAGR of over 20% over the past 5 years, their cause being furthered by strong compliance to environmental standards and global registration of products.
  2. Increasing Domestic Consumption: While India’s per capita income is still significantly lower than that of other developed markets, the growing disposable income and increasingly progressive mindset among people is resulting in a rise in consumption of end-user products such as paints, personal and home care, etc. which can drive domestic consumption of specialty chemical products.
  3. Lower spend on R&D: While global players are incurring a spend of 6-10% on R&D, Indian players spend less than 3% on R&D with most of them developing genericized products only.
  4. The emergence of sustainable chemistry: Stakeholders in India are increasingly cognizant of harmful effects of chemicals in India, both on health and environment – prompting them to take steps towards sustainable and green chemistry.

All in all, the Indian specialty chemicals segment makes for a pretty optimistic outlook. It gets better, however.

China is suffering from disruptions in its chemical industry thanks to a range of measures by the Chinese govt. prompted by China being home to some of the most polluted cities in the world. The govt. tightened credit availability as well as its stance on environmental regulations leading to the shutting of a few facilities recently. These disruptions, coupled with geopolitical tensions arising from the US-China trade war, and de-globalization as a result of COVID have created an opportunity for India to pounce upon the uncertainty and develop into a hub for specialty chemicals manufacturing facilities for players across the world.

Opportunity for India

The time has come for India to leverage their low-cost manufacturing & labour facilities, along with strong IPR protection policies to encourage MNCs to strengthen their presence in India. However, India needs to close gaps in its environmental policy regulations and scale up its major players to capitalize on this opportunity. The government needs to play an active role in this, and can do so by:

  • Enabling easier business in India for chemical firms by means of infrastructure & fast track approvals
  • Improving focus on R&D, by technology and skill development
  • Improving the supply of raw materials, by expediting PCPIR implementation and encouraging private sector investments
  • Adopting a sustainable growth approach, by implementing and incentivizing compliance of health & safety guidelines

The chemical industry is an exciting watch right now, with great growth potential – none more so than for India. It is down to us to capitalize on this humungous growth opportunity and generate high externalities to empower other manufacturing sectors in the country.

The Author

The author of this piece is Pranjal Bangani, if the piece adds value, head on to LinkedIn, and drop a thank you. You can also share the piece with your best friend on WhatsApp.

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