The Indian Speciality Chemicals Industry

17 Oct 2020  Read 233 Views

The chemical industry is pivotal in the industrial and agricultural development of a country. It provides building blocks for several downstream industries such as papers, paints, textiles, soaps, detergents, etc. 

Covering 80,000+ products, this industry services a large number of end-use application industries. The industry is estimated to employ more than 2mn people in India. Top speciality chemical companies are engaged in sustainability and green chemistry, such as reduced carbon footprint and improved raw material supply. 

The speciality chemicals market has been on the increase in various applications, and this has helped in boosting the total market in multiple regions. The major driving factors for the market growth are growing demand from the end-user industries such as food, textiles and automobiles.

Understanding Speciality Chemicals

Speciality chemicals are particular chemical products which provide a wide variety of effects on which many other industry sectors rely. Such industries that depend heavily on it are automotive, aerospace, food, cosmetics, agriculture, manufacturing, and textiles. They can be some kind of formulation or single chemical entities whose chemical composition influences the end product.

Speciality chemicals are made with extensive research and development, which is the main difference between them and commodity chemicals. They have only one or two core applications, unlike commodity chemicals which have dozens of different applications.

Now speciality manufacturers can be divided into three main categories:

speciality manufacturers categories

The speciality chemicals can be further subdivided into various categories based on their uses in the end-user industry into personal care ingredients, dyes and pigments, agrochemicals, polymer additives, water chemicals, textile chemicals and application-driven segments. 

These are the largest constituents of the speciality chemical sector and contribute to over 80% of the speciality chemicals universe.

Difference between Speciality and Commodity chemicals

Differentiation

Base/Commodity Chemicals

Speciality Chemicals

Product variety

Standardised products

Customised Products

Base for Differentiation

Pricing

R&D Capability; Quality consistency

Market structure

Large number of players

Fewer players

Switching cost

Low (Customers prefer low-cost suppliers because of standardised products)

Moderate (switching suppliers is difficult on account of a long approval process). 

Core Growth Driver

Cost Leadership

Innovation-driven by high R&D

Economy of Scale

Benefit is significant due to standardised products

Benefit is limited due to higher number of low volume products

Global Chemical Industry

This industry is on the bull run as the global chemicals market was estimated to be around USD 4.0 trillion in 2019. Commodity chemicals make up 80% of the global chemical industry, with the balance 20% being constituted by speciality chemicals. Speciality chemicals are different from commodity chemicals in terms of the extensive product R&D and innovation involved, which often get translated into better margins, profitability and lesser Capex intensity. 

Global speciality chemicals overview

Globally, the speciality chemicals industry grew at 5.7% CAGR over the last 5 years, reaching USD 805 billion in 2019. It is estimated to grow at 6.4% over the next 5 years to reach ~USD 1.2 trillion by 2025. The past couple of decades have seen a significant shift in the manufacturing of chemicals from Europe and North America, to Asia.

One of the most prominent trends in the global chemicals industry has been the emergence of China as a dominant player. This is reflected in an increase in China's share in the global chemicals industry from 6% in 2000 to around 25% in 2020.

Trade flows in Specialty chemicals

The last few decades have been favourable for the Asian markets, especially in terms of Speciality chemicals due to the paradigm shift of manufacturing activity and consumption growth. Asia has gone on to become a net exporter for a wide range of speciality chemicals, which were erstwhile being imported from EU and North America.

China has established itself as one of the leading suppliers of speciality chemicals to other countries across the globe. However, with China going through economic downturns and the US-China trade war, India is emerging to become a prominent player in this space.

speciality chemicals industry size

CAGR (2014 - 2019): 5.7%

CAGR (2019 - 2025E): 6.4%

Global Share of speciality chemicals

Source: Aarti Industries 

Indian Chemical industry

The Indian chemical industry is one of the fastest-growing industries in the world. Currently, it ranks 3rd in Asia and is the 6th largest market in the world with respect to output, after the USA, China, Germany, Japan and South Korea. The Indian chemical industry stood at USD 180 Billion in 2019, which represents one of the bright spots within the Indian manufacturing sector. 

The speciality chemical segment, at USD 32 billion in 2019, constitutes about 18% of the total chemical industry in India. The industry's growth is mainly driven by consumption growth and export opportunity.

Indian Speciality Chemical Industry

Indian speciality chemicals industry has grown with a CAGR of around 11% from 2014-2019 period and is expected to grow with a 12% CAGR in the next 5 years. It is too fragmented with only a few players present in the sub-segment like UPL, which is the only domestic speciality chemical producer with net sales of more than 1 Billion USD and a global manufacturing network.

The scale on which a company operates is also a critical differentiating factor across sub-segments as it helps them to gain a larger share of the customer's wallet. Customers across the globe expect their suppliers to adhere to the compliance norms acceptable across the globe, which serves as a significant entry barrier for scaled-up companies in the industry.

Segment share of speciality chemicals

Source: FICCI

Unorganized Market

One of the major flaws in the sector is due to a large number of Unorganized players catering to the needs of smaller unorganized customers in their respective sub-segments. For instance, in flavours and fragrances, the unorganized market largely caters to tobacco and incense sticks market whereas in surfactants these players cater to the unbranded soaps and detergent manufacturers. 

In fact, in some sub-segments like base ingredients, the market share of the unorganized market is more than the organized market. The size of the unorganized market in the industry is inversely proportional to the level of R&D and innovation required.

sub segments of speciality chemicals

Source: Ministry of commerce

Trade Flow

Overall, India is a net importer of chemicals; however, this does not hold for all the sub-segments of the chemical industry.

Trade flow

India is self-sufficient when it comes to Petrochemicals. India has RIL for most of the petrochemicals building blocks (such as ethylene, propylene, benzene) and public sectors like IOCL, ONGC, HPCL, GAIL having large refining capacities.

However, most of these petrochemicals are directed towards bulk chemicals. Due to this other speciality, sub-segments have to rely on imports for their feedstock.

Hence, India turns out to be a net importer of petrochemical intermediates and bulk chemicals. As we move downstream, India is a net exporter for a wide array of speciality chemicals across the globe.

Characteristics of Indian Speciality Chemicals

1. Indomitable India's Export presence: India is a country with low-cost manufacturing capabilities, the workforce with strong engineering skills and abundance of human resources. These traits have made India a preferred manufacturing destination for players across the globe.

2. A surge in the growth potential of the domestic market: India still lags behind the major developed nations in chemical consumption on a per capita basis. But the sheer growth in disposable income of the people and an increase in urbanization has led to the growth in the end-user segment like paint, personal care and home care, textiles and adhesives. This, in turn, has been one of the significant contributors in top-line growth of speciality chemicals in India.

3. Availability of skilled labour at lower cost: India has a competitive advantage of having skilled labour at a lower cost. This leads to lower operating expenses and other costs in comparison to other nations.

4. Lower focus on R&D: Many major players in India spend less than 3% of their revenues towards R&D activities in comparison to many global counterparts spending 6-10%. The domestic speciality chemical industry is highly generic in operations as there are only a handful of companies developing innovative and unique products.

5. Government's policy push: The government has initiated actions like mandating BIS-like certification for imported chemicals to prevent dumping of cheap and substandard chemicals in India.

Further, the government has allowed 100% FDI under the automatic route in the chemicals sectors, excluding hazardous chemicals. The Indian government has proposed a draft National Chemical Policy where it aims to increase the share of the Chemical sector to 6% in GDP within 10 years.

6. Strong entry barrier as a key tailwind for growth: Differentiated business model and strong entry barrier acts as a strong tailwind for growth of speciality chemicals sector. Right from the beginning hefty processes like vendor acquisition, customer loyalty, long and tedious process of product registration/approval, play their cards constructing a barrier for many small players to enter this segment.

The Problem with China

China's government has made stricter laws with respect to the protection of the environment from January 2015. They have made it compulsory to build effluent treatment plants and levied a green tax on them to keep pollution under a certain level. This hit their bottom line plus, the chemical companies now needed Capex to scale up their production and build such plants. 

The Chinese government had also made it compulsory for mid to small size chemical companies to shift their base to dedicated special chemical parks far away from habitat by the end of 2020. These factors have led to the slowdown in the growth of the chemical industry in China. 

Further, the US-China trade war and COVID 19 has contributed to the cause of International players seeking India as their next destination for manufacturing of Speciality Chemicals.

Is the growth in speciality chemicals in India only due to anti-China sentiment?

No, some of the major chemical companies in India have been investing in R&D from the past several years. The R&D spend as a total percentage went up to three times over the last decade. 

The Chinese Bluesky policy has also contributed to this growth where even if one factory was not in compliance with their policy, then the whole park was shut off. This led to supply chain disruption, which helped Indian players to set up. 

With the government allowing 100% FDI, this sector has seen a good inflow of investments with a fair bit of M&A in the last few years. Governing bodies, as well as the stakeholders in India, are actively considering a shift towards adoption of sustainable methods of manufacturing chemicals.

Which sub-segment is getting the maximum investor coverage?

While investing in this segment, one should look for companies that are trying to create global leadership in their molecule sub choice. For instance, Navin fluorine focuses only on fluorine chemistry, thereby creating itself as a dominant player in the fluorine industry. 

Further, look for companies with the end user-led growth. Sectors like agrochemicals, flavours and fragrances have seen huge end-user growth recently. The major reason for the agrochemicals has been due to good monsoon spread, and it is largely insulated from pandemic like COVID19.

Whereas due to surge in demand for packaged foods and fragrances(sanitizers and soaps) have led to the growth of foods and fragrances. One must avoid dyes and pigments as they have cyclical upturn and downturn in their EBITDA margins; There has been a recent spike in demand for agrochemicals API manufacturers. 

Major Companies Overview

Company

Leader Position

Aarti Industries

Worldwide 75% of the portfolio is ranked in the range of first to the fourth position covering a market share of 25-40% respectively. Ranked third in chlorination, fourth in nitration and second in Ammonolysis and hydrogenation.

SRF

Occupies more than 50% market share in domestic refrigerant market.

Vinati Organics

Represents 65% of global market in Isobutyl Benzene and ATBS while in Isobutylene represents 70% of the market share.

Sudarshan Chemicals

Ranked fourth worldwide in pigment manufacturing.

Atul Ltd

Mostly focused on Aromatics with a 95% market share in p-AAI and around 75% market share in p-AA which are used in healthcare, food industry and sanitizers.  

Deepak Nitrite

Engaged in industrial intermediates and holds a global market share of around 60% in D.A.S.D.A., used in manufacturing of dyestuffs and optical whitening agents.

Navin Fluorine International Limited

Engaged in manufacture of Fluorine and attains a market share of 35% in Fluorochemicals.

Galaxy Surfactants

Has a customer base of 1750+ which includes Colgate, Dabur, Loreal etc and is spread over 80+ countries. Has 15% global market share in Phenoxyethanol which is used in manufacturing of soaps and perfumes.

Conclusion

Low cost of manufacturing and availability of skilled labour amalgamated with a proven track record of producing world quality products is one of the enabling factors for the Indian speciality chemicals market. 

However, the shortage of feedstock supply and the majority of players operating on a smaller scale which cannot overtake the sales of Chinese counterparts acts as one of the limiting factors in this segment. This remains as one of the major reasons for India to import chemicals.

Despite this, the Indian speciality segment is expected to return to a robust performance in the upcoming year, with China decreasing its market share in the Chemical sector and US-China trade war, leaving Indian companies with a good opportunity to scale up.

About the Author: Chirag Gupta | 3 Post(s)

"The ability to observe without evaluating is the highest form of Intelligence." Following this quote Chirag is on the road to feed his huge apetite of curiousity. He is an engineering graduate who loves to conversate with technology while playing with numbers.

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