Factors contributing for the structural growth of the sector in India is the increase in outsourcing opportunities due to global consolidation and domestic demand, fueled by burgeoning consumption, creating R&D ecosystem and rolling out sector specific PLI schemes
The Indian specialty chemicals sector has grown at a fast pace of 11.7% in terms of value in the last five years whereas the global market has grown by around 5% during the same period. The industry is particularly in a sweet spot as many global players are looking to reduce their reliance on China post COVID-19. Recent government measures taken in China have also resulted in the closure of many factories and are directly benefiting Indian chemical manufacturers.
Major factors that have been contributing for the structural growth of the sector in India is the increase in outsourcing opportunities due to global consolidation and domestic demand, fueled by burgeoning consumption, creating R&D ecosystem and rolling out sector specific PLI schemes.
In a $4-trillion global chemicals industry, China has been a dominant player for more than three decades, with nearly 36 percent market share. Factors like lower labour costs, high subsidies on both capital and exports, and relaxed environmental norms have played a vital role in providing China an unmatched success in the sector. However, with the pandemic, conditions now have changed drastically.
With global companies seeking to de-risk their supply chains, the industry is looking at the 'China Plus One' strategy, also the Chinese government has taken few measures due to which large chemical plants may shift to dedicated zones; introduction of green tax, based on quantity of solid waste produced in the manufacturing process, will also significantly reduce the profitability of Chinese manufacturers and the recent power outage have impacted 25% of the chemical production in China which will benefit Indian chemical companies.
Apart from that, the latest initiatives taken by the government of India such as Make in India, Atmanirbhar Bharat, PLI Scheme i.e. Production-linked Incentive Scheme for pharma, textiles and other sectors is also likely to increase the demand of specialty chemicals here in India. Recovery from the COVID-19 shock is also going to be a positive for the sector along with lower penetration of specialty chemicals in India. Given these factors, going forward, specialty chemicals are expected to register 12-13% CAGR.
Indian companies have inherent advantages in the production of chemicals and there are many success stories in the specialty chemical space which needs to be leveraged by providing them with a lower risk environment and this can result in substantial increase in business. Focus on R&D, sustainable manufacturing practices, and innovation & diversification in product portfolio will help India in taking 2-3% of global market share away from China.
This might result in encouragement in investment through incentives and ease of doing business and lowering the risk of investors. The industry will proceed to remain a high development industry, be that as it may, it is seeing a few difficulties which should be tended to, especially with reference to essential unrefined components like gaseous petrol and raw petroleum costs the country over are on the ascent. It is driving the prices across the value chain up. In addition to the rising input cost, domestic players are also marred by the rising shipping rates. Logistic challenges along with rising input costs have added short term margin pressure for specialty chemical players.
The Indian government has taken up various initiatives to promote the local specialty chemicals industry and to capture the market share lost by China due to the sudden change in the Chinese Government policies especially with regards to ESH norms. Initiatives like permission for 100% FDI under automatic route, BIS certification mandate for imported chemicals, PLI scheme, financial incentives and many more. The Indian government recognizes the chemical industry as a key growth element and expects it to contribute around 25% of the GDP by FY25.
Having said about the challenges, the recent report by CRISIL says that the revival in domestic demand and continuing, robust exports will spur a 50% on-year increase in the capital expenditure (Capex) of specialty chemicals manufacturers this fiscal to Rs. 6,000 - 6,200 crore. Report also mentioned that Indian manufacturers have logged a compounded annual growth rate (CAGR) of 11% in revenue between fiscal 2015 and 2021, increasing India’s share of the global specialty chemicals market to 4% from 3%. With this, the rise in Capex should not come as a surprise.
All in all the growth drivers of the speciality chemical sector looks intact. From advanced technology, strong research capabilities, backward and forward linkages, and development of domestic capacity to reduce dependence on imported raw materials, all aspects are strong enough to give robust growth of the sector and domestic players like us are prepared to capture these opportunities.
Subscribe To Our Newsletter & Stay Updated