In Conversation With Mr. Patil on Speciality Chemical Market Trend & Growth

Mr. Vinay Dattatreya Patil
President | Indian Speciality Chemical Manufacturers Association (ISCMA) | Managing Director-S. A. Pharmachem Pvt. Ltd.

Mr. Patil, recipient of distinguished Alumni award under the 1st Generation Entrepreneur Category on 10th May 2019 by UAA- ICT Alumina Association. He talks on the Indian speciality chemicals market/industry, shares expectations of manufacturers from the government, highlights the market opportunities and shares his views on the road ahead.

IO: What are speciality chemicals? Please give us the total number of companies dealing in speciality chemicals in India.

Mr. Vinay: 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.

Currently, there are more than 100 companies dealing in speciality chemicals in India.

IO. How has the market grown over the last few years and what are the market expectations?

Mr.Vinay: Speciality chemicals has been one of the few sectors that have bucked the pandemic slowdown and most companies in this space are now poised to deliver growth in FY21. A changing geopolitical scenario will continue to drive growth over the next decade.

In 2018, speciality chemicals was an approximately USD 710 billion market worldwide. Between 2012 and 2018, a revenue pool of around USD 60 billion to 70 billion in the speciality chemicals sector moved to Asia.

This shift stemmed from a marked increase in discretionary and fundamental consumption among the burgeoning populations of Asian countries. Today owing to the covid-19 crisis, the speciality chemicals market is expected to shrink by 5-8% against FY-19. However, given strong fundamentals the market is expected to grow by USD 110-130 bn between FY 18-25. Nearly 65 percent of this incremental revenue pool is likely to come from Asia, powered primarily by disproportionate GDP growth in China and India (over 5 percent CAGR). Asia’s share in the total demand for speciality chemicals could grow from around 47 percent in 2018 to 50 percent by 2025.

Indian speciality chemicals is actually one of the oldest sectors, which has evolved from being a supplier of natural extracts (dyes like Indigo and flavour extracts from spices) to become a diverse industry catering to global markets and commanding ~5% market share in the $600 billion global speciality chemicals market.

While the sector has grown at 10% for the past decade, the industry in India was overshadowed by China, which sprinted to capture 35% of the global market in production and 25% of the global market in consumption.

While Indian companies have been leaders in several segments and have been part of the supply chain of most global customers, for investors the focus was on China and its rapid build-up in chemicals as well as speciality chemicals, which made it integral to global supply chains.

Chemical companies have been riding high, but the trends that have underpinned that performance are shifting. Companies should reflect carefully on their strengths as they move into this new territory.

IO: Please throw some light on the opportunities for the Indian speciality chemicals manufacturers in near future?

Mr. Vinay Patil: Despite the current pandemic situation, the Indian chemical industry, in general and speciality chemicals, in particular, has numerous opportunities considering the supply chain disruption in China and trade conflict among the US, Europe and China. Anti-pollution measures in China will also create opportunities for the Indian chemical industry in specific segments.

IO: Which state is contributing majorly in the speciality chemicals market? If so, any reasons?

Mr. Vinay Patil: Gujarat has 5% of India’s population, yet contributes 8% to India’s GDP and 20% of India’s exports. This is phenomenal. Gujarat is a hub of chemicals in India and slowly India is becoming a global base for chemicals.

The major chemical regions in Gujarat are Ahmedabad, Vadodara, Bharuch, Vapi, Valsad, Dahej, Hazira and Jamnagar. According to the report of Gujarat State, manufacturing of chemicals and chemical products has a major contribution to Gujarat’s economy.

Over the past two decades, Gujarat has become one of the most preferred locations for industrial investment in India. Gujarat has achieved an annual growth rate of over 10% p.a. over the past five years and is one of the most industrialized states of India. It accounts for 16% of the nation’s industrial production and 22% of its exports.

Gujarat possesses several advantages which have enabled it to chart a path of rapid growth and industrialization such as sound infrastructure facilities, availability of skilled and semi-skilled manpower, excellent domestic and international connectivity and rich natural resources. The key differentiating factor has been Gujarat’s investor-friendly policy towards industrial development. These have resulted in Gujarat evolving as the hub of India’s chemical and petrochemical industry – with the state accounting for more than half of India’s total chemical industry and ~63% of total national petrochemical production. The chemical industry is today the largest and fastest growing component of Gujarat’s manufacturing sector.

IO: What are the expectations of the chemical manufacturers from the government?

Mr. Vinay Patil: The chemical sector is one of the major contributors towards the economy of India and plays a crucial role in the development of other industries and also the nation. With the current size of approximately USD 163 billion, the Indian chemical industry accounts for ~3% of the global chemical industry and is expected to reach USD 300 billion by 2025.

Manufacturers urge the Finance Ministry to allocate enough budget for building better infrastructure along with an adequate amount of power and water supply which can support the industrial growth of chemicals. More infrastructure for setting up of Chemical industries in southern and eastern parts of India is needed to cut down the transportation cost of chemicals that are majorly set up in the western coast.

Ample and inexpensive feedstock for the chemical industry has been a problem for a while now, the duty on a lot of raw materials is high and it needs to be brought down to help the chemical manufacturing sector. Also, the government needs to address the issue of inverted

duty structure. It has been observed that in some cases the import duty applicable on the finished product is lower than the import duty on the raw material or intermediate product which discourages domestic value addition. Due to inverted duty structure, the domestic industry gets adversely affected as manufacturers have to pay a higher price for raw material, while the finished product lands at lower duty and cost. The issue has become more definite as India is now a part of Free Trade Agreements with countries like Japan, ASEAN and South Korea etc. Thus in order to overcome this issue, there is a need for a revised duty structure Raw material duty – 0 % to 5; Intermediates – 7.5 % to 12 %; Finished Goods – 15 to 20%.

IO: Please share your views on Indian chemical industry and your views on the road ahead?

Mr. Vinay Patil: India has one of the largest global chemical markets, and is ranked sixth in the world and fourth in Asia in terms of global sale of chemicals. India accounts for 2.5% of the world’s global chemical sales. The chemical industry contributed around 8.8% of India’s manufacturing GVA and 1.4% of its national GVA in FY19.

While the industry was already facing cyclical challenges such as overcapacity, pricing pressures, and trade uncertainty before 2020, many post pandemic changes have shown a structural or disruptive character. Chemical companies in India have responded to the crisis by focusing on operational efficiency, asset optimization, and cost management.

As the industry moves into 2021, the changed economic, social, environmental, and political expectations are expected to play an even greater role in shaping its future. To succeed in the shifting industry landscape of the chemical market, companies should consider implementing a series of targeted, strategic initiatives across major functional areas such as R&D and technology. Too much focus on the short term, however, could mean that companies end up neglecting long-term opportunities, including investing in innovation, emerging applications, and adopting new business models that generate sustained growth.

A critical aspect of dealing with this disruption in 2021 will be understanding which customer behaviours are temporary versus those that are permanent, as recovery will likely be uneven across end markets and geographies. Companies can address this uncertainty by revisiting their product portfolio and conducting robust scenario planning that includes the unknowns.