It is estimated that the value of the Indian specialty chemicals space could grow to $100 billion (2.5 times) by March 2025. That is a geometric growth ahead of these chemical companies. Here is why the specialty chemicals space looks interesting.
Big growth drivers for the sector
The big growth between 2020 and 2025 is likely to be driven by an average growth of 15% CAGR in the user industries. In addition, there is a huge opportunity for exports across the Western world and that also offers an export opportunity for these companies. Globally, the specialty chemicals business is transforming the way pharma sector changed some 4 decades ago. The sector is becoming more cost conscious and hence is showing a predilection towards generics. India has the right manpower, skills and the low costs to make the best of this global opportunity.
China factor is making a huge difference
Even before the COVID-19 pandemic and the disruptions in Chinese supply chains, the output of specialty chemicals had substantially contracted in China. Implementation of stringent environment protection regulations ensured that regulators clamped down heavily on chemical manufacturers in China. This opened up a huge window of opportunity for Indian companies which could partially match the scale required globally. That has been a driving factor for Indian specialty chemical companies in the last 3 years. Going ahead, the COVID-19 impact in the chemical hubs of China and scepticism of global economies about Chinese products is likely to be a big boost for Indian specialty chemical companies.
Specialty chemical prices remain buoyant
Chemical prices in the international market have remained buoyant in the last couple of years. The Chinese government clamped down heavily on small chemical companies for flouting environment norms and that resulted in a shortfall in the market and higher prices. Now Trump is again talking about imposing tariffs on China as a response to COVID-19 and that will again keep the global specialty chemical markets undersupplied. With supply chains still disrupted, the supply of specialty chemicals is getting constrained but the demand from user industries like paints, detergents, toiletries and cosmetics continues to be robust. That demand supply gap is also expected to favour Indian specialty chemical companies.
Big shift of specialty chemicals to organized segment
Back in 2014, out of the 700 chemical companies in India the top 20 companies account for 48% of the output with the balance 680 companies accounting for 52%. The shift has more towards the organised sector post demonetization and the GST launch. But the trend will get accentuated post COVID-19 as smaller units will find it hard to source finance, materials and labour. The shift to organized segment will mean better control over supply and price. That is likely to favour the listed speciality chemicals players.
Economies of scale may be finally happening
McKinsey estimates that India’s specialty chemicals market could be closer to $100 billion by the year 2025. That would make the Indian market larger than Japan and South East Asia. It will be half the size of China and also half the size of the US and the EU. That would open up a huge window of opportunity for specialty chemical companies in India. And chemical companies are already building scale via expansion plans.
Nearly 60% of the specialty market is dominated by just 5 segments; paints & coatings, dyes & pigments, agrochemicals, specialty polymers and plastic additives. These are also the segments likely to see the biggest demand traction as India and the world recovers from COVID-19. The only concern could be stricter environment regulation and rich valuations. But, as we have seen in the past, when growth is buoyant valuations normally don’t matter too much!