India Chemicals: Uncertainty is certain

6 Mar 2023 , 10:25 AM

ICC is the apex national body representing the Indian Chemical and Petrochemical industry. and the conference was attended by over 100 CEOs, 80 CXO level speakers and 500 delegates from various parts of the world. IIFL Capital Services’ interaction with participants revealed somber outlook, with most of them expecting demand weakness to persist for at least the next two quarters. New enquiries have dried up and the orders from European clients are getting deferred. Companies exposed to discretionary demand like dyes & pigments, automotive, flavors & fragrances and polymers are facing severe headwinds while agchem and pharma based-value chains are doing well. Consensus view was that the current volatility is here to stay and business uncertainty is certain in the near term.

However, almost all of the interactions pointed towards healthy medium-to-long-term outlook, on the back of strong capex pipeline with outsourcing opportunities remaining intact. Comments offered by several participants reiterate IIFL Capital Services’ cautious view on the sector, with recovery likely to be prolonged.

Marching towards $1 trillion by 2040

This year’s theme was based on ‘Indian Chemical Industry: March towards USD 1 Trillion by 2040’. Thus, presentations and discussion were centered around the various ways to achieve the $1 trillion target. Shri Arun Baroka — Secretary, Chemicals & Petrochemicals, Ministry of Chemicals & Fertilisers, GoI — highlighted that supply-demand gap in petrochemicals and intermediate chemicals provide attractive business opportunities for India. The government is taking required steps like rationalizing custom duty, imposing BIS standards, setting up Centre of Excellence, reducing time to grant ECs, and setting up of chemical parks to attract investments. Consultations are also ongoing for incentivizing chemical production through PLI schemes.

India — Next chemicals manufacturing hub

McKinsey, as a knowledge partner, released a whitepaper on ‘India: The next chemicals manufacturing hub’. The report highlighted various aspects of Indian chemical manufacturing. It’s benchmarking against the six global chemical clusters revealed India’s strength as a global destination for manufacturing chemicals. It also highlighted India’s potential to triple its share to 10-12% by 2040 in global Chemicals sector. The Speciality Chemicals segment is expected to be a key driver of this growth, with a potential to contribute more than $20 billion to India’s exports by 2040 (10x jump). Although analysts at IIFL Capital Services remain optimistic on the industry’s prospects, they find these projections to be more aspirational.

Focus on Agrochemicals to drive Chemicals exports

Shri Susanta Kumar, Joint Secretary – Department of Chemicals & Petrochemicals — stressed on the efforts to bust the myths regarding agrochemicals in India. He urged the industry to come up with more scientific data points and take efforts towards educating farmers about the benefits of using agrochemicals. The government is bringing reforms such as companies are no longer required to submit data on toxicology if published information is already available. This is very positive for domestic players, as it rules out any arbitrary banning of agrochemicals. Indian Agrochemicals is a $5.5 billion market (Exports + Domestic) growing at ~8%, and is expected to contribute ~40% to India’s Chemicals exports. It is also likely to capture ~13% share of global agchems by 2040. Sodium (soda ash) and Caustic Soda are likely to become $13 billion and $11.5 billion markets respectively; while Fluorine is expected to reach $4.2 billion.

Europe’s pain to be India’s gain?

Europe’s Chemical sector, — the second largest producer globally — is facing significant challenges, on the back of geopolitical tensions, Green deal and its ambition to go climate neutral by 2050. Consequently, its competitiveness is increasingly getting challenged for most production input factors. Further, SMEs constitute ~96% of European chemical companies, which are witnessing drastically weak outlook for growth. While this is likely to prolong recovery for companies that are exposed to Europe, the view was that it would benefit Indian players in the long run through Europe + 1 shift.

Buzz on sustainability – Decarbonization and Renewables

The jury was unanimous on pursuing sustainability through decarbonization and foraying more into renewables, electric mobility and bio-chemicals. Net neutrality is compelling companies across the world to optimize existing fossil supply chains and adapt to the circular chemicals economy to achieving net-zero targets. Newer opportunities are also emerging from renewables, future of mobility, electronics, diagnostics and biotechnology. Though currently India lags, the industry is all set to leapfrog in the next 10 years. The growing demand for bio-friendly products globally is likely to benefit India, as it is expected to become the leading producer of many chemicals that are sued in such products. The companies that are exposed to these segments should do very well in the coming years.

Oil/Coal to Chemicals

With the world moving more towards electric vehicles and renewable energy — oil demand for fuels and coal demand for power — is expected to change drastically. This calls for stepping up efforts to move towards oil/coal to chemicals. GoI has set a target of 100 mMT of coal gasification by 2030. The Union Budget 2023 has proposed four pilot projects for coal gasification and conversion of coal into chemicals, so as to evolve technical and financial viability. Efforts are also on to study the feasibility of partial replacement of LPG with Dimethyl ether, which would help in cutting import bills.