Report on the Specialty Chemicals Industry in India

The overall size of Indian chemicals industry during 2005-06 was US$30.59 billion, a growth of 10.23% over the previous year and a CAGR of 8.68% during the last 3 years. Chemical industry occupies an important place in the country’s economy. During 2005-06, it contributed about 3% of GDP and 17.6% of the manufacturing sector. However, India continued to be a net importer in 2005-06, with imports of US$7.92 billion and exports at US$5.95 billion. In the post WTO era, Indian chemical industry is undergoing a massive expansion, brand building and increased global reach. The industry is expected to grow at a CAGR of over 10% for the next 3 years, in line with the growth of manufacturing industry.

Abstract.JPG

The Specialty Chemicals segment is characterized by high value added, low volume production, although some companies are vertically integrated. Sector specific intangible value issues include heightened emphasis on research, abrupt customer migration to alternative products, regulation impacting esoteric specialty products and the intermediates used to make them. This group includes several of the Biotech majors.

Introduction

Specialty Chemicals are a particular variety of chemicals formulated out of a given set of specifications. Formulations can vary from one customer to another. These formulations vary with specifics uses that the chemicals are used for.

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Figure 1: Specialty Chemicals – A low volume, high priced chemical targeted at highly differentiated markets

Global Scenario

Speciality Chemicals forms an increasingly important part of the overall chemicals industry in the world. The true size of the chemicals is difficult to estimate though one figure (given by the High Level group of the European Commission) sets it at over $1.85 trillion. Speciality chemicals forms a significant (~24 % in case of the EC) and growing proportion of all sales. The growth is based on the fact that more and more companies require chemicals specially formulated for them. Besides it represents a higher margin, lower volume business for companies.

Global Trend for Specialty Chemicals

Since the speciality chemicals industry forms a subset of the chemicals industry and can be highly fragmented (especially in India), estimating its true market can be difficult. One estimate (by the Tata strategic management group) puts it at $500 billion. The majority of this is accounted for by Europe, U.S and Japan. However, Asia (especially China and a smaller extent India) are emerging a huge source of growth for the spec chem. Industry which has stagnated in the advanced economies due to global financial crisis. To understand the trend let’s look at the growth of the overall chemical industry in the world in 2009 which can be taken to be a good barometer for the speciality chemical industry

Figure 2 Source – BASF annual report FY2009

Major regions accounting for speciality chemicals

Europe

U.S.A

Japan

Asia (excluding Japan)

Major Global Companies include – BASF, DuPont, Dow chemical, Lyondell chemical, Mitsui Chemical

A shift in the specialty chemicals industry?

As can be seen from the chart, Asia is the only region which grew in 2009 in terms of overall sales. India and China form a major chunk of the sales from the Asian region. There are many reasons for this shift

Companies are creating specialised products for this region.

The rising economies of the countries have ushered in more demand for chemicals tailored to the requirements of Asian countries.

Low Cost sourcing point.

Stringent environmental regulations has forced companies to move to regions having less stringent regulations and lower emission reduction targets

India and China have a vast bio-resource potential to support the global trend of using sustainable agro-based raw materials for production of green specialty chemicals driven by evolving consumer preferences and regulations to conserve the environment.

5 Themes which will affect the Global Specialty chemicals industry

Innovation- While innovation is topic of hot debate and it affects every industry the speciality chemical industry is particularly affected as the requirements of companies require tailoring of chemicals and creating new chemicals to meet the needs of industries like aerospace, automobiles and plastics. The formation of ‘innovation networks’ is an important step undertaken by the industry to speed up innovation.

Energy and Feedstock – At present Oil and Natural Gas form the main resource for the speciality chemicals industry. These routinely form over 50% of the production cost. Due to

The heightened consumer preference for sustainable development

Tighter emission regulation requirements and

High (and rising) price of crude and natural gas

Companies are being forced to focus on alternative sources of energy and feedstock. In terms of feedstock the available alternatives include starch, vegetable oils, ethanol or Bio based renewable materials.

Regulation – The speciality chemicals industry is subject to increased scrutiny as chemical safety is of paramount importance. For this reason the development of adequate regulation (especially in INDIA which has a highly fragmented market of SME’s) is necessary.

Climate Change – The emergence of the climate change issue has had a huge impact on the speciality chemicals industry. The effect can be looked at as

Threat – The obvious threat is that many chemicals produced become unusable in the face of tighter regulation.

Opportunity – The development of chemicals can help mitigate climate change. E.g.

Solar Panels – higher efficiency

Fuel cell technology — heavy use of speciality chemicals

Insulation – to reduce consumption

Tyre manufacture – light weight rubber to reduce fuel consumption

Logistics – The development of infrastructure to transport and store speciality chemicals will be a key differentiator.

Current Indian Scenario

Specialty Chemicals is seen as a high growth potential industry by the Indian industry. The major characteristics of the Specialty chemicals industry are high product differentiation and value addition, smaller production units with more flexibility and low capital investment levels. This industry is extremely service intensive .It requires technical expertise in applications engineering and customer servicing.

The Indian Specialty Chemicals Industry is highly fragmented with large number of smaller players in the unorganized sector. The market for specialty chemicals in India is estimated to be around USD 80 million p.a.

Also a large number of big players like MNCs have a major presence in organized sector. These MNCs have very strong links with their parent organizations. HOC and Balmer Lawrie are the significant players of Indian origin. Major MNC players are Ciba, Nalco Chemicals,Hoechst,Foseco,Clariant etc.

Many major commodity chemical manufacturers are also migrating to specialty chemicals, as it provides higher profitability and low investment at lower margins .Most of the erstwhile textile auxiliary manufacturers have now started synthesizing exotic molecule and thus emerging as specialty chemical manufacturers.

Availability of technical manpower, low capital intensity of the industry and high profit margins are some of the reasons the specialty chemicals industry has witnessed a high growth rate in India. Improving R&D is an important factor in the growth of this industry.

The Indian specialty chemicals market including knowledge chemicals is likely to grow at a 17% annual growth rate ,doubling to USD 40bn by 2011.In emerging economies ,it has been noted that this industry grows at double the GDP growth rate .The two major factors fueling this growth are the domestic demand and export based production.

The domestic demand includes the demand from end user industries as well as increased usage of specialty chemicals.

The export based production demand is increasing as India is seen as a major outsourcing hub and also preferred destination for expanding global presence. In addition, the evolving customer needs have resulted in increased demand for newer applications of specialty chemicals.

The Indian Speciality industry is at its inflection point with focus on global market. There is increased awareness about the role played by specialty chemical in providing a competitive edge

Major Indian Players

The Indian specialty chemicals industry can be broadly classified into 3 categories:

Large Indian

MNC Subsidiaries

Small Indian

Multinational companies have a strong presence in this industry. The industry is already fragmented with many players and more commodity chemical players are migrating to specialty chemicals due to high ROI.

Large Indian Companies

Hindustan Organic Chemicals Ltd

HINDUSTAN ORGANIC CHEMICALS LIMITED, a formidable in the chemical industry was incorporated in 1960 under the Ministry of Chemicals & Fertilizers.

The main products manufactured by HOCL are Phenol, Acetone, Nitrobenzene, Aniline, Nitrotoluenes, Chlorobenzenes and Nitrochlorobenzenes.

HOCL products are used in vital industries like drugs and pharmaceuticals, pesticides, rubber chemicals, paints, dyes and dyes intermediates.

For the financial year ended on 31st march 2010 the net sales were Rs 478.63 crores.

Balmer Lawrie

Balmer Lawrie & Co.Ltd is a Government of India Enterprise which manufactures industrial packaging, barrels and drums, LPG cylinders, greases and lubricants, leather chemicals, functional additives and marine freight containers.

In the field of Specialty chemicals it manufactures Beam house chemicals, Finishing chemicals, Synthetic Tanning Agents and Synthetic / Semi-Synthetic high performance Fatliquors specifically catering to the leather industry

The company is one of the largest chemical companies of India with a net revenue of Rs 2019.41 crores in 2009-2010

MNC Subsidiaries

BASF India Pvt Ltd

It is a sister concern of BASF group of Germany, which is the largest chemical manufacturing company in the world

BASF India Limited is headquartered in Mumbai, with manufacturing facilities in Thane, Mangalore.

BASF India Limited manufactures and markets expandable polystyrene, tanning agents, leather chemicals and auxiliaries including specialized metal complex dyes, leather dyes, textile chemicals, dispersions and specialty chemicals, acrylic polymers in primary forms and crop protection chemicals.

BASF India Limited is also involved in the trading of chemicals including dyestuffs and related textile auxiliaries, and renders technical services to various industries.

BASF acquired another major player in specialty chemicals CIBA in April 2009. This was one of the biggest consolidations in specialty chemicals industry in recent times.

BASF-India’s revenue was Rs 1465.48 crores as on 31st March 2010.

Clariant India Pvt Ltd

Clariant (India), a 51% subsidiary of Swiss multinational Clariant AG is a leading manufacturer and supplier of dyes, specialty chemicals, pigments and masterbatches

Clariant AG is the second largest specialty chemical producer in the world with over 100 group companies across the globe.

Clariant India Limited has recorded the sales turnover (net of excise) of Rs. 921 crore as against Rs. 916 crore in the previous year

The below diagram shows the subsidiaries of Clariant chemicals.

Nalco India Pvt Ltd

It is a subsidiary of Nalco headquartered in Illinois, USA

It is the only ISO 9001:2008 certified specialty chemical company in India.

It produces specialty chemicals and devices used in water treatment, pollution control, oil production and refining, steel making, energy conservation, paper-making, food production, mining etc.

Nalco India’s revenue for the year ended 31st March,2009 was Rs 172.05 Crores.

Challenges faced by Indian Companies

Business is growing in India’s custom research and manufacturing services (CRAM). This may be because of India’s strong process chemistry skills and low operational cost. But this rapid growth has created many challenges for the Indian companies.

Wages have risen by 15-20%/year and it is predicted to increase for the next few years at a greater pace. The average worker in India’s manufacturing and service sectors got a raise of 18.8% in 2009, according to Hewitt Associates. And wages are projected to climb an additional 17.3% to 20.4% in 2010. Rising wages in countries such India, while not enough in themselves to slow the movement of jobs overseas, are making the logistics crisis much worse at a speed that few companies can successfully manage.

India has a large pool of skilled labor. But getting the right person for the right job and retaining that person is a big challenge for Indian companies. Job hopping has forced the companies to hike salaries of the employees rather than rewarding them for their performance.

Indian companies also have to confront issues which include the appreciation of rupee, rising costs, and managing the supply chain. Many companies in India completely rely on China for supplies of intermediates and supply chain. Any change in government policies in China badly hits Indian companies.

Chinese companies are a big threat to Indian companies. China’s biggest strength is contract manufacturing of Active Pharmaceutical ingredients (APIs).It is also extending its reach by building capabilities in biologics, bioinformatics and molecular biology. China plays a big role in supply of biology-based services.

The R&D budgets have not been fully exploited by India. The number of researcher per million is only 156 for India, while it is 7000 and 4700 for Scandinavian countries and US respectively. India’s R&D spends as a percentage of GDP is only 0.8%. R&D spend of public sector is 80% which is vastly different from US and China where public sector share is only 30%

Indian Specialty Chemicals companies faced a sudden drop in demand for specialty chemicals in 2008. This effect was more predominant in the fourth quarter of 2008 because of the financial crisis. Specialty chemical manufacturers quickly closed dozens of plants permanently and slowed production in all major regions. Other cost-cutting actions included planning for the elimination of numerous employees, sometimes up to 5-10% of their total workforce, reducing overtime, releasing temporary workforce personnel, instituting compulsory vacation and part-time work, freezing wages and salaries in fiscal 2009 and bringing forward scheduled maintenance work to coincide with cutbacks.

Many specialty chemicals segments followed the downturn of their respective end-use industries, especially for the electronics, automotive and construction industries. Relatively high future growth rates are expected from segments serving these end-use industries albeit from much declined markets compared with a year ago.

The economic downturn has also had a negative impact on consumers all over the world, causing a lower average disposable income growth for consumers, lower consumer confidence and higher unemployment. Consumers are therefore likely to generally reduce their expenses and as a result consume less. Consumers are also likely to spend more efficiently and change the amount spent on certain product categories.

In the first half of 2008, commodity and specialty chemicals manufacturers struggled with sharply rising oil-based feedstock, transportation and energy costs that were up more than 25-40% every year. This along with weak demand conditions from most of their end-use markets put tremendous strain on the value chain.

Indian companies may have their presence felt in the world but in terms of market penetration, Indian companies have barely scratched the surface. Example: Bayer is sourcing more than 98% of its annual raw material requirement in specialty chemicals business from other countries in the world.

Future Trends

The market opportunity for Speciality chemicals in China and India will be driven by demographic changes taking place in these two major economies and the shift in spending pattern that is likely to emerge. In 1995 non-discretionary spending was on necessities, by 2025 about 60% of consumer spending will be of discretionary nature. This will have tremendous implications for speciality chemicals. Leading companies in each of the speciality chemicals segment are growing faster than segment as a whole. Leading companies are also doing more to acquire lagging companies, but rarely choose large targets. Instead, they are more focused on picking up small opportunities through mergers and acquisitions.

The industry is expecting to undergo a complete revamp of specialty chemicals in the next one or two decades. The near site difficulties are from the existing and growing Commodity impulse buying. In order to stay in the market the companies not only have to fight with the small players but need to revise their plans on timely manner to Innovative business models and to achieve profitable growth.

Evolution of India as an attractive investment destination

Creating opportunities through innovative solutions

Companies present or having decided to participate in the Indian market have adopted innovative strategies to gain a competitive advantage such as:

Strategic tie-ups/ Partnerships: Ciba Specialty Chemicals entered into a JV with a leading Indian

Pharmaceutical company to upgrade its Triclosan manufacturing technology.

Local solutions for disruptive innovations: BASF made a significant contribution towards development of Tata Nano, the cheapest car in the world, by developing solutions for specialty polymers and adhesives required by Tata Motors.

Product modifications: India faces an increasing shortage of water coupled with growing environment concerns. Dow Corning, a global specialty chemical major in silicones, developed new products for the textile industry in India which has led to improved productivity and less effluent generation. The company has emerged as one of the leading suppliers of specialty chemicals to the textile industry in India.

Process technologies: Innovative processes/ technologies are being deployed in the end user industries which utilize scarce resources more efficiently by companies e.g. Clariant for the textile industry. It has designed a “No Rinse” process for discontinuous bleaching, with benefits of saving time, water and energy and has received enthusiastic response to its first introduction of the process.

Marketing: DuPont, a producer of Nylon filaments, has collaborated with FMCG majors in research and development for producing tough bristles with better retention and low moisture absorption property. The end products carry the logo of the specialty chemical company making a case of ingredient branding for the consumer product. It has helped the company to come closer to the end customer and establish market leadership in India.

Financing: The spectacular growth of United Phosphorus Limited, an Indian agrochemical major, has been largely through its strength in acquiring companies across the world and quickly integrating the benefits within the group. This is a clear example of industry foresight and successful execution which was largely made possible by its innovative cash flow management and financing methods making funds available at the opportune time and place to acquire its targets.

Breakthroughs with technology: One of the next frontiers in material sciences is “Nanotechnology” and various specialty chemical companies are exploring the space to benefit from its potential for innovations. A global player is using nanotechnology to improve the functionality of textiles through specialty chemicals that help provide ‘easy release, quick wick and rare care’ finishes that enhance water/ oil repellence, hygiene and odor free properties. This has enabled it to command higher premium through differentiation in an otherwise highly competitive market.

Differentiation through service: A certain specialty chemical manufacturer for the textile industry has started offering custom-engineered standards to assist along the entire supply chain. From development of a new shade through its communication to all its global supply partners until consistent bulk production, it ensures superior color management, a key performance parameter. Service support will increasingly become one of the most significant differentiators in the industry.

Advantage India

Lower manpower costs are one of the competitive advantages. According to a McKinsey analysis, India annually churns out six times the number of chemists every year in the US. The cost of this having this manpower is only one-tenth the amount of hiring the workers in US. The presence of such large number of skilled chemists, who’ve honed their skills in an era of process patents, at such low cost reduces process development costs in India.

McKinsey also reckons that the cost of developing a drug master file in India is 26 per cent as that of in US.

The set up cost of a plant in India is also significantly lower compared to most of the countries in the world. The cost of establishing a chemical plant by an Indian company in India is 40-50% less than that in the US. These saving are because of local technology and fabrication.

In addition to the low cost advantage, India has overcome the quality disadvantage many MNCs had about a decade ago. There were fears that Indian manufacturing facilities, might not come up to the rigorous quality control at global level. Today, several plants managed by MNC subsidiaries have ISO 9002 certification.

India has become increasing popular as an offshore supply base for chemicals. This is amplified by another emerging trend i.e. growing equity participation by Multi National Companies in their Indian Industry. As India’s edge in specialty chemicals is more and more visible to the world, mergers and acquisitions are likely to grow in the near future.

Example: The overseas parent’s shareholding for Ciba Specialty chemicals has increase from 40% to 89%.

The presence of India in the specialty chemical space is already being felt. Seeing the huge potential of the country, many MNCs have started setting up huge manufacturing plants in various cities of India.

Example: BASF has set up an 85 hectare modern manufacturing site near Mangalore. This site has been developed into one of the three integrated sites of BASF in Asia.

Companies such as Rohm and Hass, German Giants like Bayer, Degussa’s Exclusive Synthesis Unit have their production plant shifted to India. Meanwhile, across India, the number of pigment plants has doubled over the last 10 years, and exports have grown 16 times between 1998 and 2008.

Example: Rohm and Hass, the US specialty chemicals giant opened an adhesives & sealants manufacturing facility in Taloja, near Mumbai. The company has poured in $20 million into this plant, which has a production capacity of 35,000 metric tons per annum of adhesives and coatings polymers.

Of late, India is also emerging as an important base for active pharmaceutical ingredients. It is not just multinationals that are ramping up their sourcing plans from India. Home-grown Indian companies like Jubilant Organosy, Cico Technologies are increasing productivity, creating new capacity, and expanding quickly into Western markets.

Government Policies

Indian Economy was for a very large period of time, till 1991 was a protected economy. There were very miniscule Research and Development (R&D) activities happening in Chemical Industry to create intellectual property. Post 1991, with invent of globalization, Indian Chemical Industry found itself competition with the global peers. Hence it is imperative that large investments have to be made in R&D to be in a position of strength. India does produce highly skilled manpower that is its strength, which has to lead this revolution.

With investments being done in R&D, the Chemical Industry is registering significant growth in the knowledge sector. This comprises of all the three categories i.e. specialty chemicals, fine chemicals and pharmaceuticals. The Indian Chemical Market, Segment wise is as shown below: –

Segment

Market Value (billion US$)

Basic Chemicals

20

Specialty Chemicals

9

High End / Knowledge Segment

6

Total

35

Source: Department of Chemicals and Petrochemicals, Govt. of India.

Conclusion

The global downturn of 2008 had an adverse effect on Specialty Chemicals Industry in general. It led to severe overcapacity of stocks and reduction of consumer’s capacity and confidence. India and China will be the major drivers for the world economy. The growth in these countries is primarily driven by their large middle class population. Both India and China have become key players in this segment.

India in particular, produces a good enough number of fine and specialty chemicals. These chemicals are built for very specific uses. These chemicals are extremely important for increase f Industrial production. Example of segments where Specialty Chemicals do find wide use are additives and pigments used in food processing industry, as polymer additives, as anti-oxidants in the rubber industry, etc.

Specialty chemical market is likely to grow at 15% per annum. Indian companies should overcome the hurdles facing the Specialty Chemicals Industry now, so that it can move from being a key player in this segment to a dominant player in this field.

Appendix 1

EU REACH – Registration, Evaluation, Authorization and Restriction of Chemicals

REACH is the Regulation on Registration, Evaluation, Authorization and Restriction of Chemicals. It entered into force on 1st June 2007. It streamlines and improves the former legislative framework on chemicals of the European Union (EU).

The main aims of REACH are to ensure a high level of protection of human health and the environment from the risks that can be posed by chemicals, the promotion of alternative test methods, and the free circulation of substances on the internal market and enhancing competitiveness and innovation.

REACH makes industry responsible for assessing and managing the risks posed by chemicals and providing appropriate safety information to their users. In parallel, the European Union can take additional measures on highly dangerous substances, where there is a need for complementing action at EU level.

How REACH affects Indian Industry

Though REACH is an EU law, affecting the manufacturers and importers in Europe, these EU importers will transfer greater responsibility / liability on their non-EU suppliers. Therefore the Indian supplier (exporter) needs to be prepared for REACH.