Guest author: Ranjan Baruah | Independent Consultant
Specialty Chemicals are a group of “relatively high-value low volume chemicals, known for its end-use performance-enhancing applications”. They are recognized for “what they do” rather than “what they are” as in the case of Basic Chemicals. They provide “solutions “to customer applications, are knowledge-based and known to deliver much more returns as compared to Basic chemicals. The critical success in this industry depends upon understanding customer’s needs and product/application development to meet the same at a favorable price-performance ratio.
Industry value pegged at $24.9bn has the potential to grow to US$ 52.1 bn. This segment is an important growth driver for Indian Economy with a possible 13-14% growth per year. It is expected to accelerate to 17%, driven by domestic growth and stable export. The growth rate is encouraging due to the small base, the consumption and penetration levels of specialty chemicals are rather low in India.
Growth in the Specialty Chemical Industry is driven by the following factors:
More End-Use demand: With increased GDP, the Indian middle-class household is expected to grow to 148 million by 2030 from 31 million in the year 2008. The urban population is expected to increase by 275 million people by 2030, leading to consumption-led double-digit growth in the key markets. Need for better performance products, supported by service will be the key factor. (e.g.: Clean municipal water, construction chemicals increased use).
End-User Industry growth drivers:
Increased Intensity of consumption: Compared to countries like USA or China, the current penetration of specialty chemicals is low (e.g. construction chemicals) With an increased focus, improved products, and customer awareness, the use of specialty chemicals will increase (e.g. Construction Chemicals, Pesticides use in India )
Improved Consumption Standards: Consumption standards are policies implemented by the government to prompt the safe use of products. These standards are necessary for improving society’s standard of living and enhancing consumer safety. With the developing economy, India has started to regulate products more stringently, strengthen consumption standards, which in turn is leading to increased consumption of specialty chemicals (e.g. solvent-based paints vs. water-based paints)
INR depreciation: As compared to Chinese RMB (appreciated steadily in the last 5 years), INR, on the other hand, has depreciated by nearly 22%. This is beneficial to companies wanting to shift/start production in India.
IPR Protection: Although IPR protection is still in its infancy, it’s much stronger than many countries (e.g. China). International Property Rights Index, India ranks 55 of 130 countries compared to China which ranks at 59. In legal terms also, India ranks 71 against China at 77. This makes it better for R&D intensive, early technology lifecycle production.
Indian Specialty Chemical Industry sub-segment:
The chart below has a few stringent standards which Indian have started to implement:
Key Industries driving the growth of Specialty Chemicals:
Automotive Sector: Indian focus of small cars is changing to midlevel cars, thereby increasing demands. Current production of automotive is growing on the average at 9-10%. The need for components, using such coatings is also increasing (current production of approx. 2million cars, 3million 2/3 wheeler, 0.3million LCV/HCV and unknown number of bicycles).
Most of global majors are present in India, therefore, related TIER I and II vendors. These companies follow norms of rest of the world, making it mandatory for others to follow.
Automotive Component export is a major segment of user industry, using specialty chemicals to meet the production standards of rest of the world.
International community is looking at India as a manufacturing base for reasons of manufacturing economy, knowledge of common language (English), multi directional technically skilled manpower.
Construction Chemicals: Construction industry is growing at approx.16% annually, to be recognized as an industry worth US$ 100bn by end of XII five year plan. Specialty chemicals account for only 0.4% of total construction spends as compared to a possible 1%, which is the norm in developed economies (paints, coating material, reinforcing fibers, admixtures and others). The key factor is, to have/developing products and adopting advanced coating, ceiling and reinforcing material like polyurethane base coating, silicon and polymer based re enforcing material.
Water Chemicals: The demand for water is growing, thereby putting pressure on availability of water for irrigation, drinking and industrial use. Chemicals for conserving this resource seem to be on priority list. Recycling/conservation of water has become a must. Water treatment chemicals for reducing in-process industrial applications, to reduce BOD /COD, disinfecting water for potable purpose offers potential beyond doubts.
Textile Chemicals: With the growth of demand, in both domestic and export market for textiles, the chemicals like dyes and pigments offer never reducing requirements.
Personal Care: With growing affluence, Indians are able to spend more on hygiene and personal care products. Increasing demand for wide range of cosmetic chemicals, health care products and well as hygiene products using specialty chemicals , polymers and oleo chemicals. This segment’s growth is expected to surpass the growth of other segments.
Valuation of specialty chemical segment: The nature of specialty chemical industry is very complex and therefore, while valuation, this must be considered. This industry provides stable margins in stark contrast to basic chemical industry. Specialty chemicals do not go through the stringent regulatory approvals, as in case of pharma, agrochemicals or food industry but supplies critical material used in these industries. These small volume/high value products contribute a small percentage to the total cost, enjoying a high level of client’s stickiness.
The sector is poised for a strong growth to both, top and bottom line, there by offering reentry opportunity.
Comparative Industry Valuation:
Indian Government’s measures to improve competitiveness:
- Industrial Licensing has been done with in most sectors, except for a very small list of hazardous chemicals
- Approval is granted for FDI up to 100% in chemical sector
- Government is continuously reducing the list of reserved chemical items for production in small scale sector, there by assisting greater investments in technology up gradation and modernization.
- Policies have been initiated to set up integrated Petroleum, Chemicals and Petroleum Investment Regions (PCPIR). PCPIR will be an investment region, spread over 250 sq. km for manufacturing of domestic and export oriented products of petroleum, chemicals and petrochemicals.
- These initiatives are expected to attract large investments, both domestic and foreign, with requisite improvements in infrastructure and competition.
Strengths and Opportunities:
This segment has immense potential for growth, driven by growing end user industry. Technology & Innovation will play a major role in growth. India has a large pool of English speaking technical man – power as well as scientists and researchers.
Risks and Concerns:
Currency Appreciations: Significant appreciation in Indian Currency could impact growth as competitive advantages vis a vis China could decline, thereby possibly slowing down the shift of base. Some products, prices at IPP, could also have an impact on significant currency appreciation.
Slow Down in User Industry Growth: Slowdown in growth on user industry such as paints and coatings, specialty polymers, construction chemicals etc. could impact the overall growth for the sector.
Slow Down in Global Growth: Global slowdown could have an impact on the industry segment, as exports contribute substantially to the segment. Any slowdown in global growth impacting the end user industry growth will have as adverse impact on the overall growth for the sector.
Pollution Control Norms in the company: All companies have invested heavily on pollution control equipment meeting the pollution control norms. Any further tightening of norms by either Government or State Pollution Control Bodies will call for further investments, which may have a negative impact on the industry.
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