Page 135 - CW E-Magazine (9-7-2024)

Point of View

Raising the competitiveness of India’s chemical

industry in challenging times

While the Indian chemical industry has for much of the last decade been an outperformer in comparison to its global counterparts and
to other industrial sectors in the country, that has changed in the last three years. Weak demand in global markets, rising costs of feedstock
and growing competitive pressures have come to bear heavily on the Indian chemical industry, adversely impacting margins and profitability.

While some segments of the industry have been more impacted than others, none has been immune. Though there are some early signs
of recovery in overseas demand as companies are beginning to replenish depleted inventories, there is uncertainty on whether this will endure
and put the industry back on track to better profitability.

Challenging three years
According to an analysis by McKinsey, a consultancy, India’s chemical industry reported growth in Total Shareholder Returns (TSR) of 20%
CAGR in the period from 2014 to 2023, even as global peers reported just 8.5%. This has been attributed to strong growth in the domestic
market (albeit from a low volume base), as well as success in global markets. The latter has come about by mainly leveraging on a low-cost
position (especially for fine and speciality chemicals) and a culture of process innovation.

The TSR of the chemical industry also outperformed the local Sensex TSR (representing the broader economy), which grew at a CAGR of
13% in the period from 2014 to 2023.

Since 2020, however, the picture has changed significantly. While the Sensex TSR grew by 16% CAGR between 2020 and 2023, the
chemicals business reported just 9% growth. However, this was still better than the growth in TSR in other major industry segments, and
nearly twice the average for the global chemical industry.

In short, the chemical industry underperformed other industrial sectors in India – both upstream and downstream of it – but did better
than its peers overseas.

Declining margins
The TSR decline seen in the last few years was largely caused by margin declines, which, on average, fell from 12% in 2020, to 10% in 2023.
This happened even as revenue growth clocked 17%, compared to 11% between 2017 and 2020. This seems a quirk but can be explained by
the fact that much of the rise was accounted for by price increases brought about by rising costs of raw materials, mainly petroleum derived.

Reversing the situation and putting the industry back on a faster growth trajectory (as measured by TSR), will hinge on a recovery in
margins. This has two drivers – the first, external to a company and determined largely by global market conditions; and the second, internal
and operational.

External factors
The global state-of-affairs in the chemicals business can be summed up as follows: stalling global demand, consequent to a slowdown
in the largest market for chemicals, viz. China, compounded by the travails in Western Europe; severe overcapacity following an investment
binge (mainly in China) in most value chains; and dim prospects for demand growth in an economic outlook that sees per capita consumption
slackening from its historical pace.

As a result, even as domestic consumption of chemicals has more or less held up in the last two years in India, exports have shown annual
declines of about 4%. This can be attributed to demand slowdown in the major economies that India exports to, as also a rise in self-sufficiency
in some. The latter is most evident in petrochemicals, wherein India’s trade balance (imports minus exports) has increased from $22-bn in
2019 to $30-bn in 2023, driven both by an 8% fall in exports and a matching rise in imports to meet the growing needs of the domestic market.
The rise in imports in large measure reflects the inability of the domestic industry to raise capacity to meet incremental local demand. This
is well exemplified by the case of polyvinyl chloride (PVC) for which India has the dubious distinction of being the world’s largest importer. The
decline in exports of petrochemicals such as para-xylene and benzene are consequent to the rise in self-sufficiency in China.

While the business of fine and speciality chemicals plays to India’s strengths and exports from this sub-segment of the chemical industry

Chemical Weekly July 9, 2024 135

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