Page 136 - CW E-Magazine (9-7-2024)

Point of View

will stay a key driver of overall export growth, it too has not been immune to global trends. Exports have dropped in the last three years due
the industry-wide destocking (which is still to fully play out, according to some), as well as supply chain constraints.

In the wake of Covid, which exposed the vulnerabilities of supply chains to damaging disruptions, there are calls to build internal capabilities
in critical industries (drugs and pharmaceuticals being one) in the EU and in the US. While their impacts may not be evident for some more
time, this is an aspect that should worry businesses here.

About half of India’s exports of chemicals goes to Europe and the Asia-Pacific region and demand growth in both regions has been mute
of late. While in the former consumption growth has slowed to a piffling 1%, in the latter it is down to 4% (from 10%), pulled down by the
slowdown in China, even as manufacturing capacity there continues to rise. According to McKinsey’s analysis, China is expected to add
22-mtpa of new capacity for propylene and 30-mtpa for ethylene in the near term – which will be matched by investments in downstream
olefin-consuming sectors. This will have two consequences: fall in imports in the value chains in which these investments take place; and
steeper competition for Indian chemical companies both in the domestic and export markets.

What can be done?
The challenging outlook for the Indian chemical industry calls for a greater focus on improving competitiveness, and McKinsey recommends
a five-pronged approach: striving for functional excellence using digital tools and analytics; becoming truly global; accelerating application-
based innovation and product development; focusing on sustainability; and deepening and globalizing the talent pool.

Indian companies have traditionally underinvested in building functional excellence through adoption of digital and analytics-based
performance improvement. This, the consultancy believes, can enhance annual EBITDA by 400-500 basis points. It cites the example of a
‘digital and analytics leader in petrochemicals and refining’ who achieved around 10% annual EBITDA impact through 20 advanced analytics
use cases, ranging from yield and throughput improvement using sensors, to quality improvement through predictive modelling and in-process
traceability. Aspects of business that could benefit greatly from improved analytics include dynamic pricing to better combat volatility in prices
for raw materials; value-based pricing (particularly relevant for speciality chemicals); more efficient procurement through the use of data-driven
models for predicting price movements; and improved supply chain management thanks to better demand forecasting.

Building a strong global presence, including through acquisitions, enhanced supply chain infrastructure, application development capabilities
and deep regulatory understanding can boost revenues by 10-30%.

Innovation – especially product innovation (in contrast to process innovation) – has been a weak spot in the Indian chemical industry, and
that needs to change. The business of speciality chemicals is all about understanding customer needs and offering bespoke solutions, and
this is a path few companies have taken so far. Product offerings with improved sustainability profiles also afford a sizeable path to profitable
growth but call for substantial investments in innovation and serious commitment from senior management for the long term. These could
take the form of green alternatives to existing chemicals, for example, by substituting fossil fuel derived raw materials with bio-based ones.

While India is well placed to make this transition thanks to its extensive agricultural base, product choices need to be made judiciously.
The first-generation bio-feedstocks – mainly starches, sugars and vegetable oils & fats – are intimately linked to the food chain and hence not
sustainable options, except as an interim measure till something better comes along. The newer generation options come from agricultural
wastes (lignocellulosic biomass) and algae, and while they are scalable, several technical challenges still need to be overcome.

India’s chemical industry (like many other industry sectors) can benefit from the low construction costs compared to the competition,
but much of this stems from a labour arbitrage that comes into play only when procurement and engineering is done locally. This is the case
for most fine & speciality chemicals, where basic process technologies are locally available, as are facilities for the design and engineering
of most equipment. In the capital-intensive bulk chemicals business this is not the case. For one, process technology for many large-volume
chemicals is still not available locally (think ammonia, ethylene, caustic soda, etc.), and procuring them from abroad comes with stiff licensing
fees that can make all the difference to overall project costs. On the other hand, most plants for active pharmaceutical ingredients or technical
agrochemicals are built based on indigenously developed knowhow – either within the companies themselves or through collaborations with
publicly-funded research laboratories.
In summary, the cost competitiveness Indian chemical industry is clearly evident in fine and speciality chemicals. These segments – far
removed from a barrel of crude oil – play to India’s strength and do not expose the country’s weaknesses. They have already made a mark
globally, and recent geopolitical developments point to a greater role for them in the years ahead. Every effort must be made to reinforce their
competitiveness.
Ravi Raghavan

136 Chemical Weekly July 9, 2024

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