Page 133 - CW E-Magazine (14-11-2023)

Point of View

Safety in chemical industry: Capital markets must

take cognisance of risks

The news that emerged in the last couple of weeks couldn’t be starker in contrast. A mid-sized API and intermediates company
concluded a successful IPO, and listed at a small premium. Just a couple of days later, a serious accident at the company’s plant in Mahad
(Maharashtra), killed 11 workers and injured several more, a few critically. While the cause of the accident has not yet emerged – and it
almost never does – the incident drives home the fact that the chemical industry still has a long way to go in improving its record of safety,
especially in the SMEs that run into several hundreds and account for a significant share of the industry’s output.

This recent incident is not an isolated one; too many are happening and tarnishing the reputation of the industry as a whole.

Under-estimating safety risks
What is also worrisome is that capital markets are grossly under-estimating safety risks when valuing companies. The rush to list at
very attractive price premiums has abated in the last few months and several planned IPOs have been put off for now, due to adverse market
conditions. But listings by companies in the industry over the last couple of years have been at hefty premiums, and based on ambitious
growth and profitability projections. These numbers have been justified mainly on a couple of counts: the export opportunities as customers
world-over look for alternatives to China; growth in the domestic market as manufacturing, in general, takes on a faster trajectory to meet
demand growth, driven, in turn, by rising per capita incomes; and government spending, particularly in infrastructure.

But the valuations do not account for the vast variations in the safety, health and environment (SHE) capabilities and practices amongst
the companies. And they should!

The ability of the chemical industry to raise funds from the capital markets presents an excellent opportunity – missing for much of
the past (with a few exceptions) – to expand capacity, diversify portfolios, consolidate market share (including through acquisitions), and
needs to be welcomed. But it is important to scrutinise the track record of companies choosing to go public on matters related to safety,
as it can represent an existential threat. Investment bankers, who are crucial to the successful listing of IPOs and play a major role in
fixing the allotment price, owe it to the investment community to do the required due diligence. Professional agencies can be engaged to
do independent and detailed analysis of capabilities and vulnerabilities, and these need to brought out to the attention of the public prior
to the listing – akin to financial risks that are well advertised in the Draft Red Herring Prospectus filed by companies with capital market
authorities. Accidents can significantly erode valuations, and investors need to be aware of the risks they are taking on this front.

Some may term the calling out of chemical companies for this kind of scrutiny as unwarranted and discriminatory. But it needs to be
borne in mind that this is an exceptional industry that deals with hazardous materials, operates processes at high temperatures & pressures,
and produces wastes in multiple forms, many of which can pose dangers to human health and the environment, unless adequately and
scientifically treated. The ability of a company to manage these hazards through appropriate controls, systems and well-documented
procedures, so as to reduce risks to workers in the plant, people in the neighbourhood, and to the environment at large, to the fullest extent
permitted by technology, is an aspect that needs to be studied, validated, and communicated widely to all stakeholders, including to investors.

Advances in process safety
The impacts of chemical accidents can be deadly, as brought home by the Bhopal Gas disaster, which remains the worst industrial
accident the world has ever seen. Though there have been no accidents of similar severity since, smaller ones do take place world-over,
not to mention the many, many more near-misses. All this has led to an erosion of public faith in the chemical industry, notwithstanding
the fact that the industry is not optional, but vital.

While accidents in the chemical industry can happen for several reasons, process-related causes top the list. Following Bhopal, an
extensive body of work has been formulated addressing all aspects of chemical process safety. Processes can now be designed to be
inherently safe. To cite one example, MIC (methyl isocyanate) – the gas that leaked from a storage tank on the fateful night in Bhopal – is
now made and consumed in situ – obviating the need for its storage and removing the possibility of an accidental release.

Understanding of reactive chemistry – what goes on inside the reactor – is now much better than a few decades ago. This has permitted
far better understanding of exothermic chemical reactions, for example, which have the potential to get out of control, causing grave

Chemical Weekly November 14, 2023 133

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