Indian Chemical Firms Take Fight To China

CHEMICAL ENGINEER Gopi Latpate from Aurangabad sold his IT firm ValuD Consulting to Fortune 500 multinational JLL in October 2018 and invested in 50-plus India-focussed start-ups in energy, technology and social empowerment. He, along with long-time friend Balasaheb Darade, who left his job in U.S. to work for social causes in India, thought of starting a transformative business. They were joined by Ajay Agarwal, former owner of polyester chip and yarn manufacturer Shubhalakshmi Polyesters, acquired by Reliance Industries for ₹1,592 crore in September 2022.

Their new company, New Era Clean Tech, is setting up one of India's first large private coal gasification projects. The five million tonnes per annum (mmtpa) project, spread over 1,650 acres in Chandrapur district of Maharashtra, involves an investment of $2.5 billion or over ₹20,000 crore over next 8-10 years. The target is to start the first phase of operations by 2027-28. The project is part of the trio's vision to use India's vast coal reserves and make chemicals, rivalling China, which controls at least 45% of the global chemical market. Coal gasification involves turning coal into clean syngas or synthesis gas, a mixture of hydrogen and carbon monoxide, the basic building block of the chemical industry. It can be used to make intermediate products such as methanol, blue hydrogen, ammonia, urea and final products in basic starting chemicals such as ammonium nitrate, nitric acid, acetic acid and mono ethylene glycol. Before this, Indian industry never looked at coal gasification as a serious opportunity, except for captive units of Jindal Steel and Power or Reliance Industries' pet-coke cracker or a PSU joint venture fertiliser unit being built at Talcher in Orissa. India imports 50% natural gas, 90% methanol and 13-15% ammonia it consumes. "China's dominance in chemicals is rooted in its 100-plus coal gasification units that make enough basic chemicals and downstream products. That is where we are way behind," Gopi Latpate tells Fortune India. India is aiming to invest ₹4 lakh crore to build 100 million tonnes (MT) coal gasification capacity by 2030. PSUs BHEL, NLC India, Coal India and its subsidiaries, Indian Oil Corporation and GAIL (India) are working on starting coal gasification projects. Building coal gasification capacity to become self-sufficient in basic petrochemicals is just one part of the unfolding chemical sector revolution to counter China. India's speciality chemical sector, for instance, grew 41% in FY22. The boom over last few years has helped India surpass the U.S. to become the second-largest exporter of agrochemicals in the world after China. The country is projected to account for 20% of incremental chemical consumption over next two decades, say experts. "India is expected to become a $850-1,000 billion chemical market by 2040, taking a 10-12% share of the global trade (from 4% now), by growing 9-10% annually," says a study by Indian Chemical Council (ICC) and McKinsey & Company. India's chemical sector, $220 billion in 2022, is anticipated to grow to $1 trillion by 2040, says IBEF.

So, what are the levers, segments and policies that will make India the next chemical hub, competing headlong with China?

Stellar Growth

The Fortune India study of India's Richest 2023 has found that the chemical sector has at least 10 billionaires: Madhukar Parekh and family of Pidilite, Vivek Jain of InoxGFL Group, Arun Bharat Ram of SRF, Salil Singhal of PI Industries, Satyanarayan Nuwal of Solar Industries India, Bajranglal Taparia of Supreme Industries, Pavan Jain & Siddharth Jain of Inox Air Products, Mehta brothers of Deepak Nitrite and Deepak Fertilisers And Chemicals, Vinod Saraf of Vinati Organics, Rajnikant Shroff of UPL, Aswin Desai of Aether Industries, Ashok Boob of Clean Science & Technology, Yogesh Kothari of Alkyl Amines Chemicals and Mukesh Shah & Jayesh Shah of Fine Organic Industries. The chemical sector accounts for ₹2,33,881 crore wealth, according to the study. Owners of Aarti Industries, Atul, Galaxy Surfactants and DCM Sriram whom Fortune India had identified as billionaires a year ago narrowly missed the $1 billion wealth mark due to dip in share prices of their companies. Most of these companies have grown fast over past few years by leveraging supply disruptions, Covid outbreak/lockdowns and recession in China that are forcing global companies to diversify supply chains. The result: India is now the 6th largest producer of chemicals in the world and 3rd in Asia. The industry, which makes over 80,000 chemicals, contributes 7% to the country's GDP. One in five companies has grown at a compound annual growth rate (CAGR) of more than 15% during 2013-23, according to a study of more than 70 listed Indian chemical companies by investment and advisory firm Candle Partners. Their revenues grew from ₹87,600 crore in FY13 to ₹2,18,400 crore in FY23 (10% CAGR). Five-year CAGR was 13% while three-year CAGR was 17%, says the study, which did not cover large capex and commodity price-driven sub-segments such as fertilisers, petrochemicals and carbon black.

Taming The Dragon

For a perspective on whether India can become an export giant, one needs to look at how China became a chemical powerhouse. The western bloc, led by France, Germany, Italy and U.S., controlled 40% global chemical trade till the global recession in 2007-08. This was the time when China started building massive infrastructure in petrochemicals and basic chemicals, thanks to low labour costs, lax environmental rules and government subsidies. The trade grew from 24.1% in 2009 to 40% in 2019, says a Kearney India chemical sector report. ‘"By then, China emerged as the sole or dominant source for several classes of chemicals (including pharmaceutical APIs and critical intermediates)," it says.

But things are changing. First, U.S. and China started a trade war in FY19, with U.S. imposing tariffs, reducing imports and shifting sourcing to emerging hubs like Vietnam and Mexico. Global companies soon started putting pressure on China to implement stricter environment and quality norms. The government there imposed penalties on over 80,000 units for breaching emission limits. It shut down or relocated nearly 1,000 plants near Yangtze river. Another factor was labour costs. Till 2007, labour costs in China were lower than in India. But from 2005 to 2015, they rose at 19-20% CAGR, as against 4-5% in India, according to Kearney estimates. "India has become the preferred manufacturing destination for companies across the world. Supply chain disruption during the pandemic has opened doors for Indian suppliers," says S. G. Mokashi, chairman, CHEMEXCIL (Basic Chemicals, Cosmetics & Dyes Export Promotion Council).

Covid's impact has been the most pronounced. When China went under a lockdown in FY22, U.S. emerged as India's biggest chemical trading partner. In dyes, India beat China in the U.S. market with exports growing 55% to $299 million. Chinese exports rose 4% to $289 million. In inorganic chemicals, India's exports grew 52% to $175 million. The U.S. also became the largest destination for India's organic chemicals (worth $1.52 billion, 62% more than in FY21). In agrochemicals, the U.S. became the second-largest destination after Brazil, as exports rose 39% to $1.1 billion.

However, after China opened up its economy and started clearing inventory cheaply, India's exports came under pressure. In FY23, they fell 21.21% in volume and 2.19% in value (to $23.78 billion) compared with 38.67% growth in value (to $24.3 billion) and 13.99% growth in volume in FY22. Export of major items such as dyes and organic chemicals fell in value terms while agrochemical exports fell in volume terms. A few sectors that continued to grow were inorganic chemicals (23.09% in value, though volumes shrunk 4.25%), dye intermediates (46.95% rise in volumes and 11.11% in value) and cosmetics and toiletries (22.01% rise in value), shows CHEMEXCIL data.

Renewed Speciality Focus

Despite the short-term blip, Indian companies continue to fight China tooth and nail. Take phthalic anhydride (PA), used in toys, water bottles, upholstery, paints, blood bags and water hoses, which China had been dumping in India over last few years. The Indian industry complained that PA from China was toxic. The government recently banned PA imports. One of the biggest PA makers in India, Thirumalai Chemicals, has now started building a PA and food ingredient–fine chemical plant at Dahej in Gujarat which will add 1,00,000 tonnes to its 1,50,000 tonnes capacity in Tamil Nadu. It will be operational next financial year. "We will become one of the largest producers of PA and some speciality chemicals in the world," says R. Parthasarathy, chairman and managing director, Thirumalai Chemicals.

Or take Deepak Nitrite, which grew revenues over four times from ₹1,689 crore in FY18 to ₹8,020 crore in FY23, thanks to its aggressive global strategy. India used to import phenol and its derivatives, about two lakh tonnes a year, mainly from China, Saudi Arabia and Korea. Deepak Nitrite smelt an opportunity and floated Deepak Phenolics. It invested over ₹1,400 crore to commission capacity for two lakh tonnes phenol, 1.2 lakh tonnes acetone, its co-product, and 26 lakh tonnes cumene. It is now investing ₹5,000 crore in Gujarat to make speciality chemicals phenol, acetone and bisphenol. "We aim to start the first phase in 2024-25 and complete the projects by 2026-27. This is a testament to our focus on import substitution through value addition," says chairman & managing director Deepak C. Mehta.

These two are not an exception. Take Ahmedabad-based agrochemical and pigment specialist Meghmani Organics Ltd. (MOL), which grew revenues from ₹699 crore in FY20 to ₹2,557 crore in FY23. Its next big focus area for growth is titanium dioxide (TiO2), a pigment used in paints, coatings, plastics, papers, inks, food, medicines and toothpaste. At present, imports, mainly from China, meet 70% of demand. MOL forayed into TiO2 by acquiring a plant and commissioning the first 16,500 MTPA phase in January 2023. Second phase will double capacity to 33,000 MTPA by third quarter of FY24. "We will become one of the major manufacturers of TiO2 with 29% capacity-wise share," says Jayanti M. Patel, executive chairman, MOL.

These moves — focus on niche areas and value addition — are helping India emerge as a major player in the global chemical market. Net exports of speciality chemicals are expected to rise around ten times from about $2 billion in 2021 to $21 billion by 2040, according to McKinsey. Almost 80% exports would come from four sub-segments — agrochemicals, dyes & pigments, cosmetics & personal care and food ingredient chemicals. India’s speciality chemical makers will grow faster than their Chinese competitors and increase market share from 3-4% in FY21 to 6% by FY26, says Crisil. Indian speciality chemicals segment is projected to grow 6-7% in FY24, it says, though China dumping inventory after Covid affected margins in FY23. "Last fiscal, revenue growth plunged to 11%, from 41% in FY22, owing to a steep correction in realisations in second half triggered by dumping from China," says Anuj Sethi, senior director, CRISIL Ratings. Speciality chemical segment will grow 18.4% in FY23, 19% in FY24 and 17.6% in FY25, says a Windmill Capital analysis.

Another high-growth speciality sub-segment is food and food ingredients. The $3 billion segment in expected to grow at a CAGR of 7-9% over next few years. Sodium and caustic could grow at 10% CAGR till 2040 to touch $13 billion and $11.5 billion, respectively. Similarly, fluorine market is expected to grow at a CAGR of 10% to $4.2 billion by 2040, benefitting companies such as InoxGFL's Gujarat Fluorochemicals and Navin Fluorine.

Agrichem Drive

The $5.5 billion agrochemical sub-segment is growing at a CAGR of 8.3%. By 2040, it is expected to account for almost 40% of India’s chemical exports and 13% global agri-chem market, says McKinsey. As per WTO, India became the second-largest seller of agrochemicals in the world in 2022 with exports worth $5.5 billion, surpassing U.S. ($5.4 billion), France ($4.1 billion) and Germany ($3.9 billion). China was far ahead with $11.1 billion.

UPL, PI Industries and Anupam Rasayan, leading global players in agrochemical and custom synthesis and manufacturing, are looking to use India's generic chemistry skills to dominate in off-patent products, which account for 75% of the $78 billion global agrochemical market. At least $4 billion worth of 20-plus agri-chem molecules are going off-patent in next two years.

However, for the first time in a decade, Indian agrochemical makers are expected to see a drop in revenue (by up to 3%) in FY24 as prices fall due to supply deluge from China, muted demand due to destocking by global manufacturers and weather conditions, says Crisil. "With global manufacturers restocking before the onset of the cropping season in Latin America and U.S. (which accounts for 55% of India's exports), recovery in overseas demand should begin from November 2023," says Poonam Upadhyay, director, CRISIL Ratings.

Capex To Continue

To leverage opportunities, chemical companies have been investing in new facilities and de-bottlenecking old plants over last ten years. They are expected to continue this with renewed vigour. Indian speciality chemical companies have planned ₹16,100 crore capex over next three years, says Naveen K.R., senior director, Windmill Capital. Candle Partners says capex of speciality companies is about 13% of revenues. It expects major capex from Tata Chemicals (₹1,580 crore), Aarti Industries (₹1,330 crore), Atul Ltd. (₹870 crore), Godrej Industries (₹830 crore) and Jubilant Lifesciences (₹810 crore) in 2023.

Aarti Industries is expanding ethylation (formation of a compound by introduction of the ethyl group) capacity at Dahej which is expected to come on-stream in first half of FY25. The company is planning to further debottleneck its nitro toluene (used in dyes) capacities and has lined up ₹3,000 crore expansion in FY24 and FY25. Gujarat Fluorochemicals is de-bottlenecking its PTFE (used to make teflon) capacity and expanding its fluoropolymer (for high-performer plastics) capacity by spending ₹1,250 crore in FY23 and FY24.

Vinati Organics is increasing capacity of its main product, ATBS, used in textiles, dispersants and additives, from 40,000 MT to 60,000 MT at a cost of ₹300 crore; it is expected to spend another ₹200 crore in FY25. Anupam Rasayan's FY23 capex was ₹170-180 crore. It is expected to be ₹500 crore in FY24 and FY25. Clean Science And Technology is investing over ₹315 crore in FY24 and setting up a greenfield project for HALS, used as a stabiliser in plastics and polymers. PI Industries management has given a capex guidance of ₹500-800 crore for FY23 and FY24.

The chemical industry has added approximately ₹93,700 crore ($11 billion) in market cap in last three years, though valuations have eroded 38% from peak, according to the Candle Partners study. There were about 18 IPOs during the period.

Petchem Focus

Another area where India is focusing is petrochemicals (petchem). There is a reason for that. India's current chemical trade deficit, $9-10 billion, is expected to balloon four times to $40-42 billion by 2040, says McKinsey. While exports are projected to grow at a CAGR of 9.5-10% to $140-145 billion by 2040, imports are likely to grow at 9–9.5% to $180-185 billion. Out of three segments — inorganic, petchem and speciality — only speciality is expected to be a net exporter. At $41 billion, petchem's deficit is projected to be almost twice as large as inorganic chemicals’ $21 billion. India's petchem sector is projected to grow about 11% per annum to $100 billion by 2027 and $350-370 billion by 2040.

The good news is that in the petrochemical production cycle, India has abundant feedstock for higher carbon building blocks — butadiene (C4), benzene (C6), paraxylene (C8) and orthoxylene (C8). However, for building blocks C1 (methane, formaldehyde, methanol and derivatives), C2 (acetylene, ethylene and derivatives), C3 (propane, propylene, acetone and other derivatives), it depends on imports for intermediates and end products derived from ethylene, propylene, methanol and toluene. Though China has created giant capacities in all petrochemicals, its growth will slow in next five years due to focus on speciality, whereas India will expand significantly, says a recent Moody's report.

Leading from the front are India's oil marketing companies (OMCs) eyeing net zero goals and reduced share of fossil fuels in revenue mix. Indian Oil Corporation is setting up a $7.4 billion (₹61,077 crore) petrochemical complex at Paradip in Odisha, its largest investment at a single location. Hindustan Petroleum Corporation is building a two-million tonnes petrochemical complex at its Barmer refinery at a cost of $8.7 billion by January 2024. Bharat Petroleum Corporation, which built a petrochemical complex at Kochi a couple of years ago, is planning an ethylene cracker at its Bina refinery at a cost of $5.9 billion. Oil and gas explorer ONGC is also diversifying into petchem. Its subsidiaries Mangalore Refinery and Petrochemicals and OPaL (joint venture with GAIL & GSPC) plan to increase capacity of its cracker units and enter into more petrochem products.

Demand for electric vehicle batteries and next-generation fuels like green hydrogen is also expected to boost India's chemical production. Several companies are getting into these segments. "We may soon see several green ammonia facilities ranging from 500-5,000 tonnes per day. Demand for green chemicals is also going to increase," says Rajesh Kamath, MD & CEO, ThyssenKrupp Industrial Solutions. Pramod Chaudhari, chairman of biofuel technology specialist Praj Industries, which is diversifying into green chemicals, agrees. ‘"We have developed technology to produce a bioplastic, polylactic acid, as part of our foray into a renewable chemical and material product basket. We will start the plant soon," he says.

Government is also creating a policy environment for growth. The new Petroleum, Chemicals and Petrochemicals Investment Region (PCPIR) Policy 2020-35 is targeting a combined investment of ₹10 lakh crore ($142 billion) by 2025, ₹15 lakh crore ($213 billion) by 2030 and ₹20 lakh crore ($284 billion) by 2035 in all PCPIRs. The four upcoming PCPIRs are expected to generate employment for 33.83 lakh people.

The government has also mandated BIS-like certification for imported chemicals to prevent dumping of substandard products and is working on a production-linked incentive scheme for the chemical and petrochemical sector. FDI inflows in the sector (other than fertilisers) were $20.41 billion between April 2000 and June 2022. Other major incentives include building end-to-end manufacturing ecosystems through clusters and chemical parks, IT exemptions, single window clearances and special incentives for SEZs.

With that kind of ecosystem, and India's inherent advantages in labour costs, technology skills and manpower, the well-established Chinese chemical dragons can expect a big battle from India's chemical sector.