The speciality chemical segment is going to strongly drive the chemical industry in India. The specialty chemical companies within the chemical industry sector are expected to thrive on domestic availability of raw materials, accelerated capital expenditure (Capex) to build product development capabilities and investment in Research and Development (R&D) for added traction in the sector. Increased R&D will allow these companies to step up their position in the speciality chemicals manufacturing value chain to become 'proprietary chemical producers'.
Speciality chemical companies will also look at import substitution along with export opportunities to further drive their business. As per a report on the Indian chemical industry by HDFC Securities, speciality chemicals are manufactured because of their performance or function and can be single chemical entities or formulations whose composition influences the performance and processing of the end product. These chemicals can be further subdivided based on end-user industries.
The HDFC report states that the companies supplying speciality chemicals to the pharma and agrochemical industries are expected to do well due to steady growth in these segments and stringent regulations that create entry barriers for competitors. Speciality chemical companies are also spending heavily on Capex to meet demand of industries in the pharma and the agrochemical sectors as they pose great growth opportunities, given the current pandemic situation.
Interestingly the Indian chemical industry is one of the fastest growing industries in the world. Currently, it ranks 3rd in Asia and is the 6th largest market in the world with respect to the output, after the US, China, Germany, Japan and South Korea. The industry's growth is mainly driven by consumption growth and export opportunity. The specialty chemicals industry can be subdivided based on the end-user industry into agrochemicals, dyes and pigments, personal care ingredients, polymer additives, water chemicals, textile chemicals and application-driven segments. These are the largest constituents of the speciality chemicals industry and cumulatively constitute over 80 per cent of the speciality chemicals universe.
As per the HDFC Securities report, the growth of speciality chemical companies will depend a lot on their ability to innovate. Indian chemical companies have augmented investments in R&D activities and India's share in the aggregate R&D spending incurred over the globe by chemical companies has grown from 2.7 per cent in CY08 to 3.3 per cent in CY18. The report also highlights that global trade conflicts that have erupted around the world, especially amongst China, the United States and Western Europe will further create opportunity for Indian chemical companies. The report observes that this has led to shifts in global supply chains, affecting bilateral trade between China and the US. China is the largest chemical producer in the world, contributing 35.8 percent of global chemical sales. Many downstream multinational companies that imported the bulk of their chemical requirements from China may consider supplementing this supply from elsewhere and large chemical markets that remain accessible in this scenario could present opportunities for Indian chemical companies.
A report by CRISIL also points out that Capex of specialty chemicals makers in India will jump by 70 per cent to almost Rs 13,000 crore combined in the two fiscals through 2020, compared with Rs 7,500 crore in fiscals 2017 and 2018 as they may find space vacated by the Chinese and due to healthy domestic demand, and improved operating rates. CRISIL observes that over the past two fiscals, China, which has a 20 per cent share of global specialty chemicals revenue, tightened environmental norms resulting in closure or shifting of capacities in 50 chemicals manufacturing clusters. More closures are expected in the Jiangsu province over the next two fiscals. This supply disruption and increasing cost of compliance for Chinese players have meant global end-user industries diversifying their vendor base, including tapping Indian players.
