Prasenjit Chakraborty

The chemicals industry, which has been growing reasonably at a quick pace and contributing about 3 per cent of India’s GDP, still remains fragmented and highly dispersed. If one were to review the progress over the last two years, it has been a period of consolidation, with expansion of existing capacities and addition of new ones.

The traditional major producers of bulk chemicals – North America, Western Europe and Japan – face challenges pertaining to feedstock availability, rising labour and energy costs and increasing environmental pressures. This has led to a gradual shift in the manufacturing base, benefitting countries like China, India and those in the Middle East.

The inorganic bulk chemicals such as the caustic-chlorine and sulphuric acid and downstream products, have witnessed significant changes in terms of increase in existing capacities as well as emergence of new ones. Some of the major consumers of bulk chemicals have turned manufacturers for their captive requirements. The domestic chloralkali market has been threatened by cheaper imports.

Moreover, weaker chlorine demand has driven most of the caustic soda manufacturers to operate at lower capacities and with reduced price realisations. Consolidation is seen in the industry, which is welcome, given the fragmented nature of the industry.

Economies of scale

India is yet to reach the economies of scale as far as bulk chemicals industry is concerned. “This situation is amplified by the fragmented nature of this industry in India. Just to cite an example, we have around 45 units manufacturing 8 million tonne per annum of sulphuric acid, which is manufactured by a few large units in Europe or the US,” said K Vasudev, president (aromatics division and bulk chemicals & intermediates division) of Atul Ltd.

The industry typically faces challenges when it comes to availability of feedstock at the right prices; cheaper imports; slower adaptation of new technologies; logistics-related issues such as availability of improved infrastructure and freight costs. Although there have been improvement in all these areas, the pace of reforms has been slow and needs acceleration.

According to HS Karangle, director general of the Indian Chemical Council, the chemical industry is slowly coming out of the recession, and for bulk chemicals industry in particular, there are certain issues that need to be resolved to facilitate its growth. Barring the fertilisers sector, the bulk chemicals industry, mostly falls in the SME category, and this is one of the stumbling blocks to achieve economies of scale. Another reason is energy cost.

“Many bulk chemical players are importing costly coal as a source of energy. Due to the high cost, domestic bulk chemicals manufacturers are not able to compete in overseas market. Low scale of operation is another reason for this. However, bulk chemicals industry is surviving because of the demand from the domestic market,” said Karangle.

Gradual reduction of duties from the sector is also hampering its growth. Dr Kishore M Shah, president of Indian Specialty Chemicals Manufacturers’ Association (ISCMA), strongly believes that the government should simplify the tax structure and the bulk chemicals industry should get energy and feedstock at competitive rates. “Since gas prices are shooting up, power that is generated from gas has become costly. The industry cannot afford interrupted power supply,” he pointed out.

Tough road ahead

In recent times, two major segments, which have been hit due to increasing imports, mainly from China, are soda ash and caustic soda, resulting in lower capacity utilisation. “In case of caustic soda, with an existing installed capacity of 29.22 lakh tonne, the existing 36 producers recorded an overall output of 22 lakh tonne at an average of 77 per cent of capacity utilisation. This has forced the local producers to cut prices leading to a severe squeeze in their margins,” observed Vasudev.

The immediate and prompt way to protect the domestic industry is to urge the government to levy anti-dumping duties on imports. Some of the chemical imports from China include caustic soda, soda ash, carbon black, oxon-alcohols, phthalic anhydride and several other chemicals.

It is important to note that imported chemicals are cost-effective. That is why capacity utilisation for many chemicals in India is not hundred per cent. The reason for this being the gradual reduction of duty from the sector. “It is because whatever protection was given by the government in terms of duty to the domestic players earlier has been reduced considerably over a period. This provides an opportunity to China as its scale of operation is huge. That is why we are finding it difficult to compete in international market,” lamented Karangle. According to him, providing protection on every front is not possible in the current circumstances. But wherever applicable, the government should apply anti-dumping duty; in this way the interests of domestic players could be served.

Import from China is not the only hurdle. The real challenge, today, is to create world-class manufacturing capacities in line with the growing demand in the country. “It is in this direction that the government policies should become conducive in building capacities. In the case of China, government regulations mandate only large-scale projects in bulk chemicals for approval,” pointed out Vasudev.

The overall infrastructure in the country is still inadequate, which also deters the growth. Another bottleneck is pertaining to the ability in manufacturing value-added downstream products made from bulk chemicals. Besides, assurance of feedstock for the sector is equally important. “Gas to the chemical sector is not guaranteed as of now. If we make provision for reserved gases for this sector, it would mean assurance of feedstock for the industry. If this materialises, we can expect investments in the sector,” opined Karangle.

At present the bulk chemicals industry is spending around 0.50 per cent to 1 per cent of its total turnover for R&D. It should be increased to around 4 to 5 per cent. Government support coupled with focus on R&D would take the industry to new heights, and this is the only way to compete with China.

Investment in technology upgradation

Many of the chemical plants during the licensing era were built to cater to domestic requirements. Lower per capita consumption did not encourage setting up of bigger plants, as a result they were not comparable in scale to global chemical plants. The protection era did not call for any major technology upgradation. However, post-liberalisation reforms have resulted in rapid changes in terms of investment and upgradation of technology. “India is second after Japan to have converted 93 per cent of its caustic soda capacity to fuel-efficient, green membrane cell technology, with plans to convert the balance capacities by 2012. Similarly, some of the soda ash manufacturers in India have world-class plants,” said Vasudev. Caustic soda sector may be an isolated example in the entire industry. However, a closer look says only a few companies have invested in technology upgradation. Many are sitting on the fence and waiting for the right opportunity.

When it comes to R&D, it is a low key affair for the bulk chemicals industry. Vasudev strongly believes that R&D contributions in this industry have to improve significantly in terms of new process development, improvement in process efficiencies, and new methods of effluent treatment & disposal. The major inputs expected from R&D would be on developing valueadded downstream products from bulk chemicals. “At present the bulk chemicals industry is spending around 0.50 per cent to 1 per cent of its total turnover for R&D. It should be increased to around 4 to 5 per cent. Government support coupled with focus on R&D would take the industry to new heights, and this is the only way to compete with China,” exhorted Shah.

What restricts the industry to spend higher amount on R&D? The overall production of the industry is quite small, and perhaps restricts players to invest in R&D. “The scale of operation in the industry does not allow substantial R&D investments. It is justified when scale of operation is increased and export has substantial share in the total production,” categorically stated Karangle.

Role of government

The Government of India should encourage setting up of mega chemical industrial estates based on green technologies. These sites would definitely enjoy significant cost economies in terms of common utilities, common effluent treatment plants, storage facilities, proximity to ports, etc. Such estates have already been established in countries like China, Singapore, Thailand and those in the Middle East. “Needless to mention that caustic soda plants being a powerintensive industry, electricity and utility charges need to be rationalised, so as to enable them to compete at an international level,” opined Vasudev. As suggested by some of the industry experts, import duty for membrane cell plant should be reduced, since these are not available indigenously. Most importantly, there has to be a significant improvement in basic infrastructure facilities, including modernised ports, chemical storage terminals and common effluent treatment plants. Implementation of the Goods and Services Tax (GST) will undoubtedly eliminate the current complexities in tax structure prevailing at the Central and state level. When threatened by surging imports, domestic industry would seek government intervention by way of anti-dumping duties or safeguard duties levied on the imports into the country.

Towards attaining ‘bulk’y growth

According to Vasudev, the Indian chemicals industry produces more than 70,000 products. Commodity chemicals continue to be the largest segment, followed by specialty, fine chemicals and agrochemicals. “The inorganic chemicals industry including products such as caustic soda, chlorine, sulphuric acid, etc is worth $ 2.5 billion, and is expected to grow at a rate of 10 percent,” he said. The industry is passing through a consolidation phase. Take the example of Aditya Birla Group’s recent move; it has bought Kanoria Chemicals. This is a welcome step in view of the fragmented and dispersed state of the industry. Consolidation is also necessary to achieve the economies of scale in manufacturing and better efficiencies. The industry would focus more on improved operating norms, making significant progress into value-added downstream products and addressing environmental concerns. One would also witness a trend wherein major users would backward integrate to manufacture bulk chemicals themselves in order to have an assured predictability of their input costs.

It is anticipated that the government policies would be favourable for the Indian manufacturers to build world-class capacities, enabling them to compete at international level and protect the industry from the surging imports through imposition of anti-dumping duties or safeguard duties. Increase in per capita consumption is expected to further accelerate the growth of the chemicals industry in India. Looking at the government’s move and industry’s willingness, it seems that the bulk chemicals industry will emerge stronger in the years to come.

Source: Chemical World