Anubhav Sahu Moneycontrol Research
A potential lowering of import tariffs by China for Indian chemicals is a positive and doesn’t seem to be a chip off from the US-China trade war. China’s own strategic interest, supply-side reforms, focus on higher value added chemicals are key imperatives behind such a scenario.
China to open market for commodities and basic chemicals
One of the key issues flagged by India during bilateral talks with China has been its burgeoning trade deficit. China is India’s biggest import destination and among the first three export destinations. Of the $162 billion trade deficit India witnessed in FY18, 39 percent was on account of China. In FY17, this share was as high as 47 percent.
In earlier talks, India has been asking China to further open up for Indian products like IT and pharmaceuticals. During the India-China strategic dialogue in April and Wuhan informal summit, India made a case for higher export of agro-commodities and pharmaceuticals to China.
Earlier this month, China announced it would cut import tariffs on goods from India and certain Asia-Pacific countries (South Korea, Bangladesh, Laos and Sri Lanka). Trade goods reportedly targeted are soyabean, chemicals, agricultural products, medical equipments, textile, steel and aluminium products.
Chinese move politically timed but strategically needed
This may be as timely as it can get. China has recently targeted some commodities imported from the US to ratchet up the tariff trade war. Duties imposed on these commodities are important inputs for various streams like animal feed and plastic processing industries. It also indirectly aids in implementing supply-side reforms by import substitution as China’s clamps down on pollution emanating industries. This also suits China’s strategic interest as it wants to invest more in high-tech industries. Read: China trade war no winners
Key chemical manufacturers to gain
Major chemical that India export to China are p-Xylene (para-xylene), o-Xylene (ortho-xylene), benzene, ethylene glycol, linear low density polyethylene (LLDPE), dyes and pigments. Interestingly, basic chemicals are skewed towards aromatic chemicals and used for making polyester, PET (polyethylene terephthalate) products, dyes, plastic goods. Of the chemical products exported by India, China is the major export destination. Lower tariffs would further consolidate India’s share of the Chinese import market.
Top chemical exports to China
Top exports to China
Data from the Department of Chemicals & Petrochemicals suggest that in case of most major chemical exports to China, production capacities are at optimum levels. Here p-Xylene is an exception as capacity utilisation was sub-optimal in FY17 and likely to improve from here on. At present, Reliance Industries stands to benefit as it is the biggest manufacturer with more that 60 percent of domestic capacity. Upcoming petrochemical projects (HPCL-Mittal energy, GAIL's Andhra project, Ratnagiri refinery) are expected to meet latent demand.
Where are we placed in the chemical value chain?
To what extent are value-added derivatives of basic chemicals, discussed above, exported back to India. Is the quantum enough to nullify the forex gained in first stage?
If China and other emerging countries are focusing on chemicals higher up in the value chain and relegating supply of basic chemicals to countries like India, then the latter is not participating to its full economic advantage.
In FY17, India’s net export of o-Xylene was worth Rs 601 crore and net import of phthalic anhydride was Rs 276 crore.
In CY11, there was a dip in these numbers partially due to imposition of anti-dumping duty on phthalic anhydride, which prevailed till CY17. While this duty has extended to CY18 end, Thirumalai Chemicals’ FY18 annual report indicates that lifting of anti-dumping duty on phthalic anhydride could be premature.
Plasticisers value chain
Import and export of phthalic anhydride and o-Xylene (tonne)
Similarly, there are other set of chemicals, like epoxy resins, which are derived from some of the basic chemicals sourced from India but are facing anti-dumping duty as they are imported to India. Going forward, duty protection that the value-added chemicals now enjoy can go down in light of this development.
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