28 z CHEMICAL NEWS APRIL 2017

OPPORTUNITY AREAS IN CHEMICALS FOR MAKE IN INDIA

MANISH PANCHAL CHARU KAPOOR NIHAAL JELKIE

INTRODUCTIONRapid growth of end use industries, changing lifestyle of consumers and rising discretionary income are driving the consumer industry, which have a trickle-down effect on their key enabler which is the chemical industry. To satiate the ever increasing demand for chemicals, net imports have risen at 26% p.a. from USD 2.6 bn in FY08 to USD 13.8 bn in FY15, while production has grown at 3.3% p.a. over the same period.

DISPROPORTIONATE RISE IN IMPORTSIndia is a net importer of chemicals since feedstock availability has historically been a woe of the

industry. As depicted in Figure 1, net imports of organic chemicals and plastics have steeply risen in the past decade largely driven by imports of products such as polymers,

methanol and petrochemical intermediates. Lack of adequate technology and skilled personnel to work with latest technology, gap in specialized infrastructure, relatively cheaper imports of certain products and unfavourable duty structures in some cases have been the major contributors to rising imports of chemicals in India.

The Indian petrochemical industry has been growing based on ethylene capacity additions around a limited number of oil refineries, unlike the US Gulf coast or Jurong Island where large chemical clusters with multiple crackers operate and manufacture intermediates and further downstream chemicals as well.

Fraught with challenges, majority of international companies have

Feedstock availability, difficult access to latest technology and unfavourable duty structures have led to muted investments resulting in a plethora of chemicals being imported in India across the value

chain. The net imports have risen from USD 2.6 Bn in FY08 to USD 13.8 Bn in FY15. Imports of several chemicals and polymers today are equivalent to a global scale plant output. With chemical demand shifting towards Asia, and China reassessing its chemical industry play, it could offer opportunities for chemical companies to invest selectively in India. To top it, government’s enhanced focus on “Make in India” and several states making Chemicals as one of the preferred industries will facilitate realizing such opportunities. To make the most of the USD 12 Bn opportunity in petrochemical intermediates, we believe companies need to reassess their business model & manufacturing footprint; say Manish Panchal, Charu Kapoor and Nihaal Jelkie of Tata Strategic Management Group.

26% 29% 9% 9% 16% CAGR

Net Imports of Chemicals FY 08 (USD Bn) Net Imports of Chemicals FY 15 (USD Bn)

7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00

1.33

0.94

2.02

0.570.35

6.62

5.70

3.71

1.04 0.99

Plastics & Articlesthereof

Misc Chem productsOrganic chemicals Inorganic chemicals Synthetic rubber &factice

CHEMICAL NEWS APRIL 2017 z 29

preferred to ship products to India, rather than develop / expand a manufacturing footprint within the country.

EXPANDING DEMAND-SUPPLY GAP IN PETROCHEMICAL INTERMEDIATESValue chain integration and strategic linkages are key to the overall attractiveness and economics of the chemical industry. Petrochemical intermediates are a major segment to ensure connectivity between upstream building blocks and the downstream

specialty chemicals. Despite surplus naphtha of over 7 MMTPA within the country, large quantities of petrochemical intermediates are still being imported. This has created disconnect between the petrochemical building blocks and the specialty chemical industry. As shown in Figure 2, the Demand-Supply gap for petrochemical intermediates has been rising at 12% p.a. over the past 5 years and stood at around 5.5 MMTPA in FY15. TSMG estimates this gap could exceed USD 12 bn or 11 MMTPA by FY20.

IMPROVING ECOSYSTEMTo reduce the high current account deficit, the government intends to increase the share of manufacturing from the current 16% of GDP to 25% of GDP by 2022. The

government has decided to make the 22 refineries in the country the nerve centres, while petrochemical complexes and crackers will surround them to diminish logistical and infrastructural issues. While commissioning activities in the Dahej PCPIR are underway, the other 3 PCPIRs (as depicted in Figure 3) are under various stages of planning.

Further, states like Gujarat and Maharashtra are providing incentives such as subsidized land costs and relaxation in stamp duty exemption on the sale/lease of land, power tariff incentives and special incentive

packages for mega projects. For instance, 2% subsidy has been offered to big industrial units with actual investments of up to Rs 100 crore by the Gujarat government. The government recently lifted the moratorium for existing and new projects in Ankleshwar and Panoli, prompting further investments in the region.

OPPORTUNITIES TO MANUFACTURE WITHIN INDIAToday, the per capita consumption of chemicals in India is amongst the lowest in the world. Hence, demand

3.1 3.9 3.6 4.1 4.9 5.5 MMT16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

–

FY10 FY11 FY12 FY13 FY14 FY15

Production Consumption Imports

9.810.9

11.312.2

13.013.7

5.85.3

4.54.14.2

3.3

6.7

8.28.18.17.7

7.0

30 z CHEMICAL NEWS APRIL 2017

will continue to grow, with the potential for selective manufacture under the Make in India Campaign. Plastics and organic chemicals could be interesting categories, with strong latent demand stemming from the flexible packaging industry, for instance. As depicted in Figure 4, several petrochemical intermediates and polymers are being imported in India in large quantities. Hence, setting up an economic size plant in India for some of these products could be a possibility. Needless to say, the practicality and viability need to be assessed and several factors need to be taken into consideration to ensure that a sustainable competitive advantage can be created. For selection of products and product groups to manufacture need to consider the following:z Global supply-demand: With Asia

becoming a strong manufacturing hub for chemicals, the cost benefit analysis of importing chemicals directly from these countries will need to be assessed. However, for a large number of chemicals, local demand itself has been growing in China, Korea and Taiwan. This poses challenges to the direct import of these chemicals since supplies from these countries could become expensive and irregular.

z Feedstock security: Availability of good quality raw material domestically or import at international parity prices needs to be ensured. Naphtha production in India has been rising over the years and is currently in surplus. In India, over 80% of ethylene and propylene is used for the manufacture of PE and PP and other related polymers. A cracker operator could thus reserve a percentage of its output of ethylene and propylene for the production of their derivatives. Further, benzene being the key raw material for aromatic intermediates, can be utilized entirely through domestic

production. Also, pyrolysis gas can be used as feed for the extraction of toluene and higher aromatics, which can then be used for the manufacture of aromatic derivatives. Regular supplies of raw material need to be ensured. Further, during economic volatility, companies should be equipped to process alternate feedstock such as petcoke gasification and biomass conversion.

z Regulatory environment: The impact of FTAs on imports should be evaluated for each product segment of interest. Thanks to FTAs signed with various countries, some chemical segments have inverted duty structures, making it cheaper to import higher value downstream products. Further, dependence on anti-dumping duties should be minimized. However, it is of interest to note that basic customs duty (BCD) on propane, ethane, ethylene, propylene, and butadiene is being reduced from 5% to 2.5%.

z Competition: Evaluation of the level of consolidation of the segment is key to assessing the feasibility of investment. Further, several products which are gradually being deemed as non-core in the western part of the world could be of interest in the growing Indian market. Assessment of technological

prowess of competition is also a key determinant. In addition, return on capital employed for existing players in India vis-à-vis global players would provide a sense of the competition within the industry and the attractiveness of venturing into a given segment.

z Downstream market attractiveness: There is a strong linkage of petrochemical intermediates with the market for specialty chemicals, which is the fastest growing segment in the Indian chemical industry. Being a key enabler, specialty chemicals are used across a large spectrum of consumption led industries, with segments such as automotive, construction, FMCG growing at a strong rate.

POSSIBLE OPPORTUNITY AREASTSMG’s preliminary assessment highlights several product groups for manufacture across the petrochemical value chain.1 Ethylene and Propylene

derivatives: With investments in gas concentration units downstream of FCCs, ethylene and propylene production can be enhanced and be used for manufacturing petrochemical intermediates like MEG, EDC, vinyl chloride and acrylonitrile which are currently being imported in

Import of Chemicals (KT; FY 15)

Typical Plant

Size (KT)300 1,150 750 600 200 350 300 200 120

1581

1045 1004

713618

465

318

200134

PVC PTA MEG Acetic Acid Styrene Ethylenedichloride

VinylChloride

Monomer

Phenol LAB

1800

1600

1400

1200

1000

800

600

400

200

0

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large quantities. The consumption has reached critical size in many C2 and C3 derivatives, with a few expected to reach an inflexion point in the medium term. This is an opportunity not only for specialty chemical companies but also for petrochemical players to integrate these derivatives in their value chain.

2 Butylene derivatives: With butadiene and butylene being chiefly available from steam crackers, PBR and MEK can be interesting products to manufacture. Butanol is largely imported in India but can be produced from propylene and thus be used for the production of a variety of end products such as butyl acetate and acrylates which are again imported.

3 Aromatic derivatives: The domestic market for aromatics is driven almost entirely by the demand for polyesters (hence PTA), polyurethanes and resins. Surplus benzene in India can be used for the production of benzene derivatives such as cyclohexane, cumene and nitrobenzene

which find wide application in polyurethanes, phenolic resins and nylon.There are multiple products and

segments that could be selected, but carefully crafted evaluation would help build a rational investment decision. The key underlying thread for each of the areas discussed, stems from the fact that refinery output need not be used solely for fuels but for creating much more value in the manufacture of further downstream products. This can further be corroborated from the government’s vision of investing in a large refinery complex in Ratnagiri, with output serving as feedstock for downstream complexes. This is an opportunity that large MNCs can address through co-investment with a refinery in India. There are medium to large scale refineries in India that could be willing to explore such a possibility.

CONCLUSIONThe rapidly increasing gap in intermediates deserves a close assessment to unravel right opportunities. If adequately

ABOUT TATA STRATEGIC: Tata Strategic Management Group, set up in 1991, is the largest Indian owned Management Consulting firm. We enhance client value by providing creative strategy advice, developing innovative solutions and partnering in effective implementation. ABOUT THE AUTHORS: MANISH PANCHAL Sr. Practice Head – Chemicals, Life Science & SCM , TATA Strategic Management Group Email: manish.panchal@tsmg.com CHARU KAPOOR Principal - Chemicals, TATA Strategic Management Group Email: charu.kapoor@tsmg.com NIHAAL JELKIE Associate Consultant - Chemicals, TATA Strategic Management Group Email: nihaal.jelkie@tsmg.com© Tata Strategic Management Group, 2017. No part of this document may be circulated or reproduced for distribution without prior written approval from Tata Strategic Management Group.

addressed, this will have a multiplier effect in specialty chemicals which is likely to cross USD 50 bn by FY20. India stands as a prospective investment destination as it remains an under-penetrated potential market with strong latent demand stemming from the consumption driven end use industries and a push through “Make in India” initiative. Various manufacturing opportunities across the chemical value chain exist which could be globally competitive and provide the right entry options to build sustainable businesses. Success will depend upon right selection of product groups, location, and guaranteed feedstock availability. Furthermore, building strategic partnerships would help in minimizing challenges related to infrastructure, complex regulatory processes, gaining technology access and reducing time to market. In our view, this opportunity could create a few new jewels in the Indian chemical manufacturing industry or position itself as a global dominant player in select areas if it is effectively exploited.