Historically, the EU and the US dominated the chemical industry, accounting for nearly 40% of global sales until 2006. However, the 2008 Great Recession shifted the landscape, allowing developing nations to surpass these mature economies. Over the past decade, the industry's epicenter has moved to Asia, with China emerging as the primary beneficiary.
China's manufacturing dominance has limited importers from seeking alternative suppliers, but India has consistently aspired to challenge this. Especially, in the chemicals industry, Where India has formidably contended, China's supremacy, vast resources, manufacturing capabilities, and cost advantages, in turn, reshaping the dynamics of the industry. India ranks as the 6th largest producer of chemicals globally and the 3rd largest in Asia, contributing 7% to the nation's GDP.
In 2023, the global specialty chemicals market was valued at approximately USD 627.7 billion with Asia Pacific dominating the with a market share of 20.46%. In India, this segment accounts for 22% of the overall chemicals and petrochemicals market, valued at USD 32 billion. Despite facing significant challenges over the past two years, including uncertain demand, inventory destocking, erratic monsoons, a weaker export market, and intense competition from China, India's specialty chemicals market is projected to grow at a CAGR of 12%, reaching USD 64 billion by 2025.
Rise of China in the Global Chemical Market
China’s contribution to global chemical sales surged dramatically from 24% in 2010 to 37% in 2018.
Several factors have driven this growth:
- Domestic market playing a significant role: Initially, the chemicals industry prioritised meeting the rapidly growing domestic demand. With the chemical sector being connected to specific sectors, such as automobiles, electronics, renewable energy, etc., it proved an advantage. Furthermore, Chinese production of many of these products is so large and growing so fast, that local chemical companies have an advantage by being close to their customers.
- Government Support: Favourable government policies, including subsidies and relaxed environmental regulations, have played a crucial role. Government support includes substantial subsidies, upgraded chemical parks, and the cultivation of select companies as national champions. Furthermore, China aims for fine chemicals to constitute at least 50% of its total chemical production, utilising foreign investment for technology transfer.
- Investment in R&D: Significant investments in research and development (R&D) have bolstered the industry's growth. Innovation is a key focus, with initiatives like the 2023 "Guiding Catalog for Industrial Structure Adjustment" promoting new materials such as low-VOC adhesives, water treatment agents, and electronic chemicals.
- Low-cost Resources: Easy access to low-cost capital and labour has made China an attractive production base for global chemical manufacturers. There's a concerted effort to relocate chemical refineries inland to reduce costs and population pressures, notably shifting operations from Jiangsu province to Inner Mongolia and Xingang, leveraging abundant coal reserves for coal-chemical projects.
These advantages have enabled Chinese chemical companies to invest heavily in both R&D and capital expenditures, outpacing their counterparts in the EU and Japan, where capital spending and R&D expenditure grew by only 1-2%.
Challenges Facing China's Chemical Industry
A shift in the global supply chain brought on by the China+1 strategy and a drop in domestic end-user demand, the Chinese chemical industry is facing several challenges that could slow its momentum:
- Economic Slowdown: China's GDP growth is projected to decelerate to 6-6.5% over the next 2-3 years, compared to the 8-10% growth experienced over the previous decade. This slowdown is expected to reduce demand for specialty chemicals from key sectors such as construction, automobiles, textiles, and consumer durables.
- Stringent Environmental Regulations: In 2015, China implemented stricter environmental norms, resulting in the temporary shutdown of 40% of its chemical manufacturing capacity in 2017 for safety inspections. This has increased the cost of production, especially for smaller, non-integrated plants.
- Rising Labour Costs: Between 2005 and 2015, labour costs in China increased at a compound annual growth rate (CAGR) of 19-20%, compared to 4-5% in India. This has reduced China's cost competitiveness in the global market.
Opportunities for India
India's chemical industry, valued at approximately USD 220 billion in 2022, is poised for significant growth, with projections estimating it will reach USD 300 billion by 2025 and USD 1 trillion by 2040. The specialty chemicals segment, which accounts for 20-25% of the overall chemicals industry in India, is expected to grow at a CAGR of 12-13% over the next five years.
Key Growth Drivers
- End-use Market Expansion: Growth in industries such as construction, textiles, automobiles, and consumer industries such as food processing, personal care and home care is driving the development of different segments in India’s specialty chemicals market.
- Raw Material Availability: Increasing availability of basic chemicals will support further investments in specialty chemicals. For instance, BPCL has added capacities to produce specialty petrochemicals derived from propylene.
- Industry Consolidation: Post-demonetization and the implementation of the Goods and Services Tax (GST), the Indian specialty chemicals industry is moving towards consolidation, which will enhance economies of scale and production efficiencies.
- Global Plant Shutdowns: Environmental concerns have led to the closure of chemical plants in the EU and China, creating opportunities for Indian manufacturers to increase their export share.
Challenges to Address
To fully capitalise on these opportunities, India must overcome several challenges:
- Infrastructure and R&D Investment: The lack of infrastructure and insufficient investment in R&D hinder the sector's growth. Increased government support is essential to provide feedstock availability and protect against aggressive imports.
- Infrastructural Development: India's chemical production infrastructure is still developing. More support in terms of fiscal incentives and the establishment of downstream units is needed to enhance production capacity.
There is a golden opportunity for India to enhance its global chemical export market share. With strategic investments, policy support, and a focus on R&D, India can position itself as a leading player in the global specialty chemicals industry. The growth potential in India's domestic market and opportunities arising from global shifts highlight the country's capability to become a major chemical manufacturing powerhouse.