BHUBANESWAR: Buoyed by increasing demand from end-user industries and tight global supply due to stringent environmental norms in China, the specialty chemicals sector in India is poised to grow in double digits, according to an India Ratings and Research (Ind-Ra) report released on Monday.
The implementation of strict environmental norms in China has reduced competitive advantages for Chinese firms, especially inefficient smaller firms that became unviable.
In 2017, an estimated 40 per cent of the chemical manufacturing capacity in China was temporarily shut down for safety inspections, with over 80,000 manufacturing units charged and fined for breaching permissible emission limits. The ratings firm expects the supply of major chemicals from China to remain subdued in FY19, favourably impacting volume and pricing for Indian exporters.
Moreover, additional investments by Chinese firms to comply with strict norms have increased their cost of production. Higher cost of production, along with the appreciating Chinese yuan, reduced their competitive advantage, thus benefiting Indian exports. Given the strong domestic demand for specialty chemicals, low cost of production, and availability of skilled labour, large foreign players are increasingly looking at India as an alternative investment destination.
The sector registered double-digit growth during 2013-17, supported by subdued oil prices and strong domestic and export demand. Ind-Ra expects companies operating in the sector to sustain their competitive advantage, given R&D investment and operational efficiencies continue to grow. The ratings firm expects sector profitability to be sustained in 2018 and, thus, specialty chemical companies can utilise their internal accruals and modest debt to meet capex requirements.
The Indian chemicals sector is a market worth about $160 billion, with specialty chemicals representing about 20 per cent of the value. “We expect the specialty chemical sector to grow by about 10 per cent annually to almost double the market size by FY25, driven by growth in end-user industries. A growing middle-class population with an increasing disposable income, strong export demand, and high domestic demand for construction- and agriculture-related chemicals will drive the sector’s growth,” said Prateek Goyal, senior analyst, India Ratings and Research.