Preceding the EGM, SDC EC featured a lecture on the Indian chemical industry by Mr.Ravi Raghavan on 13th October 2018 at Textiles Committee with an attendance of over 25 members.
About Prof Ian Rattee
Paying tribute to iconic multifaceted Prof Ian Rattee (1926-2015), OBE in recognition of science and teaching and co-discoverer of Procion Reactive dyes of ICI with Dr.W.E.Stephen, Dr.K.S.Murthy spoke about his life and achievements leaving a proud legacy behind.
It was a proud moment for him when his mentor said that his first doctoral thesis was received through his hands. Head of Department of Colour Chemistry & Dyeing at the University of Leeds during 1962-87 with B.Sc, ARCS, FRSC, Chartered Colourist, 35 publications, 25 patents besides Gold Medal of SDC and Henry Milson Award by AATCC, USA. A voracious reader, fluent in German, Italian, French, Spanish and Russian, Passion for performing arts like Jazz, he was active in theatre almost till his last days. He attended SDC Silver Medal Award function to KSM in 2013 on the Day of Celebration at Bradford despite deteriorating health and supported him. He was laid back and informal with his students and encouraged their development. The rapport that many of his students were privileged to enjoy lasted through decades.
Introducing Mr.Ravi Raghavan, Mr.Sai Ganesh, Hon Chairman said he is distinguished alumnus of UDCT, B.Sc (Tech) in plastics, M.S. in polymer chemistry from Drexel University, USA, Editor and Publisher of Chemical Weekly since 1986, organised conferences and presented several papers on Indian chemical industry. He is Past President of UDCT Alumni Association and Hon Fellow of IIChE. He spoke on global chemical industry and role of China, current issues in terms of opportunities and challenges for the Indian chemical industry with examples in pharma sector.
Role of chemicals
150 years since chemical industry has been an essential industry. The broad based structure comprises basic, fine and specialty chemicals.
- Basic chemicals: Are of high volumes made in continuous plants (10,000 tons to a few millions of tons), cost structure is dependent on feed stocks, where the industry invests, and where projects are set up. Other than agrochemical and pharmaceutical industry, no new molecules are coming up due to various reasons including regulations. Business focus on bulk and fine chemicals is on manufacturing while in specialty chemicals, it is on application development and marketing.
- Fine chemicals: Sold based on molecular identity.
- Specialty chemicals: Related to product development, marketing and a formulated product used to solve the problem. There is a myth that they generate higher returns for companies, which is not true.
Economies of Asia
China, India, Japan and South Korea. China's GDP is 5 times that of India and 7-8 times larger in size. Global chemical industry was estimated at about $4 trillion in 2017 and China crossed $1 trillion in 2015 and is at $1.3 trillion now. India was $150-180 billion and $250 now. Variations are due to the inclusion of active pharmaceutical industry but not formulation industry, petrochemical industry and not refining industry. 12 of 30 biggest producers are in Asia (Japan, South Korea and China). In ranking, China is bigger than the next 6 countries put together in the world and Nafta and EU put together. According to Cefic, China is looking to move from “following the lead” to “taking the lead” and from a “big country” to a “great power” of the petroleum and chemical industry, leading on technology innovation and trade prevailing in international markets.
World capital spending
$76.5 billion spent by China in 2014 representing half the total amount invested by the 8 largest countries. The other is North America where investments are resurgent due to availability of shale gas. America has largest petrochemical investment program adding to 20 million tons of ethylene capacity over the next 4-5 years. Trade between USA and China is slowing down with consequent repercussions for the way molecules move around the world and that will have impact for India. Basic polymers, petrochemicals and PET which goes into making fibre film and bottles.
China expanded chemical production in the last 15 years with dominance in select sectors. China is 50% world capacity growing consistently for 15 years at 16% per annum. Demand doesn't grow at this level and capacity is incremental of plant sizes, which are huge for economies of scale. Glut of petrochemicals in many a value chain reflecting in capacity utilisation rates across the industry is downward which means prices tend to soften with squeezing of margins. The trend has been downward owing to build up that China has done.
World spending on R&D
Investment in China's R&D in 2014 was €9.1 billion, lower than USA at €11.1. They have innovated products on radical technology with new routes to make chemicals like ethylene and propylene from coal (coal to olefins). Gasify coal to make synthesis gas to methanol and crack it to make coal gas. They have plants built on indigenous technology developed by industry-research institutes partnership with strategic importance. Each of the project is valued at $2-3 billions.
Global chemical sales
World chemical sales are €3.223 billion. By 2030, 2/3 of global chemical sales will be in Asia. India's chemical growth during the last 10 years has been met by imports. Once China develops indigenous technology, for them to ramp it up, commercialise and take it to the market is simpler and they have come to dominate the world market. Vitamin C plants are forced to close because of China. Similar is the case for Xanthan gum and fermentation technologies which are not easy to do. It has 55% of global market for agrochemical like Glyphosate notwithstanding patent of Monsanto and Aspartame.
Transition from short to long
Capacity building is rapid. From 2000-2014, China has 29 million tons of PVC and they are an important player who makes it from coal using calcium carbide acetylene, vinyl chloride monomer, and million tons of epichlorohydrin. India imports 2 million tons from China; China has slowed down looking at CAGR from 1990 to 2014 and yet accounts for 62% of incremental capacity between 2014 and 2020.
Recent developments in China
There is a spate of plant closures. Environmental authorities have stepped up scrutiny and inspections of both domestic and international. MNCs have significant stake in China. Flouting law entails forced closure, fine and imprisonment. Several companies have been forced to lower their operating rates to avoid shut down with instruction that this area, estate and plant has only this kind of load that environment can bear. Yet another reason many plants are closing is due to vendors closing and a power plant was shut down as consequence of downstream chlor alkali unit. This has been seen in steel, coal-based power, and textile industry etc. In 30 major industrial parks, 1/3rd of chemical units have faced action.
China's environmental policy is to move chemical production to dedicated centres with infrastructure to treat industrial emissions prior to discharge with responsible care. They have created several clusters in zones far away from human activity to preclude risk of pollution from chemical industry. Manage the risk by managing exposure to mitigate the problem. Make investments to improve and resume operations.
- Are these measures here to stay? Yes. China has progressed to middle income country for environmental norms tend to get better and growth has been tempered from grow at any cost to grow with responsibility.
- Will this have impact for India's chemical companies? Yes.
- Do they pose opportunities to India's chemical industry? Yes.
Some are positive, and some are negative. It opens opportunities for Indian companies in global arena. Companies are dependent on China for several raw materials are re-evaluating supply audit. They look for vendors in alternate geography. They are also contemplating internal manufacturing in their own plants or neighbourhood like Western Europe looking for opportunities in Eastern Europe. They de-emphasise manufacturing, looking at sales, innovation and marketing and got out of manufacturing. Last decade evolved more of outsourcing and models in which they are managed even across the world. Chinese companies make necessary investments in technology to address the level of technical skills and innovation ability besides ability to take risks. All of this will entail a cost.
- Positive consequences: Healthier industry. Cost will have to be reflected into product pricing.
- Negative consequences: Disruption in supply chain in the short term besides price escalations in dye intermediates, pharma intermediates and APIs. It is difficult to pass it on to customer because pharma products are price controlled since government response mechanisms takes a year or two for them to react to price for feed stock or raw material.
India's Fine chemical industry
Seeing increased interest from Western companies for price economics. Producing something in Germany vis-à-vis India illustrated variations in fixed manufacturing cost, R&D cost, general sales and administration with 15-20% price differential.
India's pharma industry
We are about ½ to 2/3rd of the world's supply in generic pharma market. This is due to reliance on APIs and intermediates on imports. 75% of APIs and intermediates imported into India are from China since there are no manufacturers here e.g. para-Aminophenol for paracetamol and salicylic acid for aspirin. India produces 26,000 tons of paracetamol and imports 12,000 tons. Import of Intermediate para-Aminophenol is 30,000 tons.
Dependence on API imports
Percentage of imports from China are one hundred causing concern to government. Imports of 50% plus of top 16 pharma companies was shown and for any major API or pharma formulated product, they look at integrated manufacture of all the critical raw materials.
What should we do
- Make in India by building integrated value chain with world class technology and plants build to world scale. To compete, you need to have scale and competitiveness.
- Government is mooting PCPIR (Petroleum, Chemicals and Petrochemicals Investment Region) where they will have dedicated zone for oil refinery, naphtha cracker, gas plant and olefins, downstream complexes and speciality chemicals. PCPIR at Dahej is functioning. This is a model that every country like China, Singapore, Jurong island, Shanghai Park, Shenzhen etc for integrated operation to attract downstream industries and to develop a broad-based chemical industry.
- Creation of API parks to address the needs of pharma industry.
Indian fine and specialty chemical companies have solid results and sought attention from capital markets. 65 research analysts came to hear the address for tracking the non-petrochemical chemical industry. IPOs in this industry is tough. Unicorn in pharma and Fine Organic Industries are excellent IPOs. This attractiveness provides companies access to capital market and find new projects, expansion and acquisitions.
How can people help
Customers have role to play.
- Manufacturing initiative needs to be supported by domestic consuming industry with the vision of India as integrated and competitive supplier of chemicals.
- Strategic thinking into purchasing.
- Long term security and comfort in local sourcing and collaboration, we must be together. - Dependence of one country in the handful of suppliers neither predictable nor understandable and repercussions are hard to understand, and you are engaged with customers and buyers.
Mr.Ravi Raghavan concluded with learnings from the Chinese
- Action to build business from core competence like technology, raw materials, customer intimacy.
- Find where MNCs are making exceptional returns. Focus on R&D, market resources against it and leverage local knowledge.
- Establish an R&D ecosystem, collaboration with academia and research institutes.
- Invest in talent, continuation in education, online courses to keep the learning going.
- Maintain the entrepreneur spirit.
Q & A: Mr.Ravi Raghavan fielded the questions with viable answers, clarified doubts, cleared misconceptions and offered advice.
- Paracetamol and Aspirin
China focus on non-regulated markets for price considerations whereas India penetrated regulated markets like USA, Western Europe and Japan with value chain from API into formulation and companies like Dr.Reddy's; Sun Pharma, Glenmark have front end businesses for formulations and that is something which Chinese lack.
- Dicyandiamide (DCD), Epichlorohydrin and Acrylic acid. China imports steric acid for Alkene Ketene Dimer (AKD) and have captured the globe.
No single plant of DCD in India due to large capacity being produced in China and import duty of 7½%. Small plant for epichlorohydrin which is not of economical size and could not compete regardless of China. No Free Trade Agreement with China and RCEP (Regional Economic Cooperation Plan) agreed for Free Trade with rest of the Asian countries, China would be treated independently. In caustic soda they have taken a different route with need for quality standard. India is making by Membrane Cell process and China by Mercury Cell.
Industry negotiated with DIN Standard for sale in India keeping China out. Regarding AKD, there is a threat which is to be diminished for opportunities.
- America versus China, any advantage with levy of 30% tax.
Chemical industry flows will be affected and there will be impact. If China doesn't buy from America, materials like polymers and ethylene derivatives must go somewhere and such direction will play in some time. To other places, they must move HS (Harmonised System) code and show value addition.
- How Academic University and Research institutes help Chinese industry's growth?
Phenomenal with solid relationship between industry and research institutes and Dalian Institute of Chemical Physics developed MTO technology and Membrane Cell caustic soda technology. Fermentation e.g. Xanthan gum. Collaborations are game changers.
- Pharma industry--Indian has done better than Chinese. They have scored in the areas of APIs and intermediates and in formulated pharma space we have done better and India's perception in global market is better and ranks behind software industry and how West perceives Indian produce.
- PCPIRs are model for growth--They are right models for development and growth. PCPIR, cluster, chemical park means the same thing. A place set aside for chemical industry development. Availability of utilities, feedstock, infrastructure to set up plant with focus on manufacturing. There are 6 PCPIRs of which only Dahej is functioning at present.
- Who are the competitors to India in fine chemicals? In fine and specialty chemicals, chemistry is intensive. The opportunities are India and countries in Eastern Europe like Czechoslovakia, Rumania, Poland, Spain and Portugal.
- Customer relationship building and governments support We have been largely insular and now started looking at opportunities elsewhere. For infrastructure like land allocation, zone to make product, utilities, road, ports, government support is needed barring subsidy.
- Indians and Chinese are coming together with companies operating at both countries. How far is this model going to evolve trade?
They are not coming together. Chinese companies are opportunistic everywhere and making inroads. Mr. Ravi differed on what we can do collaboratively with China and partnerships have not been successful. Take advantage of situations like what we have today and raise prices and margins with or without China.
Yet another shock that China has given the world is their decision to stop importing waste (millions of tons of waste material, metals, aluminium, paper, plastic, glass etc.) and there are repercussions especially on petrochemical and pharma industries.
Dr. K. S. Murthy,
Pidilite Industries Ltd.