India Chemicals Blog

It is encouraging to read that Samsung Electronics is setting up a major export hub in India. A new plant, its second in India, is being built to produce 1.5m colour TV sets, 200 000 LCD Tvs and 300 000 LCD monitors with output targeted at Europe, the US and the Middle East. Currently, China is Samsung’s largest export hub where it has six manufacturing plants.

India’s consumption of most major chemicals is at least 4-5 times behind China and this is partly to do with China’s dominance in global trade. A rapid consumption growth is possible only if manufacturing in electronics and other industries migrates to India.

Will more companies follow Samsung? I think the process started a few years back though momentum has yet to build up. The process is likely to be slow and India faces stiff competition from Vietnam and other low cost destinations around the world.

Ever since the sub-prime crisis broke out in the US, questions have been raised on whether India can safely ride out the storm.

We have already seen the impact on the stock market and it is hard to imagine that India escaping unscathed if the crisis deepens.

However, some economists believe that the impact will be marginal chiefly because of India’s low reliance on exports and weaker linkages to the global economy when compared with other Asian countries such as Malaysia, South Korea and China.

Goldman Sachs estimates that a 1% drop in US GDP growth would shave off only 0.25% India’s growth.

At the other end of the spectrum, Morgan Stanley’s Chetan Ahya says the rise in global risk appetite had contributed to India’s growth. But if investors remain risk averse in the coming year, it would hurt India’s growth story by reducing the country’s access to risk capital and by increasing funding costs.

After enjoying the rewards of the Indian and global growth story, it is probably time to start worrying about the pain that an economic downturn will unleash.

India these days is not too slow to catch up with the rest of the world. The toy recall by US-based Mattel has prompted a Mumbai-based Consumer Welfare Association to file a public interest litigation asking for the ban on the manufacture, import and sale of all kinds of toxic toys.
The petitioner has also asked for a study to assess the levels of harmful chemicals in all toys sold in the market – those imported from China and those made locally. China accounts for 50% of the country demand.

While the petitioner should be commended on acting fast to protect consumer interests, I wonder if India has the required infrastructure to monitor contamination. And does it have the laws and the will to track and punish offenders?

China's problems with quality and chemical contamination are not new but rising global awareness could prompt companies to look at alternative sources of supply. India appears to be well placed to fill the gap. But doubts persist.

I asked a plastics converter last week if China’s quality problems represent an opportunity for Indian manufacturers to expand their presence in the global market. He was honest enough to admit that barring a few exceptions, Indian quality standards in the plastics sector are probably lower than that of China!

A few days back I had referred to China’s quality-related problems and whether this would turn out to be an opportunity for Indian exporters.

I believed at that time that it would take a few more months for the opportunity to emerge and that Indian manufacturers would have to work hard to be recognised as suppliers of quality products.

But according to this report in today’s Economic Times, global toy manufacturers and retailers have already started placing big orders in India.

Last week, Hanung Toys bagged a $150m order from Ikea and the company’s chairman and managing director is quoted as saying that there is a growing realisation in the West that Indian companies do not compromise on quality.

Do you agree?

India’s organised retail business has a long way to go before it catches up with the rest of the world. There is a lot of interest in this sector these days with all the big Indian companies, including Reliance Industries, lining up to grab a share of the retail pie.

So how big is the opportunity? I heard at a retail seminar last week that the share of modern self service outlets is only about 8% in big cities of India, way behind the average 49% for Asia.

Indian households spend about 40% of their income on food and personal care. The corresponding figure for the US and UK is 15%. A lower figure is better for retailers as it shows that households have the money to spend on other consumer products.

India has three modern stores per million people while Japan has the highest concentration of 692/million.

India has about 6.4m traditional grocery stories and only about 3,400 supermarkets. China already has over 60,000 modern retail outlets and traditional grocery stores account for about 68% of total trade.

In its quest for value addition, Saudi Arabia is aggressively marketing itself as an investment destination for the plastics industry. And processors from India are being wooed to set up shop in the Kingdom.

A delegation of Indian processors, just back from a visit, appeared impressed at what was on offer. The opportunities were discussed at a briefing organised by the Organisation of Plastic Processors of India (OPPI) earlier this week.

Plastics consumption in the Kingdom is currently about 1m tonnes/year as against production of around 7m tonnes/year. With polymer output set to spiral after the commissioning of new cracker complexes, raw material availability will not be an issue.

India’s construction boom continues and pipe manufacturers are steadily expanding capacities.

Finolex Industries has plans to double its pipes capacity at Ratnagiri, Maharashtra, in phases to 200,000 tonnes/year over the next three years. The first phase will see an expansion by 30,000 tonnes by end-2007.

In an interview with ICIS news, a senior company official also said that the company was looking at building a new facility in northern India.

Besides construction, the agricultural sector is also driving expansions.

Jain Irrigation has announced plans to invest Rs400-500m in a new pipe and drip irrigation facility in Tamil Nadu and another in north India in the next six months.

These expansions will fuel PVC demand in the coming years, which is currently growing at about 15%/year. Pipes accounted for about 70% of India’s PVC consumption of about 1m tonnes in 2006-07.

Indian PVC capacity of around 1m tonnes/year falls short of demand. Finolex manufactures 260,000 tonnes/year PVC at Ratnagiri, but it also plans to import 75,000 tonnes in 2007 and 120,000 tonnes in 2008.

Reliance Industries, the country’s largest PVC manufacturer, also started importing PVC this year.

The deficit is likely to continue as the only new plant on the Indian horizon is Chemplast Sanmar’s 200,000 tonnes/year project at Cuddalore, Tamil Nadu, that is due to be completed in mid-2008.

The deficit has stimulated interest in new PVC projects but viability has been hard to justify due to feedstock constraints. One company that had looked at building a plant based on imported VCM or EDC decided to drop the project because of stiff competition from Chinese carbide-based PVC. Another company, fresh entrant to the PVC business, has the chlorine but is unsure if the project would be viable if based on imported ethylene.

Reliance is of course in the best position to add volumes. It has ethylene in its system. Company officials have said that a PVC and chlor-alkali project are being evaluated. But we are still waiting for a formal announcement.

An interesting article in today’s Mint on how high natural rubber prices are forcing Indian tyre manufacturers to turn to synthetic rubber.

Natural rubber prices have risen by 13% since May as Indian production has been affected by rains and an outbreak of Chickungunya virus which affected the health of workers at rubber plantation in Kerala.

Natural rubber output is now projected to reach 743,000 tonnes for the year ending March 2008, down from last year’s 853,000 tonnes. Government officials have played down the impact of lost production citing sufficient stocks and healthy imports.

However, it appears from today’s report that the tyre industry has taken measures to alleviate the margin squeeze. Natural rubber is said to account for about 50% of costs for a tyre producer. And prices of synthetic rubber are on an average Rs6/kg lower than natural rubber.

The report states that the average ratio of synthetic to natural rubber was 79:21 last year. This has now changed to 74:26.

Despite India’s stellar economic performance there are signs that the country’s polyolefin surplus will not disappear very soon.

In a presentation at last week’s Asian Chemical and Petrochemical Conference, Raj Datta of Haldia Petrochemicals Ltd drew out three scenarios.

In the first case, India would have a surplus of 2m tonnes of polyethylene (PE) and 1.27m tonnes of polypropylene (PP) in 2011 if demand grows at 8%/year. The surplus would ease to 1.7m tonnes of PE if demand grows at 12%/year. And the surplus would disappear only if demand grows at 19%/year.

India will be adding about 5m tonnes of PO capacity over the next 5 years. There are capacity expansions by Reliance Industries, HPL and Gail. And the new entrants will be Indian Oil Corp with its new plants at Panipat and Oil and Natural Gas Corp (ONGC) with its cracker and derivatives complex at Dahej.

I am bullish on India but find it difficult to imagine sustained annual demand growth in excess of 15%/year.

A large chunk of the emerging surplus, especially for PP, will be with Reliance which is best placed to take on global competition. But what about the smaller Indian players and more importantly the many new projects that are in the pipeline. Will the financials of these projects work if a significant percentage of the output has to be exported?

This is one more reason why the various state governments planning the many petroleum and chemicals and petrochemical investment region (PCPIRs) need to look beyond commodity petrochemicals.

As for Asian and Middle Eastern companies looking to export to India, maybe it is time to rework those calculations.

Indian demand for caustic soda has been steadily expanding thanks to the alumina sector but investments in new chlor-alkali facilities are being held back by limited demand growth for chlorine.

As is usually the case, India’s low per capita consumption suggests immense opportunity for growth. India’s per capita chlorine consumption is only around 1.85 kg as against China’s 13 kg. This figure can grow only if the industry invests heavily in vinyls – the key end use market for chlorine.

Globally, around 39% of chlorine finds it way to the vinyls chain. The other big end-uses are isocynates and propylene oxide.

India imports around 400,000 tonnes of PVC annually but except for Chemplast Sanmar’s new plant due this year, no new investments have been announced. A big headache for prospective investors is securing ethylene at the right price.

The local market for many of the other end-uses is still too small to support worldscale investments. And unfortunately India has not been able to build a chlor-alkali hub which would link all chlrine users along the lines of what has been developed in Geismar, US, or Botlek in the Netherlands.

I think one Indian site that has the potential to develop as a chlorine hub is Dahej where Gujarat Alkali and Chemicals Ltd (GACL) plans to link its chlor-alkali facility with an investment in chloromethane in joint venture with Dow Chemical. Reliance Industries already has a cracker at the site and ONGC is planning one which should have ethylene to spare for a vinyls unit. All that is needed is to bring in a few more investors to complete the chlorine chain. Other chlor-alkali facilities at the site include one operated by Reliance Industries and a second being built by Meghmani Organics.

At last week’s one-day seminar on chlorine derivatives organised by the Alkali Manufacturers’ Association of India (AMAI), there were plenty of fancy charts and optimistic growth projections. But it was hard to detect any serious commitment towards new investments.

Reliance Industries is reported be looking at sourcing technology from India's National Aersospace Laboratories (NAL) to build a 4000 tonnes/year carbon fibre plant at Vadodara.

NAL had set up a 20 tonnes/year plant in Bangalore in 2006 with the material used for light combat aircraft, missile and space programmes.

Carbon fibre is certainly a good business to be in. The product is said to be short globally on increased consumption by the passenger aircraft sector, especially by Boeing and Airbus. Frost and Sullivan expect demand for carbon fibre composites from the aerospace industry to hit 35,800 tonnes by 2010, up from 7,260 tonnes in 2007.

Most of the big manufacturers of carbon fibre have lined up expansion plans. Toho Tenax, a wholly-owned subsidiary Teijin, plans to raise capacity by 1,700 tonnes/year at an existing plant in Germany by 2009.

The company had started up a new 2,700 tonnes/year line in Japan earlier this year. This line raised the company's total capacity to 11,800 tonnes/year. Toho Tenax has projected a 15% global demand growth in the coming years with consumption expected to exceed 40,000 tonnes in 2010.

Japan's Toray plans to invest $149m in the business to meet rising demand from aviation and industrial application. A new calcination and precursor line producing 1,000 tonnes/year of polyacrylonitrile (PAN)-based carbon fibre are due to come onstream in July 2009. This would boost Toray's global capacity to 18,900 tonnes/year.

Toray is increasing its PAN-based carbon fibre capacity at its plants in Alabama, US, and Abidos, France, both of which are scheduled to come online in December 2008. And the company would like to take its total capacity to 25,000 tonnes/year by end-2010.

Toray has also projected a 15% annual increase in global demand but its figure for 2010 is higher at 53,000 tonnes.

Cracks in the Chinese textile and clothing export machine have started showing with shipments to the US in the first quarter of this year declining by nearly 10% from the same period in 2007.

A new report from Textiles Intelligence states that the country is losing its competitive edge in this industry on the back of rising input costs, lowering of export tax rebates, new labour laws and other regulations and tighter credit availability.

At least seven Asian countries can now offer lower costs than China which are as high as $1.08/hour in the coastal provinces. In comparison, wage costs in Vietnam, Pakistan, Cambodia and Bangladesh average $0.38/hour, $0.37/hour, $0.33/hour and $0.22/hour respectively.

Additionally, the Chinese government is keen to move to a new economic model. This one will be focused on domestic consumption and exports of high value products. China clearly does not want to be a factory for the world for low end products.

A drift in textiles has in the past signalled the start of a wider change in global manufacturing. I have been increasingly coming across reports of companies looking at alternative locations for products ranging from plastic toys to leather goods. And a question that is also being asked is if the US can bring back jobs from China

China's diminishing competitiveness and is good news for Indian exporters if they can overcome the many hurdles standing in their way. Indian companies too face rising input and wage costs but probably not on the same scale as China. And the industry needs to find a skilled and productive workforce of the kind that made China an export powerhouse. And even more important, a supportive government policy would go a long way in helping the Indian industry expand its global market share.

Yet another sector is suffering from of the global economic turmoil. The export-dependent dyestuff industry is projecting nil growth this year, down from 20% in 2008, says this report.

Export orders have fallen by 50% in the last four months for this industry which ships about two-thirds of its output to the US, Europe, Northeast and Southeast Asia.

There is not much hope from the domestic market too. The $52bn Indian textile industry, one of the largest end-use sectors for dyes, has also seen orders fall especially from the US and Europe. The industry is expected to record a 5% decline in total exports this fiscal year.

A bigger worry is India losing its competitive edge to other Asian countries which offer more competitive wages.

India's apparel exports to the US dropped 11% in rupee terms during October to December last year. But apparel exports to the United States from Vietnam jumped 35% in dollar terms while those from Indonesia were up 8.44%. Even exports from Bangladesh were up 6.6%.

So the government has finally approved three Petroleum, Chemical and Petrochemical Investment Regions (PCPIRs). Now comes the difficult part. Who is going to undertake mega investments at a time at a time when the global economic outlook is uncertain, demand for key chemicals has crumbled and not many are willing to stick their neck out to make an optimistic forecast.

The three favoured locations for PCPIRs are Dahej in Gujarat, Nayachar in West Bengal and Visakhapatnam in Andhra Pradesh. Of the three, I think only Dahej is going to come up in the near future. And that is because the hub include ONGC's planned cracker and derivatives complex which has been in the pipeline for a few years now.

Hindustan Petroleum Corp (HPCL) is to be the anchor tenant at the Visakhapatnam hub with a refinery and petrochemical complex. But the outlook for this project is uncertain as one of the partner, Mittal Investment, appears to have backed out. The other partners in the project are Gail and Total.

The Nayachar hub has been described as the West Bengal chief minister's "showpiece project". But after the Tata debacle in Singur, it is doubtful if companies will queue up to invest in the state.

The approval for the PCPIRs comes barely a week after China's announcement of a huge stimulus plan for the country's refining and petrochemical sectors.

The Chinese government has promised construction of large-scale projects such as refineries and crackers. Details are still sketchy and it is not clear at this stage how many of the projects will be new and related to core petrochemicals.

However, I am confident in the Chinese government's ability to push through investments through Sinopec and PetroChina. Somehow, I can't see that happening in India.

If China's plan includes a lot of petrochemical capacities the country's dependence on imports will decline rapidly. At the same time, India's need for imports will grow going by current projections.

I was at the Plastindia trade show earlier this month and I was pleasantly surprised to see everyone quite confident about the long term prospects of the Indian plastics industry despite a disastrous Q4 2008.

I suspect the optimism was party due to the sharp recovery in prices in December and January.

Agriculture and infrastructure are expected to be tomorrow's growth drivers. Farmers have been making good money and are expected to spend more while the government is allocating more funding for agriculture including investing in irrigation projects that would support demand for pipes.

The old argument of India's low per capita consumption as an indicator of the country's potential was still doing the rounds. And so were projections of the country emerging as the third largest polymer consumer in the world by 2012. I really doubt this will happen as Indian demand is currently only around 5.5m tonnes. To reach the No 3 slot, demand would have to more than double to 12m tonnes over the next four years.

It's the turn of the Confederation of Indian Industry (CII) to highlight the threat of cheap Chinese imports. "The threat of dumping of cheap Chinese products in India is real and serious," says Venu Srinivasan, the new president of the CII.

This is something that's been worrying many Indian companies for a while now.

If demand from China's traditional markets continues to fall the country's exporters will have no choice but to turn to new markets and this includes India. Given the massive global scale capacities that China has built up over the last decade, exports from the country have the potential to wipe out Indian producers across a number of sectors.

The Wall Street Journal (WSJ) carried a good report last week on the rising trade tensions between the two countries.

"We've always said the world is large enough for India and China, but we have a problem with a surge in exports that hurts Indian industry. It's a cause for worry," said the Indian commerce secretary, Gopal K. Pillai, in an interview with the WSJ.

Pillai said Beijing subsidised exporters, obstructed Indian farm imports and supported Chinese companies who preyed upon vulnerable Indian industries.

India is said to have about a dozen antidumping cases against China outstanding at the WTO, including investigations into export surges of truck tyres and industrial chemicals.

India's synthetic fibre and fibre intermediate produces will be happy to know that the textile industry is likely to soon receive a number of incentives from the government. A stimulus package, due to be announced next month, would include subsidies on interest and additional funds for technology upgradation, says this report.

This is needed as other incentives announced by the government earlier this year have failed to revive the industry, says the Confederation of Indian Textile Industry

Textile exports have been declining since September 2008 and industry players have complained that the Indian government has not matched efforts put in by governments in China, Pakistan and Bangladesh to support local producers.

India's textile exports in fiscal 2009 were estimated to be around $22bn, a long way from the government target of $110bn in fiscal 2012.

The new textile minister appreciates the huge task facing the industry. He said recently that the industry needed an annual investment of Rs300bn to maintain growth momentum. He has promised a helping hand from the government - something that the industry has been seeking for a very long time.

I was at a Dow Corning press conference yesterday for the launch of an expanded Xiameter platform in India, another step in its effort to tackle commoditisation of the silicones business.

The no-frills Xiameter, a web-based ordering service, was launched a few years back as customers had become familiar with silicone products and were no longer interested in paying for expensive technical service.

Now as competition for standard grades gets stronger and more speciality grades turn into commodity, the number of products offered via Xiameter is being doubled to 2,100, nearly one third of the company's 7,000-strong product portfolio.

The successful Xiameter business model helps differentiate price-driven customers from innovators, explained Jean Paul Mollie, region president for India, Middle East and South Africa at Dow Corning.

While the Xiameter brand offers standard silicones at market prices, the Dow Corning brand offers speciality products and new applications for customers wanting customized solutions and technical support. Interestingly, nearly 40% of sales of the two brands is now web-based.

The expansion of the Xiameter platform illustrates an ongoing challenge facing speciality chemical companies. As no product remains a speciality forever how should companies handle commodity products without diluting the essence of the specialities business - innovation and service? Should portfolios be continuously reassessed to reduce focus on maturing products? How much time and money should be invested in developing new business models to maintain cost-leadership in commodity grades? How can commodity markets be serviced most efficiently? Is Internet the answer?

Mollie declined to estimate the size of the Indian market for silicones and would only say that the country was seeing strong double-digit growth. Dow Corning will be focusing on opportunities in the transportation, construction, solar energy and life science sectors in the country.

Dow Corning has a strong focus on solar power globally and has plans to expand capacity by 90% within the next four years. A new solar solutions application centre is being set up in South Korea to cater to the Asian market.