India Chemicals Blog

Jubiliant Organosys' announcement that it has clinched deals worth $60m from global life science majors reinforces India's growing strength in the custom research and manufacturing services (CRAMS) business.

Rising competition and research costs are supporting the CRAMS outsourcing wave and beneficiaries include Shasun Chemicals, Nicholas Piramal, Divis Lab and Dishman Pharma.

A report in the Financial Express estimates that the Indian CRAMs business is growing at 25-30% annually with local companies investing in new facilities to capture a bigger share of the $35bn global CARMS business. And opportunities abound as drugs worth about $85bn are expected to go off patent in the new few years.

Jubilant Organosys $123m acquisition of US-based Hollister-Stier Labs further consolidates is position in the global custom research and manufacturing (CRAMs) business.

Interestingly, Jubilant will not be moving projects to India following the acquisition. In an interview with CNBC, Hari Bhartia, Jubilant's managing director, says the company will be looking at expanding the Hollister-Stier facility and using it to grow in the US market.

Bhartia also dismissed talks of the all-cash deal being too expensive pointing out that Hollister-Stier's CRAMS business has been growing at almost 40%. The purchase price values the transaction at under 11.2 times Hollister-Stier's 2006 earnings.

With an estimated annual growth of 25%, the Indian contract research and manufacturing services (CRAMS) sector is attracting global attention. Globally, drugs worth $70 billion would be going off-patent by 2011 and Indian companies providing contract manufacturing services are expected to grab approximately 30-40% of this opportunity.

It is still early if Indian companies can dominate this sector but this report interesting as it outlines the country's strengths and strategies being adopted by the sector's top players.

Looking for a high-paying job? How about investing in a PhD degree first?

The Indian R&D sector is booming and so are salaries even as companies struggle to find scientists. The boom is being led by the pharmaceuticals sector with both Indian companies and multinationals expanding their R&D units to take advantage of India's scientific talent.

This report in the Business Standard says salaries in the range of Rs10-40m ($240,000-$975,000) are being paid to leading scientists in pharmaceutical companies. Salaries are steadily heading to international levels.

At this rate, how long will India enjoy the cost advantage? Not many years, I suspect. India cannot, in the future, rely only on cheap talent to draw R&D business from the West or even China.

I know innovative solutions are needed to manage the talent squeeze in India. And trust Reliance Industries to find one.

According to this report, the company is now turning to its employees to fill the vacuum. Faced with a shortage of pilots to run its proposed cargo airline, Reliance has turned to its young employees and children of its older employees.

The offer is to train them and in return they would have to sign a bond to work for the company for five years. If the candidates do not join Reliance after the training or leave midway, they would have to repay the training cost which is an estimated $75,000.

The offer does not yet extend to fund education of chemical engineers. But maybe Reliance and other companies should start thinking in this direction.

India takes great pride in its large pool of scientists – said to be the largest in the world. But did you know that domestic R&D spending has never exceeded 1% of GDP. And 75-80% of the country’s R&D spend comes from the public sector.

A thought provoking report from the World Bank highlights the state of innovation in the country.

The report states that only 10-25% of general college graduates are suitable for employment and only 17% of people in their mid-20s and older have a secondary education.

Local companies lag behind in R&D spend. Of the top 50 applicants for patents in India between 1995 and 2005, 44 were from foreign companies. Only six were from Indian companies while the rest were by public institutions.

The authors of the report suggest that competition spurs innovation. Private sector R&D spend increased rapidly since the opening of the Indian economy in the early 1990s. In 2004, private sector R&D spend was more than seven times higher than in 1991.

R&D spend in the chemical sector has also been gradually rising but Indian companies still have a long way to go before they can catch up with the western counterparts.

Indian companies in the contract research and manufacturing services (CRAMS) domain appear to be doing well as is reflected in the stock market performance of these companies.
The list includes Divi’s Laboratories, Dishman Pharmaceuticals & Chemicals, Nicholas Piramal, Shasun Chemicals & Drugs, and Jubilant Organosys

This report in today’s Economic Times highlights that CRAMS companies’ shares have risen by 19% in the last three months as against a 4% increase in shares of generic pharmaceutical companies.

According to Frost & Sullivan, the contract services market revenues for 2006 were an estimated $895m or about one-sixth of the Indian domestic industry with an annual growth of 43%. The market is still in its growth stage and is expected to grow at around 34% between 2007 and 2013. Contract manufacturing accounts for 70% of this market, while clinical research and contract research account for respectively 16% and 13%.

A financial analyst estimates that India now accounts for 3% of the global CRAMS market which will touch 10% in the next 10 years. Indian generic pharmaceutical companies are reeling under price pressure but the outsourcing sector is still going strong.

It is good to note that the Indian government is looking to boost R&D spend in the chemicals industry.

According to this report, agro chemical companies would be given an income tax exemption to the extent of 1.5 times their annual R&D expenditure. The benefit will be available to all locally done research by multinational companies. This scheme is currently available only to the pharmaceutical industry.

Indian chemical companies need to get serious on R&D and innovation to effectively compete globally.

There has been some debate on how much companies should expect from innovation. Mckinsey has undertaken research on whether R&D investments have translated into returns that would meet investors’ expectations.

The model used included R&D and capital expenditure costs, a molecule’s life cycle from launch to maturity, associated peak profitability and eventual erosion. On this basis, to achieve break-even return a business unit would need to see 5-9% of its sales derived from products introduced in the past five years for every 1% of its sales invested in product-related R&D. In process-related R&D, every 1% of sales invested should achieve a 2-5% reduction in total production costs.

The consultancy applied these criteria to 27 chemical businesses from Europe, North America and Asia. The research showed a rather disappointing return-on-investment performance: 60% of the chemical companies failed to generate positive returns from their R&D investments, while another 20% earned only a marginally positive return. Only 20% companies succeeded in generating a substantial return.

India’s success in the global custom research and manufacturing services space (CRAMS) is well documented. And the untapped potential is huge especially as western pharmaceutical companies remain under pressure to cut costs.

According to one estimate, the global manufacturing outsourcing opportunity is likely to grow from US$20bn in 2006 to US$31bn in 2010. The global contract research opportunity is expected to expand from US$14bn to US$24bn during the same period.

India has a minor share of the global market and is well positioned for growth if companies can successfully overcome the challenges coming their way.

A recent report by KPMG on the pharmaceutical and CRAMs segment highlights training and infrastructure as one area.

“Education pertaining to contract research, including discovery services and clinical trials, needs to be given high priority. An adequate physical infrastructure coupled with specialised training and an industry wide accreditation system will help balance the demand-supply equation in this rapidly growing industry,” says KPMG.

The other issue that needs attention is compliance of intellectual property rights. “Issues related to data exclusivity and confidentiality are still areas of concern for most clinical trials sponsors. Stronger IPR compliances will instil greater confidence in multinational pharma companies will further boost the CRAMS segment,” says KPMG.

How big is the opportunity for Indian active pharmaceutical ingredients' (API) manufacturers? Here is an estimate presented by Satish Khanna, group president, API, Lupin Ltd, at the Speciality Chemicals Conclave in Mumbai last week.

To develop his estimate, Khanna first examined the health care spend in India vis-à-vis developing and developed countries. The per capita spend in India is only $22 as against $54 in China. The average spend for Brazil, Argentina, China, Egypt and Hungary together is $212 which indicates the potential for growth in India.

Healthcare spend in India is currently about $26bn and can grow to $100-300bn by 2015. If we take the midpoint ($200bn) and assume that the pharmaceutical market is 25% of the health care market and the API component is 30% of the pharmaceutical market, then the API segment has the potential to grow to $12bn by 2015 from about $2bn in 2007.

Khanna expects 80% of API demand to be met locally, which would result in a $10bn market.

But this excludes the outsourcing opportunity which could be as much as $10bn, says Khanna.

With most Indian API companies operating at full rates there is a need for new capacities. However, companies are currently dealing with many challenges including rising raw material costs as a result of high oil prices, manpower shortage, appreciation of the rupee against the US dollar and the over dependency on imports of key chemicals such as sulphur and phosphorus.

The EU has included many chemicals, petrochemicals and plastics in the negative list that is part of the FTA discussions. Products on the list would not get any duty concessions.

The move is a major obstacle for Indian companies eyeing the European market for future growth.

But it is early days yet as discussions on the FTA are in the initial stages. The industry still has the chance to lobby against the inclusion of chemicals on the negative list.

I have often talked about the resistance that new chemical projects are likely to face in certain parts of the country. Cuddalore in Tamil Nadu is also on the list.

I recently came across the SIPCOT Area Environmental Monitors website that lists out environmental problems in Cuddalore which allegedly are the result of chemical manufacturing operating in that area.

A citizens’ movement has also been formed to deal with problems arising from air and water pollution.

The website goes beyond Cuddalore to cover other chemical zones in Tamil Nadu. The most recent news update on the site is about fishes dying in the river Kaveri at Mettur, the site of Chemplast Sanmar’s PVC facility.

Chemplast is also building a new PVC facility in Cuddalore . At least that project appears to be on track for completion in the second half of this year

Business is booming in India’s custom research and manufacturing services (CRAMS) industry thanks to the country's strong process chemistry skills, low operational costs and the availability of a skilled workforce.

Frost & Sullivan values the Indian CRAMS market at $890m, and expects it to expand by 40% in 2008. It estimates the market for outsourcing in the pharmaceutical and biotechnology industries at $100bn in 2006, which is likely to reach $168bn by 2009. Manufacturing of active pharmaceutical ingredients (APIs) was the largest contributor, followed by clinical research and drug discovery.

But the rapid growth has created many challenges that are testing the management skills of the 25 or so Indian companies in the CRAMS space.

Wages are rising by 15-20%/year and are likely to continue at that pace for the next two to three years.

Despite India's large pool of skilled labour, getting the right people is a big problem. An even bigger problem is retaining them. This is a major issue in the contract research area, as it can impact sponsors, says Shivani Shukla of Frost & Sullivan. Knowledge management has become critical.

In addition, global acquisitions in the last few years have resulted in the need for a new breed of managers - those with a global vision and the ability to understand different cultures.

With job-hopping becoming common, companies are being forced to hike salaries to retain employees rather than reward them for performance, says Jai Hiremath, vice chairman and managing director of Hikal, which recently signed a deal with the US's Pfizer for manufacturing APIs.

The government needs to invest more in education while industry, too, must make chemistry an attractive choice for university students. A recent research study showed that only 15% of school students chose to pursue science in 2006 - down from 32% in 1950.

The other issues confronting Indian companies include the appreciation of the rupee, rising costs, and managing the supply chain, particularly from China. Many India companies rely on China for supplies of intermediates and the supply chain was badly hit last year after the Chinese government introduced a number of new policies.

There is also a fear that Indian companies may be getting overconfident.

If one company slips up on quality, resulting in product recalls, it could create a backlash similar to the one China experienced last year. There are people waiting to say that India supplies cheap products by cutting corners, says a second source.

Despite global success and around 80 US Food and Drug Administration-approved plants in India, there is a still a perception that Indian quality is not good and that operations in the country are too bureaucratic. Companies have to fight it out, advises Shukla.

Industry players are clear that they can no longer rely on cost arbitrage for growth.
"To some extent, the US and European companies understand the cost structure of the service providers - quality and project management are critical," points out Bharat Shah, president of Calyx International, a manufacturer of APIs and intermediates that entered the CRAMS space in 2001.

Comparisons with China are inevitable as China is picking up faster than expected and Indian companies better watch out.

China's strength in contract manufacturing of APIs is likely to continue. But Chinese companies are also extending their reach by building capabilities in biologics, bioinformatics and molecular biology. As Chinese companies do not face regulatory issues on the use of higher animals for tests, Shukla expects China to play a big role in supply of biology-based services.

However, one industry source points out that China has its own share of problems.
"The country has good process chemistry available and companies are strong in running their plants. But there is a lack of financial clarity. What will happen if the government subsidies go away?"

He believes contract manufacturing for products with low value addition will go to China, while companies seeking value addition will make their way to India.

Despite these challenges, the overall mood is one of optimism.

Shukla foresees expansion in new areas, including contract manufacturing of injectables, which is currently a minor segment because of the need for sterile facilities and specialized technical knowledge.

And biology-based services are gaining momentum as is evident in the rapid rise of companies such as UK gel documentation firm Syngene, integrated systems biology platform company Avesthagen and biotech firm Reliance Life Sciences, both of India.

The next three years will be good for the industry, says Shah of Calyx.

"There is significant room left [for growth]. The R&D [research and development] budgets have not been fully exploited by India and China," he says. "There will be competition and Indian companies will have to figure out a way to differentiate."

Some strategic shifts are already evident, with Indian majors moving up the value chain and entering into partnerships involve early-stage licensing and risk sharing.
Nicholas Piramal India Ltd (NPIL) signed an agreement with US pharmaceuticals giant Merck last November to carry out an integrated drug discovery program that would give the pharma giant an option to advance the most promising drug candidates into late stage clinical trials and commercialization.

NPIL will be eligible for payments on completion of certain milestones and royalties on sales of any products resulting from the collaboration.

Have Indian fine chemical and pharma companies been too hasty in their global acquisitions?

I had been hearing talk of some companies running into integration problems or having second thoughts on perceived benefits of their acquisitions. But today’s report that Matrix Labs is exploring sale of Docpharma suggests that there is some basis to all the talk.

Matrix had acquired Belgium’s Docpharma in 2005 for $263m – the largest India pharma acquisition at that time. Docpharma and the other subsequent acquisitions by Matrix were expected to help fill up the missing gaps in its portfolio.

But soon after the Docpharma buy, Mylan Inc picked up a 71.5% stake in Matrix and Docpharma does not appear to fit in Mylan’s plans for the future.

Will this be the start of a new trend with Indian companies emerging as sellers rather than buyers?

India is seeing a rapid growth in the outsourced R&D business but the country still trails behind China and much of the developed world in this sector.

This was evident in the numbers presented by the science and technology minister to the parliament yesterday. India has 150,000 researchers compared with China’s 800,000-1m.

The number of researcher per million of population is only 156 for India, way behind 7,000 in Scandinavian countries and 4,700 in the US.

India’s R&D spend as a percentage of GDP is only 0.8% compared with 3% for developed countries.

And despite growth in business, the private sector trails behind the public sector which accounts for 80% of R&D spend in India. This is vastly different from US and even China where the public sector share is only 30%.

The government also appears to have recognised the need to improve the education system to produce more researchers. Funds allocated to scientific departments during the 11th Plan period (2007-2012) have been raised three fold to Rs753bn (US$19bn).

For more on Indian R&D, I recommend this report. It reviews major developments and identifies future prospects for this sector.

Hikal is busy consolidating its position in the Indian CRAMs (contract research and manufacturing services) space.

It recently secured a long-term contract with Bayer CropScience for supply of active ingredients for crop protection chemicals. And now Hikal plans to invest Rs 2bn (US$50m) in setting up four new manufacturing facilities in Bangalore and Mumbai and an R&D centre in Pune.

The facility at Mumbai will be a multipurpose one to meet Bayer’s requirement while the one in Bangalore will supply APIs (active pharmaceutical ingredients) to Pfizer and Alpharma.

Indian papers and news channels are once again buzzing with reports about Dow Chemical and Bhopal. This time it is about the law ministry's view on whether the company should clean up the Bhopal site.

The law ministry's comments on a note to the Prime Minister's office were obtained by activists who have for long been asking the government to hold Dow responsible for the site after its acquisition of Union Carbide.

According to one report, the law ministry has stated that irrespective of the manner in which Union Carbide has merged or has been acquired by Dow, if there is any legal liability it would have to be borne by Dow.

A second report adds that the law ministry can decide on the extent of Dow's liability only after checking on the details of the Dow-Carbide deal to see if the transaction had specifically excluded liabilities arising out the 1984 Bhopal gas tragedy.

A copy of the note is available on the Bhopal.net website.

Some 50 victims of the Bhopal gas tragedy are currently in Delhi attempting to draw government attention to their problems.

The Bhopal issue has continuously hampered Dow's expansion plans for India (see previous posts). And it obviously raises questions on the company's investment plans for the country, estimated by one newspaper at $1bn.

The Indian pharmaceutical sector is keeping the M&A fire burning with six deals concluded last month, up from eight in the January-March period.

The list includes Jubilant Organosys' $255m acquisition of US-based DRAXIS Health and the $218m buyout of Dabur Pharma by Fresenius Kabi.

Indian companies are expected to continue scouting for overseas assets although interest in generic formulations appears to be waning. Outbound deals are expected to be mainly in contract research, personal care, medical equipment and pharmacy chains.

This view is supported by some of the latest deals. Two of Dr Reddy's acquisitions were in contract research and manufacturing, one from BASF and the other from DowPharma.

Indian chemical companies relying on China for phosphorus are a worried lot. Supplies from China have been erratic for over a year but the Chinese government's decision to raise export tax for phosphorus from 20% to 120% promises to compound the problem. The revised tax is applicable for exports 20 May 2008 to 31 December 2008.

Price increases can be expected and global majors appear to have taken the lead. LANXESS announced last week that it will "increases its prices significantly for all its phosphorus compounds". The move was a result of a considerable rise in the cost of phosphorus, it said.

"This sixfold increase directly affects phosphorus prices globally and forces us to adapt our prices in line with the amount of phosphorus used in the respective application," said the company's marketing manager for phosphorus chemicals. LANXESS offers a broad range of products based on phosphorus, such as synthesis chemicals, corrosion inhibitors, extraction agents, flame retardants, antifoams and solvents for a wide range of applications.

China is estimated to have 80% of the world's phosphorus reserves and is a major exporter. Although the 120% export tax is applicable only until the end of the year Indian companies need to start thinking of alternatives given the Chinese government's commitment to curb the growth of energy intensive and environmentally sensitive industries.

Are Indian chemical companies ready for Reach? Apparently not, says this report in today's Mint.

The problem appears to be not only lack of awareness about the EU programme for registration, evaluation and authorisation of chemicals (Reach) but also a shortage of labs certified for good laboratory practices (GLP), a standard developed by the OECD.

Under Reach, during a six-month period from 1 June through 30 November, foreign firms exporting to the EU must pre-register any of some 30,000 substances that are shipped to Europe as chemicals or as components in intermediate or end-user products.

The formal process of testing and full registration of all 30,000 substances will begin next year and run through a series of stages and deadlines to June 2018.

The Indian Chemical Council estimates that about 1000 Indian companies exported 700,000 tonnes of chemicals to the EU in fiscal 2007. But India has only about a dozen GLP-approved labs, half of which belong to pharmaceutical majors. The few independent labs face a daunting workload which is likely to leave Indian companies struggling to meet the EU deadline.

Atul has successfully secured a contract manufacturing deal with Stamicarbon and DSM Licensing Centre for phosgene-based polymer performance additives used in polyamides.

Atul will manufacture the additives based on guidelines given by Stamicarbon with DSM marketing the product worldwide under its brand name.

And this could just be the start as DSM has proposed to strengthen the relationship with Atul for more custom synthesis and development work, says Jagdish Shah, executive director at Atul.

ICIS news also reported that within a year Atul would set up a new plant fully dedicated to the manufacturing of these polymer performance additives as it expected an increase in demand following the long-term contract with DSM

The big news today is Daiichi Sankyo's acquisition of a controlling stake in Ranbaxy, India's largest pharmaceutical company, for $4.6bn.

Analysts have been quick to predict many more such deals which will see international pharma majors entering the generic space.

Indian generic players have been steadily expanding their presence in markets in the developed world, which had for long been the preserve of international pharma majors. Falling prices have put pressure on these giants to looks for low cost manufacturing opportunities and also expand their footprint in developing markets.

At the same time, Indian companies have realised that they need to develop as research-based organisation to grow bigger and this requires huge investments. The earlier strategy of copying drugs does not work in the new product patent regime and many Indian companies are currently struggling with legal battles.

Indian companies are also facing a cost push as prices of chemical intermediates have hit record highs. Margins for the small players are said to have fallen from 25-30% to 10%. Prices of drugs are fixed by the central government making it difficult for Indian companies to pass cost increases.

Consolidation makes sense especially if it marries the strengths of two companies.

It is time for the Indian chemical industry to wake up to the threat of increased flow of downstream chemicals from the Middle East.

Countries such as Saudi Arabia are aggressively pushing for the development of a petrochemicals industry that goes beyond olefins and polyolefins. State-owned and private companies are busy planning a host of derivatives.

Tasnee Sahara Olefins Co and Rohm and Haas have signed a 75:35 joint venture agreement for the production of 200,000 tonnes/year acrylic acid in the Kingdom. The Saudi Arcylic Monomer Co is likely to be operational by 2011. Rohm and Hass would take the majority of the output while Tasnee has the right to sell some of the production in the GCC.

This project raises questions on the future of two planned acrylic acid projects in India. The first is by Essar Chemicals with Arkema and the second by Reliance Industries with Rohm and Haas.

And Tasnee is looking well beyond acrylic acid. One of the products being considered is acetic acid. India is again an importer of this product.

PetroRabigh, the joint venture between Sumitomo Chemical and Saudi Aramco, are studying a host of derivatives (styrene butadiene rubber (SBR), MMA, PMMA and EPDM to name a few) for their second phase. The first phase, which includes a cracker and polyolefin and MEG plants, is set for commissioning at the end of this year.

Saudi Aramco's mega joint venture with Dow Chemical includes propylene oxide, polyurethane, epoxy resins, polycarbonate, amines and glycol ether.

And Abu Dhabi's multi billion dollar Chemicals Industrial City is likely to house plants for phenol, cumene and other derivatives.

I was at a petrochemicals conference in Bahrain earlier this week and the desire as well as the government pressure to move beyond upstream petrochemicals to speciality chemicals was clearly evident.

Putting together these projects is not easy. The Middle East does not have a large enough home market and so the burden of logistics costs will be high. Getting skilled manpower is a problem that shows no signs of easing. Technology for many of the derivatives is closely held and getting western companies to part with them is another challenge. Some of the foreign companies present at the conference were also not impressed with the economics of these projects in the Gulf. Their current focus remains China but they admitted that they would be keeping a close watch on opportunities in the Middle East.

So what does this mean for India? With an FTA being planned with the GCC the threat of cheap exports of a wide variety of chemicals is very real. The growing Indian market will be an obvious destination for many of the projects.

Yes, the GCC countries face many hurdles in going downstream but there is a strong government commitment. And importantly these countries have the money to ensure that the strategy works.

There are a few optimistic companies that are betting on growth in the midst of inflation, rising crude oil prices and a worldwide economic slowdown.

Some custom research and manufacturing services (CRAMS) players believe that the pressure on costs will result in more outsourcing opportunities.

This view is spurring investments with Dishman Pharmaceuticals and Chemicals planning a Rs1.5bn greenfield facility in Shanghai by end of this year. CRAMS is expected to account for 85% of Dishman's revenues by 2010, up from the current level of 75%.

Dr Reddy's too expects to see CRAMS account for a bigger share of its revenue, moving up from 10% to 25-30% over the next three years.

But success will not be easy. The CRAMS business is littered with stiff but not insurmountable hurdles that will test the management skills of Indian companies.

India is known to move slowly. So it is perhaps not surprising to read that most local companies have yet to formulate strategies to face the challenge of climate change.

KPMG recently released a report on a study carried out earlier this year to understand if Indian business leaders are aware of the climate change issue, its implications for the economy and their businesses and their readiness to respond to the impending changes.

Only 41% of respondents thought they had a good understanding of the issue and have a clear strategy in place.

While a number of Indian businesses claim to be aware of the need to reduce their carbon impact and believe that they are taking steps towards it, most companies have not taken the first step of measuring their carbon footprint, says KPMG. Only 21% of respondents indicated that they fully measure their carbon impact while 16% of respondents don't see the need for such an analysis.

The full report is available here.

India and Asean are all set to implement an FTA (free trade agreement) from 1 January 2008. Both sides completed six years of negotiations yesterday and a final agreement is due to be signed in December this year.

Over 400 products are on the sensitive/negative list and some chemicals have been included. But I understand that polyethylene (PE) and polypropylene (PP) do not figure on the list. Tariffs on PE and PP imports from Asean would be phased out over the next two years, thus opening the door for product from Singapore and Thailand just when new export-oriented plants get commissioned.

With tariffs on the two products currently at 5%, Indian producers say they will not be too badly affected but they do expect increased competition in the local market.

But a bigger threat is looming as India will soon resume talks for an FTA with the GCC (Gulf Cooperation Council).

Indian petrochemical producers are once again lobbying to ensure their products figure on the negative/sensitive list. Meetings have been held with government officials but I understand the outcome has not been positive.

There is no way that Indian chemical companies can escape from the global financial crisis. Tough times lie ahead as companies will be hit on all fronts - high cost of credit, falling demand as the global economy slows down and increased supply once new capacities in Asia and the Middle East get commissioned.

Product prices have fallen sharply in the last month. Ethylene is close to a 3-year low and benzene has fallen to $900/tonne fob Korea, a level last seen in January 2007. With buyers holding back purchases inventories are rising across the chain.

Companies are being hit in other ways too. One executive complains of expensive credit with international banks quoting Libor plus 900 basis points, up from Libor plus 100-200 basis points six months back. Indian banks are said to be quoting 18-20%, up from 9-11%.

International business is getting more difficult and riskier to transact as companies have to also deal with volatility in foreign exchange rates.

ICIS news reports that Indian base oils buyers and sellers of base oils are worried about the high level of credit scrutiny which is making an already difficult business environment even tougher.

"LC limits are frozen and there is no credit available for the love of money", said a baseoils buyer.

News is slowly trickling in of Indian pharmaceutical and fine chemical companies shutting down facilities that were acquired with great zeal during the 2005-08 overseas acquisition drive.

Shasun has decided to shut its facility at Newbie in Scotland and is reportedly shifting manufacturing to other locations in the US, the UK and India. The Newbie plant is one of two units acquired by Shasun from Rhodia in 2006.

Last week Piramal Healthcare announced that it was closing an active pharmaceutical ingredients (API) facility in the UK. The move, said Piramal, would help improve profit margins of the company's pharmaceutical solutions business by 6-8%. The unit was acquired from Avecia Pharmaceuticals in 2005.

A case of biting off more than you can chew?

This post is for all my Indian friends who still have their jobs. ECA International expects India to see an average salary increase of around 10.8% this year, down from the double-digit growth seen in the last few years but still the highest in Asia Pacific.

The average pay hike for the region is expected to be only 4.8%, down from 6.9% in 2008. Globally, average salaries should increase 4.7% this year, compared with 6.2% last year.

ECA also estimates that a quarter of the world's companies plan to freeze salaries this year.

The Hay Group expects a more moderate salary increase of 7.25% in India this year. And it says the biggest concern for Indian companies is still attraction and retention of talent.

It is good to be back to some good news. The election is finally over and the UPA has been voted back to power with promises of stability and more reforms. But the chemicals industry will have to deal with a new minister as Ram Vilas Paswan was not be voted back to parliament.

This report suggests that the chemicals and fertilizers portfolio is likely to be given to MK Azahgiri of Tamil Nadu's DMK, one of the parties supporting the Congress in the UPA coalition. It also warns that the ministry's functioning could move from Delhi to Madurai in southern India where Azahgiri has been elected from.

The long trek aside I wonder whether the new minister's position will be on chemical investments in Tamil Nadu. A very active environment lobby has been attempting to block investments in the Cuddalore chemical zone and making life difficult for companies that already have manufacturing facilities in this area.

And it is not just Tamil Nadu. The new minister needs to look at investments in other parts and decide how to kickstart the much talked about PCPIRs and attract foreign investment.

Dr Sukumar recently posted a detailed analysis of the government's PCPIR plan which clearly outlines the challenges that the government faces.

Indian information technology (IT) companies may no longer be queuing up at campuses for fresh graduates but engineering students continue to rank this sector above all others, according to the latest Nielsen Campus Track T-Schools study.

Chemicals, not surprisingly, does not figure on the list although oil and gas was seen as the 'industry of the future'. Other promising sectors, as identified by students, were nanotechnology, power, telecom and IT services.

The survey also showed that half of the 2010 graduates planned to move out of their first job in three years or less, with 51% citing higher studies as a reason for leaving. Better career opportunities, better salary, better designation, and job satisfaction are some other reasons for moving out.

But students are willing to stay back if the employer pays them well (39%), if they are satisfied with their job (34%), if their job provides a good work environment (32%), and if the employer is willing to sponsor their higher education (31%).

And what do graduates want from their first job?

"The soon-to-be engineers want to work for a technically sound company when they pass out, ranking it the highest on the list of drivers that influence choice of an employer. They want to work on sophisticated and state of the art technology, where there is good learning on the job and want to work in a growing industry, where they get 'hands on' exposure to projects," says The Nielsen Company.

Indian chemical companies should be able to offer this but can they match salaries offered by IT companies?

Jubilant Organosys appears to be taking one more step in transforming itself into a pharmaceutical company. The company is looking at selling its industrial and performance products division and expects to realise Rs3.0-3.5bn from the sale, says this report in today's Economic Times. There was no official confirmation on this from the company.

The division, with sales of around Rs12bn, includes acetyls, PVA, adhesives, animal nutrition, fertilisers and agrochemicals. Jubilant has been steadily expanding its presence in the fast growing pharmaceuticals and custom research and manufacturing services (CRAMS) space over the last few years through mergers and acquisitions.

Selling the 'non core' business makes sense and the news was welcomed by the stock market. But will Jubilant be able to find a single buyer for the diverse products that make up the industrial and performance products division?

The 100-day fever is fast spreading and the Ministry of Chemicals & Fertilisers is the latest casualty. A very bland press release outlining what the ministry plans to achieve over the next three months has come my way.

I started reading the release with a great deal of scepticism and was convinced at the end that my doubts were not misplaced.

So what does the ministry want to achieve? On the fertilisers front, it plans to upgrade the fertiliser monitoring system to ensure timely availability of fertilisers and quick disbursal of subsidy, develop options to revive closed urea units, introduce an attractive investment policy and create a road map for restructuring of sick public sector units through financial restructuring and/or changing feedstock from naphtha to gas.

The PCPIR (Petroleum Chemicals and Petrochemicals Investment Region Policy) dream is still alive. The aim now is to sign a memorandum of agreement with Andhra Pradesh, Gujarat and West Bengal before 30 August.

Other targets for the department of chemicals include speedy implementation of Gail's cracker project at Assam and to start a plastic waste management centre at Guwahati, Assam and a plastics technology institute at Jaipur

There is nothing really new in what the ministry has planned. Many of these targets should have been achieved in 2008 or even earlier. The prime minister's 100 day reforms mantra is laudable but I think the industry needs something more than just honouring old promises.

The good things in life are rarely free and that applies to solar power too. An analysis on this sector in ICIS chemical business highlights how high investment costs associated with photovoltaic (PV) cells has prevented the technology from being cost competitive on a standalone basis.

Photo by juicyrai

But a step-change in the economic competitiveness of PV cells is imminent, say Alexander Keller and Thorsten Ploss of Roland Berger Strategy Consultants. Grid parity or the point at which solar electricity becomes equal or cheaper than electricity from conventional sources could be realised by 2015, five years ahead than earlier estimates.

The consultancy says that chemical suppliers to the PV industry face two structural challenges - the shift to China and the move from conventional to thin-film technology.

Asia's (excluding Japan) share in the global PV market is projected to grow to more than 40% in 2030 from just 2.8% in 2007. Both India and China will be driving this growth. China plans to spend Euro3.2bn over the next five years while India is expected to unveil in September a target of generating 20GW of solar electricity by 2020.

The shift to thin-film is expected to provide major opportunities to the chemical industry but companies will need to adapt.

While the long term prospects are good, Indian companies are facing short term challenges. This is evident at Moser Baer Photo Voltaic which has deferred plans for the construction of a plant in Chennai due to liquidity constraints and production mismatch. The company has also temporarily closed a plant at Noida due to high stocks.

A little bit of support will be useful.

The economic crisis has led to one favourable result for the chemical industry. After years of seeing graduate chemical engineers migrate to more lucrative sectors such as IT or finance the chemical industry is now proving to be attractive.

I recently had an opportunity to meet Professor GD Yadav of Mumbai's Institute of Chemical Technology (ICT) and Professor Ghosh of the Centre of Polymer Sciences at IIT Delhi and both confirmed this trend.

There are several reasons for this, explained Professor Yadav. "Earlier IT was seen as a white-collar job. The sector was attractive as it offered good jobs and salaries. But that initial attraction has gone," he said.

With IT companies leading the way in shedding jobs students have become wary of joining the sector. Additionally there are not too many jobs on offer. At the same time salary levels in the chemical industry have improved.

The 2010 recruitment season has started at the Institute of Chemical Technology and students have been placed at chemical companies with a starting salary of Rs600,000/year. The highest salary offered is Rs1,400,000/year.

Professor Ghosh also highlighted another trend - students who drifted to IT are now looking to get back to their core discipline.

He cited the example of a polymer engineering graduate who wants to return to the chemical industry after working at a large IT company for a couple of years. But compromises will have to be made as two years of industry experience has been lost.

Graduates are, for the time being, valuing job security over salary. Chemical companies should welcome them even as they battle to keep trim costs and boost profits.

Green chemistry is gaining ground in India with alert companies following the global trend to make products from renewable feedstocks, reduce waste and energy consumption.

Pradip Kadakia, Abhishek Nigam and Ashwin Rao of Tata Strategic Management Group (TSMG) say that Indian chemical companies are making good progress in lowering the industry's environmental footprint by adopting green chemistry strategies.

They point out that growing environmental consciousness has resulted in increasing demand for green products and processes such as green buildings. These buildings cost 3-8% more than conventional buildings but payback in less than three years through operational savings. More than 300 green buildings have already been constructed in India and 700 more are due to be built by 2010. These buildings materials will spur demand for products such as high performance glass, low VOC paints and fly ash blocks.

India with its huge arable land area has a good potential for bioresources. And despite concerns about using land for non food applications, national laboratories, academic institutions and companies are actively pursuing biodiesel, bioethanol, bio-surfactants, biopolymers and biopharmaceuticals. They cite the example of Godavari Biorefineries that has started manufacturing products from renewable resources forming an entire value chain from sugarcane to sugar to other products such as ethanol, chemicals and biofertilisers.

But though green chemistry has taken off more support will be needed from the government. And companies too need to plan out their strategy carefully rather than simply following a global trend. TSMG suggests building clear sustainability goals that can be translated to market facing goals. And companies also need to assess life cycles of existing products and look for opportunities to introduce green products.

And opportunities can come up in unexpected areas. A recent report in ICIS Chemical Business highlights the move by sporting good manufacturers to incorporate chemicals based on renewable resources.

For example, Merquinsa, a Spanish thermoplastic polyurethane (TPU) producer, is collaborating with Brooks Sports, a Washington, US-based sports equipment company, to develop sustainable performance running footwear. The bio-TPUs are renewable-sourced, with 20-90% bio-content, says Merquinsa.

Chemical companies are constantly adapting to external challenges and this is clearly evident in a comparison of the ICIS listing of top chemical companies in 2008 and 1998. Three companies that figured in the top 10 list for 1998 have disappeared - ICI, Hoechst and Rhone Poulenc - as a result of mergers and acquisitions while Bayer, Elf Group and Akzo Nobel have fallen from the top 10.

Only BASF, Dow Chemical, DuPont and Mitsubishi Chemical are still in the top 10 although they are being challenged by new entrants such as Sabic, Sinopec, Ineos and LyondellBasell.

Sabic leads the pack in terms of sales growth during the last 10 years with sales rising from $4.9bn to $40bn.

But it is BASF which heads the ICIS top 100 table for 2008 with sales of $87.8bn. ExxonMobil pushed ahead of Dow Chemical to capture the number two spot with sales of $58.1bn. Dow came in third with sales of $57.5bn. Only one Indian company figures on the list - Reliance Industries which is ranked at No 34

Last year's financial crisis left its mark on the industry. Of the top 100 companies, 23 posted net losses in 2008 and overall profits fell 53% year-on-year.

A full listing of the top 100 chemical companies is available here.