Like other sectors in the chemical industry, the specialty chemicals sector is predicted to see good growth over the coming decade. The Economic Times of India reports that, “The global specialty chemicals market is likely to expand by 5.2% on a compounded basis from 2013-2018, and is estimated to jump to $761 billion by 2018 from $619 billion in 2014.”
Most of this growth will happen in Asia, the reasons for which were highlighted in a recent report by industry consultants McKinsey, when they wrote, “The appetite [for specialty chemicals] is being driven by rising standards of living and increasing demand for consumer products from household goods to cars, all of which require specialty chemicals in their production. At the same time, the upward trend in the sophistication of manufacturing in emerging economies—for example, from textiles to electronics—should increase demand for more advanced chemicals.”
An IHS report from late 2015 concurred, saying that, “During 2014-19, volume consumption of specialty chemicals is expected to increase at close to 4% on a global basis.” The report continues by stating that, “Chinese and Indian manufacturers have become key players in several specialty chemical markets.”
But in the high stakes battle for dominance in the specialty chemicals market, who will be the top dog of the future, China or India? An examination of the problems and advantages that each country has may help answer these questions.
China’s Specialty Chemicals Industry Problems
The Chinese economy is facing major challenges with growth for the first time in decades, a problem that is certain to have an impact on the specialty chemicals industry. As the BBC reported in March 2016, “A slew of weak economic data has recently added to the concerns [over Chinese economic growth] and US ratings agency Moody’s has downgraded its outlook for China from ‘stable’ to ‘negative’.”
Meanwhile, the fact that the Chinese PM is warning that, “China will face more and tougher problems and challenges in its development this year, so we must be fully prepared to fight a difficult battle,” is bound to have industry chiefs worried.
Overcapacity is one challenge that has been outlined in a recent McKinsey report on Chinese specialty chemicals, when it stated that, “The fast demand growth of the past decade has encouraged a wave of ‘me too’ investments that, with the slowdown, have led to overcapacity … even in some specialties sectors such as vitamins, depressing profitability.”
The Wall Street Journal also highlighted the problem of overcapacity reporting that, “China’s ambitions in global chemicals, coupled with its slowing domestic economy, have contributed to sharp overcapacity in parts of the industry, which analysts say is weighing on the margins of major companies and could contribute to consolidation in the sector.”
Whilst the Chinese specialty chemicals industry is still dominant, there is concern that the challenges it is facing will lead to it being overtaken by India as the sector’s major growth area. But then India has its problems too…
India’s Specialty Chemicals Industry Problems
Shri Ananth Kumar, Cabinet Minister for Chemicals and Fertilizers in the Indian Government outlined the industry major deficits when talking to promoters of the upcoming conference ‘IndiaChem 2016’. He believes that, “The 3 major issues that India Chem faces in the Chemical and Petrochemical industry are feedstock, infrastructure and tariff concession.” But he remains upbeat, stating that, “If these are provided by the government of India, then no one can stop us. We can be global leaders in the Chemical and Petrochemical industry.”
Clearly there is optimism in India that they can challenge China’s dominance in the market, but only time will tell if this optimism is misplaced. As Shine Jacob reported in the online journal LiveMint, attempts by the Indian government to prevent the countries dependency on basic pharmaceutical imports from China did not succeed. He wrote that, “Early in the year, the government declared 2015 as the year of bulk drugs or Active Pharmaceutical Ingredients (API) in a bid to promote its ‘Make in India’ initiative. The year is nearly over but self-sufficiency in bulk drugs remains a distant dream as India remains import dependent with over dependence on China even for essential drugs.”
Possibly India has too much ground to cover to catch up with the ever expanding Chinese. Perhaps the question should be whether China’s chemicals industry will ever slow down long enough for India to be able to close the gap.
China’s Specialty Chemicals Competitive Edge
Certainly China is in a strong position. According to a recent IHS report, “China will have the highest growth rate of all regions during the next five years. China is seeing some short-term setbacks in its economy and the forecast of consumption for specialty chemicals has been downgraded slightly, from the historical range of 8-9% to 7% per year. Nevertheless, it will continue to power the growth of global specialty chemicals during the next five years.”
And whilst overcapacity is a problem, many believe that the country will soon recover from this problem as domestic demand recovers. For example, Jean-François Tremblay, reporter at Chemical and Engineering News, writes that, “For years now, Chinese chemical producers have struggled with overcapacity. But the outlook is improving, especially for specialties. In particular, the construction sector, where China’s slowdown had been particularly sharp, is showing signs of life.”
India’s Specialty Chemicals Competitive Edge
Like China, India is in a strong position, but as C&EN reports, it is getting even stronger. “India, Asia’s third-largest economy, is roaring, and its economic growth is expected to pass that of China in 2016. The country’s biggest chemical producer, Reliance Industries, [recently] achieved its most profitable six months.”
And predictions are for even stronger specialty chemicals growth as the Indian economy matures and overall growth booms. As Sanjeev Gandhi, BASF’s top manager for the region, explained to C&EN, “2016 will be an even better year than 2015 for India’s economy. One reason is that the sales tax system will be reformed to lower and simplify the cost of transactions. In addition, the monsoon in 2016 will likely be better than last year’s because India rarely experiences two bad monsoons in a row. The rains matter to the economy in a country where two-thirds of the population is rural and dependent on agriculture.”
Gandhi is not alone in his belief for exceptional opportunities in India. Manish Bhandari, CEO at Vallum Capital, recently told the Economic Times of India that, “Specialty chemical companies will prosper in India because of its chemistry, R&D skillset and economies of scales achieved by the country. This is supported by a paradigm shift in Chinese markets towards urgency of reducing pollution and investing in labour cost across industries. We [Indians] have established an ecosystem of basic chemicals; a key input for the specialty and pharmaceutical industries.”
Ritesh Gupta, industry analyst at Ambit Capital, also believes that specialty chemical companies are under pressure in China, leaving foreign investors to look to India for faster growth. He said that, “Facing compliance, cost, and capacity issues, global chemical innovators are looking to outsource their manufacturing processes to India. This creates an opportunity for Indian firms over the next 5-10 years.”
But perhaps India’s greatest advantage is its market potential, which unlike China has really yet to be tapped. A point made by Dhiraj Sachdev, vicepresident, HSBC Asset Management, when he noted that, “Business is shifting to India from China. This is mainly on account of stringent effluent norms and increasing wage costs in China. India is only one -eighth, or one-tenth, the size of the Chinese specialty chemicals market, which throws up a huge opportunity for Indian companies with the potential to scale up and grow on a sustained basis.”
So Who Wins?
The most likely outcome is that both countries will see good growth in the specialty chemicals sector in the coming decades. Both have upbeat forecasts and massive market potential. Both face growing feedstock challenges, yet both have huge investment in place for infrastructure and research.
It seems that the battle will continue, with an as yet to be determined outcome. Except perhaps for one certainty; whereas in the past the comparisons always focused on East versus West, the talk of tomorrow’s specialty chemicals industry may well focus on India versus China.