Chemical Industry -Okay, just for a second, let’s play KBC here – first-ever industrially produced chemical was?
Well, answering this question might not make you a Crorepati, but investing in this industry could probably propel you onto the path toward a better financial future! Read on (and don’t Google) to find out the answer.It wouldn’t entirely be an exaggeration to say that the speciality chemicals industry is like the dark horse of a race, given the consistency it has shown in the Indian markets. Interestingly, when India’s economy faced headwinds from 2016-to 19, the chemical industry maintained a whopping CAGR of 17%!
Let’s rewind a bit here.
While the history of chemicals and their usage can be traced back to Phoenecian days, scaled productions at the industrial level started only in the 19th century with the advent of the Industrial Revolution. The modern chemical industry was birthed to develop more rapid bleaching techniques for the British cotton industry.
The world wars propelled this industry into the raging money-maker for investors today.
Cut to the present day..
The Indian chemical industry contributes to nearly 7% of the country’s GDP and is set to add a whopping US$ 300 billion to India’s GDP by 2025! It is the sixth-largest in the world and third in Asia. The chemical industry’s value in India is estimated at $178 billion. This big industry is also a significant employer, generating employment for over 2 million people.Between 2006-2019, the global chemicals industry maintained a CAGR of 8%, while the overall equity market was 6%. However, during this period, the speciality chemicals sector maintained a steady 15% CAGR!
The speciality chemicals constitute 22% of India’s total chemicals and petrochemicals market. As of FY19, the whole market size of the industry was pegged at around $32 bn. They account for more than 50% of total chemical exports from India, and the demand is expected to rise at a 12% CAGR in 2019-22, creating an additional opportunity of $20-25 billion.
The government has allowed for 100% FDI in this industry. Under the automatic route in the chemicals sector (except for certain hazardous chemicals). Industries like food processing and personal/home care are driving the speciality chemicals market. With the population rising, there will be a strong demand for speciality chemicals in the automotive industry, personal products, water treatment and construction segments.
The following are significant growth drivers of this industry (source – Invest India) –
The rise in disposable income, the population’s median age, and urbanisation increased the growing penetration and demand from rural markets. It also shifted consumer preferences toward a healthier lifestyle and environment-friendly product production. These added to the significant growth of the sector.
The Linked Incentives scheme for manufacturing -Advance Cell Chemistry Battery under Atmanirbhar Bharat Abhiyaan added an edge. India’s proximity to the Middle East, the world’s source of petrochemical feedstock, makes for economies of scale.The Indian government even supports the industry through research & development and initiatives such as reducing essential customs duty on several imported products and promoting the ‘Make in India’ campaign.
But why should I invest?
The speciality chemical industry is knowledge-driven & oligopolistic. Companies manufacturing such chemicals must have process expertise and research and development capability. The sector is also capital intensive. Combining these factors acts as entry barriers, allowing incumbents to retain a competitive advantage. Moreover, firms strive to further raise entry barriers by being more customer-centric. They focus less on products and more on support services for customer-specific needs. The price of the products is, more often than not, decided through negotiation. Thus, firms can easily pass on increases in cost to end-users. This allows companies to retain their margins.
Supply disruption in China has caused the global end-user industries to diversify their vendor base, mainly toward Indian players. Due to increasing environmental concerns, the closure of plants in the EU and China has favoured further investment in speciality chemicals. Given chemicals have become especially important to the growth of the overall economy. In recent years the entire sector has witnessed tremendous growth. And speciality chemicals present an exciting and relatively overlooked investment opportunity.