Recent Disruption in China, beneficial for Indian Chemical Companies

Recent disruption in China - Impact on Indian Chemical Companies

Twitter Handle: @shuchi_nahar

Specialty Chemical Article: https://myweekendspot.blogspot.com/2021/07/speciality-chemicals-market-size-demand.html

Government scheme to boost: https://myweekendspot.blogspot.com/2021/07/government-initiatives-to-boost-growth.html

Indian specialty chemicals companies are poised to ride tailwinds from macro drivers including ‘China+1’, import-substitution, growing costs within China (capital, operational, compliances), and currency benefits. Recent disruptions in China will cause medium-term challenges for downstream producers while benefiting base chemical suppliers. More importantly, these frequent supply disruptions in China further strengthen the case for quality Indian players in the chemical domain.

Growing import substitution by local industry makes a case for strengthening volume growth for base chemical/intermediate suppliers. Recent disruptions in China (electricity shortages, targeted plant closures) open another round of challenges for already stretched chemical supply chains globally and in India. China seems to be targeting companies/industries with higher energy consumption intensity and polluting technologies. This is likely to drive volume shortages along with significant price spikes for key raw materials.

Indian Specialty chemical industry witnessed strong yoy demand and improved pricing scenario (led by cost-push) in general during Q2. Such a scenario couple with the covid impacted base of last year makes the revenue trend strong. India has a small 4% of the global chemicals market that is growing at 5-6% in dollar terms. This suggests that even a 15% CAGR in INR terms over the next 15 years would garner just an 8% global market share. This is modest given the expected and strategic lowering of chemical exports by China (representing a 13-15% chunk of the global market).

China’s chemical industry has shifted its focus to self-sufficiency and high value-added products

Three phases of Chinese chemicals industry growth

Recent developments further reiterate China’s intent to not support capital inefficient and carbon inefficient (whether energy or emissions) businesses. This is a departure from the policies adopted over 2000-15. Cost structures would rise thanks to rising wages, energy costs, appreciating currencies, and higher capital costs needed to meet increased regulatory expectations. Indian players with proven chemistry skills, world-class manufacturing, and the ability to build strong client engagements will benefit.

Base chemicals to benefit in the near term  

Commodities such as soda ash, caustic soda, acetates, and PVC are already rallying on the back of these dual controls. In most of these commodities, pricing is a function of import parity and manufacturers of these commodities would benefit over the next 3-6 months. Volume benefits may be limited as any capacity expansion to take advantage of such shortages takes time, but price hikes would aid.

Over a longer period, China’s intent to cut down exports of these energy-intensive industries augurs well for the pricing environment in general. The challenges, however, would be the intent of Indian companies to invest capital and demonstrate execution capabilities to do these high-ticket projects and their competitiveness versus countries like Malaysia, Thailand, and Vietnam, which may still have better infrastructure to benefit from these capital-heavy projects (not chemistry-heavy unlike a few specialty chemicals).

Indian chemicals players are expected to benefit from higher commodity prices where China has dominance.

List of chemical commodities, China’s share of global capacity, and Indian players present in these chemicals

India’s chemicals market share would reach only 8.3% in 2035 despite 15% growth CAGR India market share projections assuming 5% global market growth in US$, 3% annual benefit, and 15% domestic industry growth share.

Source: Kotak Institutional Equities

What makes an Indian specialty chemicals company scalable?

There are three lenses through which investors should view this sector: 

(1) Differentiation of process capabilities, 

(2) Asset discipline (return on capital, return on carbon),

(3) Client engagement (trust, transparency). 

Indian specialty chemical sector has grown at 12%+ in the last five years and is well poised to expand its global market share to 7-8% from 4% in the coming years. The structural drivers are in place like global best practice manufacturing standard and R&D capability along with government impetus of make in India policy with pro-growth policies will act as a further catalyst for growth.

Further, a global MNC looking at China +1 strategy will help Indian incumbents to gain market share. In the short to medium term, supply disruptions emerging from power outages in China along with limited new capacity addition provides a tactical opportunity for Indian players to increase market share and will get benefits for an increase in products prices.

Sources: Kotak Research Report

Sherkhan research report

Nirmal Bang Report 

Philip Capital Research Report

Twitter Handle: @shuchi_nahar

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