The Impact of COVID-19 Pandemic on Investments in the Indian as well as Global Chemical Industry

Ajay Garg
Founder
Equirus Capital (P) Limited

“The COVID-19 pandemic - in terms of its geographical coverage, scale, and global response - is unprecedented in recent history. It confers to an external force that will have far reaching implications on societies in general and commerce in particular. While the current lockdown (or various versions of it across the globe) will significantly impact the economy and chemical industry, we foresee that Government & central banks will ensure a rapid recovery and impact on global GDP is transient in nature. Despite the affirmative actions, we believe that globally, this crisis will lead to a renewed aversion to debt along with postponing of capex and capacity additions in medium term”, says Ajay Garg, Founder of Equirus Capital Pvt Ltd

Isaac Newton, in his seminal work titling ‘Philosophiae Naturalis Principia Mathematica’, published the laws of motion. The work included the treatise that – given an absence of external force, all bodies tend to maintain inertia. While Newton’s work was supposed to cover physical bodies, the same is also true for civilizations and societies tending to demonstrate the same resistance to sudden changes. The COVID-19 pandemic – in terms of its geographical coverage, scale, and global response – is unprecedented in recent history. It confers to an external force that will have far reaching implications on societies in general and commerce in particular.

Isaac Newton, in his seminal work titling ‘Philosophiae Naturalis Principia Mathematica’, published the laws of motion. The work included the treatise that – given an absence of external force, all bodies tend to maintain inertia. While Newton’s work was supposed to cover physical bodies, the same is also true for civilizations and societies tending to demonstrate the same resistance to sudden changes. The COVID-19 pandemic – in terms of its geographical coverage, scale, and global response – is unprecedented in recent history. It confers to an external force that will have far reaching implications on societies in general and commerce in particular.

While the current lockdown (or various versions of it across the globe) will significantly impact the economy and chemical industry, we foresee that Government & central banks will ensure a rapid recovery and impact on global GDP is transient in nature. Despite the affirmative actions, we believe that globally, this crisis will lead to a renewed aversion to debt along with postponing of capex and capacity additions in medium term. However, this crisis is expected to intensify a few global trends that were visible even prior to COVID-19 and have been enumerated below.

Global markets for chemical products
The longer-term impacts will be felt in the way businesses and supply chains are structured. The complete disruption of logistics has made many countries and purchase managers realize the perils of outsourcing and over dependence on China for significant percentage of their product requirements. This will further hasten the process of de-risking supply chains in chemical industry away from China, which started as a result of China strengthening its pollution norms and got further accelerated during the Sino-American trade dispute and concomitant tariffs. This has already led to the businesses looking at geographical diversification. The key traits of any location to emerge as a credible competition to China includes availability of petrochemical feedstock, sizable domestic market, ease of doing business, and the factors alike.

India scores well on most of the parameters and is ideally placed to emerge as a credible alternative to China in chemicals manufacturing sector. India’s share in global chemicals trade by value is ~3% with established credential across the specialty chemicals segments like intermediates for APIs, agrochemicals, flavours and fragrances, dyes and pigments segments with a total value in global trade of over USD 220bn. China’s share in the above segments is ~3 times of India, and we foresee the gap to reduce over the next decade with companies shifting their production units / capacities to India.

Indian markets – focus on domestic manufacturing
India is the sixth largest producer of chemicals globally and the third largest in Asia in terms of output. For agro-chemicals production, the country ranks third globally and contributes around 16 per cent to the global dyestuff and dye intermediates production. Indian chemical industry is a ~USD 175bn industry which is expected to grow to USD 300bn by 2025 at an estimated CAGR of 9 percent.

Low per capita consumption offers large untapped opportunity
As per FICCI report on the sector, the per capita consumption of chemicals in the country is one-tenth of the world average with India being one of the low consumption countries even amongst developing nations. The COVID crisis is expected to cause long standing changes to personal hygiene habits across the social and economic spectrum which, when combined with Government initiatives like Swachh Bharat Abhiyan, should help sustain the strong domestic demand in the long term.

Import substitution
India imports ~USD 50bn chemicals with a trade deficit of ~US$17bn. Petrochemical building blocks, intermediates and polymers form over 50 percent of India’s chemical imports by value. These intermediates are vital links in the Indian chemical industry and act as feedstock for specialty chemicals, which in turn are used to produce a vast majority of consumer and technology products. This high dependence is despite the fact that India is largely self-sufficient in Naptha, the key raw material for a large set of petrochemical building blocks and polymers.

Over the past few years, India has been pushing its chemical industry to reduce its dependence on China and to manufacture the key raw materials in India. As per the industry body – Indian Chemical Council, to reduce the import dependency and to improve the exports, Indian chemical industry will need an investment of ~USD 75bn including an investment of USD 10bn over the next decade to make basic chemicals such as butadiene, ethylene, propylene, and other derivatives required for the petrochemical industry to meet the Indian chemical industries' raw material requirements. Indian companies have tried to address this through a combination of incremental capex in India and partnerships with entities outside India to secure alternative and cheaper feedstock.

While on the feedstock side, Indian petrochemical companies have already announced plans to invest over USD 15bn in building incremental petrochemical capacities over the next 5 years, companies in specialty chemicals space are expanding manufacturing capabilities to take advantage of the increased demand in India as well as exports.

The sector is being supported by various GoI initiatives including the renewed focus on reviving the four ‘Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIR)’. The four PCPIRs in Andhra Pradesh, Gujarat, Odisha, and Tamil Nadu are aimed to reduce overall capital expenditure of chemical companies by building common infrastructure of utilities, pipelines, and Effluent Treatment Plants; and strategically located at ports for easier access to both domestic and global markets.

Focus on sustainability
Sustainability and adherence to global best practices as well as environmental norms will play an increasingly prominent role in selection of industry partners and suppliers with various stakeholders placing a premium on it. While Indian companies may need to re-evaluate their business processes and policies, their long track record in working with leading pharmaceutical and consumer companies will help them in being better placed to rise to the occasion as compared to other competitors.

Conclusion:
All of this leads us to believe that Indian chemical sector is entering a golden period witnessing a rapid growth for the industry. While this will require significant capital, we do not foresee it as a challenge as we are witnessing significant interest from pools of capital (debt as well as equity) to be a part of the growth story and to enable the sector’s growth.