Investment opportunities for chemical companies in India

Six trends are shaping the global chemical industry. While they mean uncertainty in a global context, they could open up near-term opportunities in India.

Several global oil and gas giants are turning to the downstream chemical industry. This could increase India's focus on the petrochemical industry, and increased investment in the industry could ease raw material challenges and promote self-sufficiency.

The structure of China's chemical industry is changing due to stricter environmental regulations, stricter financing and integration. Although these changes may benefit some large enterprises in the long run, they may also bring uncertainty to international enterprises purchasing chemicals from China. This may create opportunities for Indian chemical companies in some value chains and segments, especially in the short term.

Trade conflicts break out all over the world, especially between China, the United States and Western Europe. This has led to the transfer of global supply chain, affected bilateral trade between China and the United States, and may also have an impact on other economies. In this case, the large chemical market that can still be accessed may provide opportunities for Indian chemical companies.

From the perspective of the whole industry, it seems that there is a trend to give priority to core business and carry out larger-scale integration, usually through large-scale mergers and acquisitions. For Indian companies, scale will be more important because it helps to consolidate their competitive advantage.

Digital technology has become a lever to improve efficiency and productivity. Many companies around the world are embracing the potential of digital; Indian companies can also take advantage of this opportunity to expand their profit margins.

Sustainability is becoming a necessity, not a buzzword, and all stakeholders are paying attention to it. Chemical companies can give priority to environmental sustainability to protect long-term shareholder value while continuing to comply with local regulations.

Investment opportunities in India

We analyzed trade flows in India's chemical industry to identify and better understand investment themes. Chemicals are an important part of India's overall trade flow. In the past five years, imports have been ranked third and exports have been ranked fourth.

The chemical industry has made a significant contribution to India's trade volume. Seizing the recent opportunities may have a positive impact on Indian chemical companies and the whole industry.

As higher quality requirements and demand related to environmental quality help to increase demand for Indian specialty products, export-oriented companies continue to expand, with an annual growth rate of 13% in India through 2020.

However, in the field of petrochemical intermediates, the situation is completely different. India currently imports about 5 million tons a year, accounting for 45% of its demand, adding up to about 11 million tons a year. China's consumption has been growing steadily over the past five years. Most importantly, if India's economy follows a healthy growth trajectory, our analysis shows that by 2025, the demand for petrochemical intermediates will expand to 33-38 million tons per year.

If these forecasts are realized, India's demand for important petrochemical intermediates will consume the output of several world-class plants for each product by 2025.

For example, the demand for acetic acid and acrylic acid will be equivalent to the output of more than three world scale plants and more than four world scale plants, respectively. The Indian company announced that it will increase production capacity by about 2 million tons per year in limited product areas such as ethylene oxide (EO) and ethylene glycol (eg). As a result, 25 million to 30 million tons of domestic demand can not be met every year - 75% to 80% depend on imports.

These forecasts are so large that demand in India is becoming a major problem for some participants in the chemical industry. The world's leading producers of petrochemical intermediates must consider India's needs when planning how to serve existing and emerging markets in the next 10 years and how to build their own businesses. Indian Petrochemical intermediate consumers are increasingly dependent on imports. Petrochemical intermediates should be an attractive growth business for upstream petrochemical producers in India if they can scale up as other countries have done in the past.

How to address key sustainability challenges in the chemical industry

The important role of chemical industry

The role of the chemical industry in the production of all goods and the provision of services is undoubtedly crucial. Chemicals are essential ingredients in many industries, from health, sanitation, construction and transportation to agriculture and energy supply. This makes the industry one of the largest in the world.

Therefore, the chemical industry plays an important role in maintaining growth and prosperity and in the transition to a sustainable society. With the increasing competition around the world, innovation is still crucial in finding new ways to meet increasingly mature, demanding and environmentally conscious consumers.

Ten challenges of sustainable development

By evaluating the reports of the top 10 companies in the chemical industry, we identified the 10 most important sustainability related themes / challenges facing the industry:

energy management

Sustainable products (materials)

Carbon dioxide emissions

Occupational health and safety

Human rights assessment

Water and wastewater

Customer health and safety

Wastewater and waste

Anti corruption

Environmental compliance

The main challenges facing the industry are the first and third, energy management and carbon dioxide emissions. High energy use in the industry leads to high investment requirements for fossil fuels and key components of hydrocarbons in power production. Greenhouse gas emissions come from the use of fossil fuels, flue gas emissions and gas burning practices. In terms of procurement, these products have a large emission factor, which means that the goods and services purchased will occupy an important position in the carbon footprint. For the remaining eight challenges, see the full report.

In addition, if you are interested in scope 3 management and supply chain opportunities, why not read "enterprise greenhouse gas emission action"?

Using supply chain and reporting standards to meet the challenges of sustainable development

In order to meet the challenges of sustainable development, supply chain or report driven standards are usually adopted.

In the context of supply chain driven standards, suppliers are required to disclose their human rights considerations, labor standards, compliance systems, environmental participation and carbon dioxide emissions through third-party solutions. The most relevant are ecovadis and CDP.

The report driven standard is based on the report standard, which is most suitable for finding the position of a company compared with its competitors, measuring the effectiveness of its management, and understanding the attitude of stakeholders towards it. Providing information on achievements in the field of sustainable development increases transparency, thereby enhancing the confidence of stakeholders in the company. A report is also highly recommended because investors are increasingly making investment decisions based on ESG standards.

The most popular reporting standards include the United Nations Global Compact and the global reporting initiative standards. The former is also suitable for beginners of sustainable development, while the latter requires more time and reports as well as professional knowledge of sustainable development.

To learn more about the challenges of the chemical industry, please refer to dfge's white paper on the chemical industry. To learn how to solve the problem of carbon dioxide emissions in the supply chain, please refer to the latest report of ecovadis analysts.

Explore key chemical industry trends

Chemical industry plays an important role in the economic development of a country, and affects the downstream sectors, such as agriculture, pharmaceutical, polymer additives, etc. Without a smooth supply of chemicals, commercial activities and company operations that use them as raw materials will face obstacles. Unfortunately, the chemical industry is not without interference, and many factors contribute to this. However, enterprises can take appropriate management steps to prepare for these challenges as soon as possible, so as to reduce supply chain risk.

Explore key chemical industry trends

The first step for chemical enterprises to prepare for supply chain risk is to understand the key current and future trends. Many types of research have emerged in the market to predict possible market trends in the chemical industry. Companies should be aware of these trends and adjust their supply management strategies to avoid problems in the immediate procurement process.

In 2019, the chemical industry has made a good response to consumer demand, price fluctuations, fierce competition and regulatory barriers, and is seeking sustainable development. In 2020, the industry outlook gives a similar picture, as companies will continue to struggle with tight trade, slower sales and tighter regulation of chemicals. This means that relying on chemical distributors cannot solve the procurement problem unless the enterprise takes additional measures to establish a seamless supply chain.

Expected trend of chemical industry in 2020

With the continuous fluctuation of oil and gas prices, the uncertainty of the chemical industry is expected to continue until 2020, which will affect transportation costs, manufacturing costs and enterprise operating costs. When the energy market is in chaos, enterprises often need to spend more money to purchase the necessary raw materials. Therefore, with the rise of primary product prices, enterprises will continue to face huge profit pressure. However, chemical suppliers will continue to play an important role in the trade and supply of commercial products, which may help overcome pricing problems.

The slowdown in the US, China, India and other major economies is real. The continuous trade protectionism policy between China and the United States has restrained economic growth and consumer demand, and affected the stability of the supply chain. In addition, there are political turbulence, fundamental changes in laws and regulations due to environmental problems, and other disturbances that cause industry problems.

The pace of technology adoption in the chemical industry will continue to accelerate. More companies will invest in research, development and technology to improve service and product quality. With the development of circular economy, the demand for environmental protection chemicals and sustainability will be increasing next year.

India's position as a new chemical center

Indian chemical companies will continue to benefit from plant closures in China and the European Union. Although Indian companies are small, they are stepping up efforts to improve the output and quality of products produced in India. Even these companies are taking Indian chemical trade seriously and contacting Indian chemical suppliers to buy products.

conclusion

Experts in the chemical industry predict that the results in 2020 will be mixed, and some problems in the previous year will continue to exist. However, driven by capital investment and government support policies, India's chemical industry will usher in growth.

Dynamic resource allocation of chemical

The global chemical industry continues to experience tremendous changes. In the past 20 years, due to the increasing use of shale gas as a cheap raw material, petrochemical production in North America has experienced a transition from low cost to high cost and then to low cost. At the same time, despite the squeeze on profitability, China has transformed from a bizarre curiosity into the world's largest chemical market. Several of the largest companies are actively restructuring, and major divestitures and mergers and acquisitions that affect the industry are in the news.

McKinsey's research in a series of industries has shown that in enterprises, capital and other resources are easier to flow to another business opportunity, shareholders' returns are higher in the medium and long term, and the risk of bankruptcy or acquirer is lower. A new study in the chemical industry confirms this conclusion: more active resource redistribution is associated with higher shareholder returns. It also shows that the difference in chemical properties is more significant.

In the field of chemicals, as in a broader sample across industries, companies are often slow to transfer resources between enterprises. In general, the distribution of capital expenditure in that year has been close to that of the previous year. But a more detailed observation will show that the levels of activity and results displayed by individual companies are quite different. We use the redistribution score to measure the resource movement of individual companies, which represents the proportion of resource movement among enterprises over the years (see sidebar, "how do we measure redistribution").

The results show that there is a significant correlation between more active resource redistribution and total shareholder income. From 1990 to 2013, the most dynamic one-third of companies reallocated their resources during this period, showing a 10.8% CAGR of TRS. In contrast, the proportion of low redistributors is 2.5%, including the bottom third. In these 23 years, the market value of a dynamic company will grow to six times that of a low dynamic company. Persistent redistributors also get higher shareholder returns than less persistent peers: in TRS, companies with more than 15 significant resource transfers (more than 5% of total capital expenditure allocation) far outnumber less active peers.

Companies with active redistributors are also more likely to remain independent: the survival rate of active redistributors is 30 percentage points higher than that of low redistributors.

The way chemical enterprises allocate resources varies with industry segmentation. In the field of petrochemical, high-volume plastics and other commercial chemicals, the key factors for success are low-cost raw materials, excellent operation and process R & D. Therefore, executives usually focus on these factors to organize strategy and resource allocation, and pay attention to the region of production and the value chain they participate in. For example, several major polyethylene companies organize their reporting departments by geography and value chain.

The most successful companies tend to build attractive positions in the chain where the cost curve is steep (e.g., ethylene production costs significantly change the entire industry globally), and regions based on raw material advantages may use their financial influence or process technology to obtain such advantaged raw materials.

In the field of specialty chemicals, the key factors for success are the choice of end market, the choice of products and the scope of value-added and differentiation. Professional companies are usually organized around these factors, focusing on the end market and product line.

For example, coating enterprises can organize around the market of construction, automobile and industry. Producers active in multiple areas of expertise organize around different components of their portfolios in a similar way.

Diversified chemical enterprises with larger scale integrate the investment portfolio of bulk commodities and special products, and balance more dimensions - geographical selection, value chain, end market, products and sources of differentiation.

In some market segments, the main performance drivers service level, cost structure and competition are regional. Examples include industrial gases, cement and other low value weight products such as sulfuric acid. In these areas, strategic decisions and resource allocation are usually regional.

What are the perfect chemical suppliers?

 In the eyes of buyers, what is the perfect chemical suppliers like?

In recent years, the UK's railway, public utilities and construction industries have become stronger and stronger. The launch of major projects such as HS2 and the world's largest offshore wind farm have created opportunities for suppliers.

It can be said that the perfect chemical suppliers is able to meet the needs of buyers, but this is not the case.

Here, let's take a look at the five qualities that we think buyers want from the perfect chemical suppliers.

1. Keep up with the industry standard

Ultimately, buyers need to know that suppliers do not add additional risk to their organization's risk profile. The main way to ensure this is to ensure that the supplier runs in a compatible way. In Achilles, each of our communities works on relevant industry standards, but they tend to center around the same area, such as ensuring suppliers comply with modern slavery laws, having a good health and safety record and a clear position on corporate social responsibility.

In fact, a study commissioned by Achilles found that when dealing with SME suppliers, buyers are most concerned about ensuring that they comply with the latest procurement standards and regulations.

Buyers tend to be particularly wary of small contractors' ability to comply with the latest laws, so it is crucial for suppliers to prove that they are doing well in this area.

2. Keep up-to-date information

Secondly, in the buyer's view, a perfect supplier should always ensure that its records are up to date.

Whether it's about insurance certificates, financial performance, health and safety, environmental policies or completed training courses, enterprises need to ensure that all information is relevant and updated regularly.

This not only makes it easier for suppliers to master their policies and documents, but also helps buyers make better decisions.

Achilles collects information about relevant industries in various fields during the prequalification questionnaire survey stage, which is a prerequisite for joining our community and requiring suppliers to update regularly, at least every year, to further ensure that these data are up-to-date and that buyers like things very much.

3. Strive for continuous improvement

For those suppliers who have been audited by Achilles, the score (which can be in the form of pass / fail or digital depending on the community) will show their performance and show it to the buyer together with the audit report.

Prove to the buyer that your organization is committed to continuous improvement through learning from the audit results and achieving better audit scores than last year, and show the buyer that your organization is constantly meeting the rising buyer standards. You may not always be perfect, but the action plan to make sure you have where you need it will go a long way.

4. Show innovation

Innovation is a key trend in the current supply chain, and buyers want to see signs of this from the suppliers they work with, as it may give your customers an advantage.

The Achilles prequalification questionnaire includes a special "supplier profile" section where companies can show their qualifications, give them the opportunity to show off their achievements and anything unusual, and they may work in internal or external organizations.

Buyers want their suppliers to be ahead of the game, always looking for a better self, while maintaining compliance. Therefore, for contractors, it is important to remember that buyers will look for signs of innovation, but they will also look for compliant suppliers, so these two factors need to exist at the same time.

5. Proactive attitude

Last but not least, a perfect supplier should have a positive attitude.

Join the Achilles community to show buyers that suppliers are serious to meet the requirements of buyers and the industry.

However, just joining is not enough. Remember to keep in touch with customers outside the Achilles platform, and your own marketing team or person in charge of marketing drives your organization to success. You can do these things on their company websites, social media, exhibitions and email signatures - let your creativity go.

Identify problems for China's specialty chemical companies

Although the size of China's specialty chemicals market has almost doubled in the past decade, few international specialty chemical companies have been able to achieve growth and profitability in this market. Foreign companies in the industry are facing major setbacks in China's growth and market share. Our market research experts believe that the profit structure of MNCs in China's specialty chemicals market is lower than that in other regions, which also shows the huge difference between leaders and laggards. The highly dispersed specialty chemicals market in the region is dominated by overcapacity and fierce competition. While some argue that falling margins are part of their global strategy to seize growth opportunities in China and build long-term business in China, there are clear signs that international companies are failing to keep pace with market growth.

In view of the steady growth of China's specialty chemical market, the international specialty chemical companies operating in China must rethink their existing operation modes and strategies to avoid backwardness.

The poor performance of international specialty chemical companies in China is caused by many factors. These include:

Not enough adjustments have been made to the Chinese market and products provided by Chinese competitors

Western companies have limited access to key potential customers (state-owned enterprises in second and third tier cities and fast-growing private institutions).

Lack of in-depth market insight, lack of relationship building ability, lack of entrepreneurial Chinese top talents in key positions of the company

More and more Chinese local competitors can provide products and participate in the competition of high-end market segments

The low capital expenditure rate of private entrepreneurs shows their ability to make aggressive investments

Chinese competitors quickly adopt Western technology - expertise and technology - to make it easier for them to offer highly competitive products

The role of specialty chemical products distributors

In the past few years, the role of special chemical products distributors has changed, which mainly affects the whole value chain of chemical products. In the past, chemical manufacturers used to see professional distributors as a necessary evil - a means to reach small customers or customers who were difficult to serve economically. Today, distributors are becoming an important part of the channel. The best dealers have deep market insight and the ability to create real value for manufacturers and customers. No wonder the market for specialty chemicals continues to grow faster than the industry as a whole.

We have recently conducted a comprehensive analysis of the sales market of specialty chemicals to identify promising markets and market segments, and to determine the development trend of the industry in the near future. (for similar analysis, see BCG report, distribution of specialty chemicals in North America, March 2016; market dynamics of specialty chemicals distribution, Boston Consulting Report, April 2014. ）The central conclusion of our analysis is that although the market is still very attractive, the threshold for the success of professional dealers is constantly increasing.

From 2012 to 2017, the distribution of specialty chemical products grew at a compound annual growth rate (CAGR) of 5.6%, with a global market size of about 97 billion euros. This is faster than GDP (2.7%), chemical industry (2.9%) and special chemicals consumption (4.9%) in the same period. However, to develop competitive advantage, scale itself can not solve the problem. Instead, professional distributors need to select specific market segments and geographic regions and then invest in the capabilities necessary to enable them to create value for chemical manufacturers and end users in these segments.

Moreover, digital technology is becoming crucial. Due to the high complexity of technology and logistics requirements, it is less destructive than other industries, but customers increasingly expect a complete online and offline experience. As a result, professional chemical products distributors must begin to invest in digital solutions, both in-house and customer-oriented operations, to expand their competitive advantage.

As of 2017, the largest markets were the Asia Pacific region (sales of professional distributors were around 40 billion euros), North America (31 billion euros) and Western Europe (13 billion euros). The rest of the market is less than 5 billion euros. The Asia Pacific region is not only the world's largest distribution market for specialty chemicals, but also one of the fastest growing regions, with a CAGR of 6.8% from 2012 to 2017. During this period, only the Middle East grew faster (7.8%). In contrast, growth in most developed markets has slowed, as expected, over the past five years: 4.7% in North America and 3.6% in Western Europe.

We expect sales growth of specialty chemicals to slow slightly to 5% by 2022, due to slower consumption of chemicals (for the industry as a whole and a subset of specialty chemicals), reduced demand in mature Western markets, and short-term setbacks in the Chinese economy. However, it will still outpace overall global GDP growth and specialty chemicals sales in major markets. (see Table 1. ）In absolute terms, most of the growth in third-party distribution of specialty chemicals will come from major markets in Asia Pacific and North America by 2022.