India's chemical sector facing risk from China overcapacity, high crude prices and weak global demand: Nuvama

Nuvama, a brokerage firm, has issued a report stating that the chemical sector of India is presently having to contend with a number of structural and macroeconomic issues, all of which might prove to be detrimental to its growth and profitability.

According to the report, global competition, increasing costs, poor demand in major export destinations, and domestic policy matters have been cited as the top threats to Indian chemical producers.

The report brings to light one of the most important structural difficulties being the overpowering presence of China in global chemical production.

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Which chemicals are China flooding the market with?

China alone holds a sizeable part of the global capacity for many basic chemicals including soda ash, caustic soda, phenol, PVC, polycarbonates, epoxy resins, TDI, phthalic anhydride, and acetic acid. Even though global demand is weak, Chinese chemical manufacturers have opted to run their plants at low utilisation levels, which is causing the international market to be flooded with supply.

This has influenced the global demand-supply scenario and has pressured the international chemical prices. Consequently, Indian chemical industries find it hard to increase their prices and profit margins as the revival is soon limited by the extra supply from China.

High crude oil prices add to cost pressures

Crude oil is a major raw material for a number of chemicals and hence, high oil prices add up to the cost of feedstock like naphtha, benzene, propylene and ethylene that are already important. The report has cautioned that the downstream chemical segments that consume a lot of energy are very much at risk during oil price volatility, which can severely margin the profits.

The report also singled out foreign exchange risks as a major barrier. The Indian rupee getting stronger against the dollar means less export earnings for the Indian chemical sector, particularly for the bulk and mid-value products.

The chemical industry of India is largely dependent on the European and American markets for its exports, and so any rise in the rupee can cut down India’s cost advantage, especially when chemical prices globally are not very high.

Weak demand in Europe and US hurts volumes

The report states that the prolonged depression in Europe and the US has diminished the demand in many end-use sectors, such as housing, consumer goods, FMCG, agrochemicals, automotive, and construction.

The low residential construction activity has affected the demand for products like PVC, caustic soda, and polycarbonates. On the other hand, the demand for the pharmaceuticals and agrochemicals has been so low that it has affected the demand for intermediates and solvents.

The report from NITI Aayog has been quoted by Nuvama to highlight the slow progress in getting environmental clearances, lack of stringent measures against dumping, and high transport and power costs as the major reasons for India's low competitiveness.

In short, the report implies that although there is a great deal of promise in India’s chemical sector, the pressure of the global oversupply, the high costs of production, the lack of demand, the risks associated with the currency, and the policy issues that need to be addressed in a timely manner are the near-term challenges for the sector.