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Downstream Industry

Session 5 : 11:45-13:15

12 Nov 2019

-Presentation byDevinder ChawlaPartner, National Head-Chemicals, Ernst & Young

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The projected growth in Indian economy would lead to a significant increased requirements of downstream and specialty chemicals

Most consumer facing industries have a very high dependence on downstream and specialty chemicals

1.9

2.8

5

FY 14 FY 19 FY 24

Indian economy (USD tn)

FMCG

Construction

Automotive

Agriculture

Healthcare Logistics

Mining

Packaging

Chemicals

Textile

► The per capita consumption of chemicals in India

compared to global average is significantly low vis-à-

vis other industries ( Chemicals 1: 10x, FMCG 1:4x,

Paints 1:3.8x, Plastic 1:2.8x)

► Chemicals constitute 30% to 60% of the consumer

facing industries value

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For the Indian downstream sector to grow, key gaps/challenges need to be addressed

InfrastructureFeedstock

► Availability

► Volatility

► Quality

► Logistics network across

modes and cost

► Factor availability and cost

► Common effluent treatment

plant

► Labour count and skills

Investments Technology

► Investment for setting up

world class and world scale

plants

► FDI in India has not kept

pace with the industry

Policy and Regulation

► Ease of doing business

► Duties and Taxes which

are conducive to

investments and R&D

► Export promotion

► Land acquisition

Lack of awareness and

reach

► Technology adoption rate

and investment across

manufacturing, supply

chain and sales

► Investment in clean

technology

► Low per capita

consumption for key

chemicals categories

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The downstream chemicals industry in India is largely dependent on imports for key building blocks and intermediate chemicals

► Naphtha

Feedstock Building blocks Intermediates

► Natural Gas

► Methanol

► Ethylene, Propylene,

Butadiene, Benzene

► Styrene

► EDC, VCM

► Xylenes

► Polymers

► PVC

► Soda Ash

► ACN

► MEG

► PTA

Low import dependence

High import dependence

Medium import dependence

► Performance

Plastics

► Toluene, Aniline

► Ethylene

Dichloride

► Polyol

► Polycarbonate

► Calcium

Carbonate

► India has managed to bridge the gap in

demand supply of key chemicals such as

ethylene, propylene, butadiene with

investment in new capacities

India needs to develop world scale plants with leading technology and quality for them to be

globally competitive

► India’s net imports* of plastics, inorganic and

organic chemicals stood at USD -17 bn in 2018

► The demand supply gap for key intermediates is in

excess of 8-12 MMTPA

*Net imports= Exports-Imports

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The changes in China-shift to consumption led model and focus on environment -present both challenges and opportunities for the Indian chemical industry

► Shift to consumption led model

► Stricter adherence to

environment norms leading to

penalty on/closing/shifting of

chemical companies

► Erosion of cost competitiveness

compared to India

► US-China trade war

► Slowdown in economy

Changing Scenario in China

► Limited availability and

increase in prices of raw

materials and

intermediates

► Oversupply for certain

products

► Companies need to look

at alternate markets/face

reduction in demand for

certain export products

► Uncertainty on market

outlook for products

► Upgrade product mix

Challenges

► India can outperform China’s

chemical industry growth

and become the global

driver by capitalizing on both

its domestic and exports

demand

► Develop stewardship and

partnerships in other

countries

► Increase cost

competitiveness

► Improve exports, enhance

customer base with global

connections

Opportunities

Story so far► China constitutes ~37% of the global chemicals sales while India accounts

for ~3.5 %

► Over the last decade, chemical industry in China has grown at 16% CAGR,

while India managed a CAGR of 9%

Government and industry needs to act promptly to leverage the opportunity

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In addition to the macros and infrastructure intervention, the industry needs to focus on improving its performance and better integration with global industry

Cost efficiency

01

02

R&D and

Technology

04

Products

05

Digitization

03

► Manufacturing cost

efficiency

► Energy efficiency► Move to

develop a

holistically

greener value

chain with focus

on inputs,

processes,

products and

waste

Performance

improvement

► Leverage data and analytics

driven decision making

► Level of automation is low

across the entire value chain

► Collaboration with research

institutes

► Develop R&D capability

► Leverage digital

technology to

develop new

business models,

explore new

markets and

increase innovation

efficiency

► Focus to improve

supply chain

planning and

performance

► Integration of

supply chain with

customers and

global industry

Supply chain

integration

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The key agenda for the Government and the industry needs to be focused on…

Government

► Development of infrastructure

Industry

Players

► Invest in developing capabilities and

efficiencies

► Develop a growth roadmap for the industry

► Supportive policies for investment, exports

► Better integration across value chain and collaborate within

the group in possible synergy areas such as technology

► Analyse and assess the challenges/ roadblocks for growth and

work with government to resolve them

► Performance improvement

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Downstream Industry requires ‘ecosystem’ to be well developed

Core Process

60-65% of capital

Non Core Process

35-40% of capital

Power / Steam

Storage

Administration

Effluent

treatment

Backup power

Others

Customer

Logistics

Raw materials

Ancillary

CA / Doctor / etc

Social

infrastructure

Testing

Storage

Fire / security

Financial

Others…

Others

Bigger chunk is outside factoryCapital blocked & inefficient ‘non core’

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Questions to Panel

► What are the key challenges industry players are facing as they plan

their growth and investment agenda.

► What are your expectations from the government to enable investment

and industry growth

► In your view, what can industry players do to propel India as a as a key

player/ source for downstream and specialty chemicals

► How can industry leverage digital, integrated supply chain, portfolio

improvement, etc

► How can industry become more cost efficient

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Thank you

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Annexure

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China, despite facing similar feedstock constraints as India, has managed to grow at ~2x the CAGR of India

Source: Cefic

EU, -28%

NAFTA, -24%

China, -15%

Rest of Asia, -12%

Japan, -7%

South Korea, -

3%

India, -2%

China, 37%

EU, 16%

NAFTA, 15%

Rest of Asia, 14%

Japan, 4%

South Korea, 4%

India, 3%

World Chemical sales by region (% share)

Year 2007(Total sales: 1,909 Euro bn)

Year 2017(Total sales: 3,475 Euro bn)

9%

7%

1%

8%

1%

0%

16%

► Stricter adherence to environment norms leading to penalty on/closing/shifting of chemical companies

► Erosion of cost competitiveness compared to India

► US-China trade war

► Slowdown in economy

CAGR

The story so far… Changing Scenario in China

Opportunities for India

► Step up to become the new manufacturing hub and driver of global CPC industry

6%

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Key trends in India CPC industry

Investment scenarioKey trends dominating the chemicals industry landscape

Mirroring patterns in end-user industries, chemical manufacturing is shifting to the emerging economies of Asia Pacific, with China as the key destination.

Chemical companies are being drawn to the Asia Pacific region due to lower costs, rising demand and a larger local workforce.

Chemical industry is gradually moving towards developing a circular economy, as economies become more concerned about environmental sustainability.

Companies are opting for innovative ways and partnering with green chemical/technology providers to reduce the environmental impact of their operations.

M&A activity is shifting from megadeal-oriented to optimization of portfolios.

Some transactions involve activist investors seeking a stronger focus on core operations. Asia Pacific has accounted for more than one-third of global deal volume in 2018. Commodity chemicals are witnessing high deal activity driven by portfolio optimization and cost synergies.

Chemical companies are investing in R&D to drive growth via innovation.

Players are enhancing digital capabilities through in-house development and in collaboration with clients, peers and, technology players, investing in developing eco-friendly production and opening key R&D centres in the emerging economies to move closer to the customer.

Chemical companies are moving towards a more smarter and integrated supply chain as a result of digitization. They are integrating customers and suppliers into R&D, raw material sourcing and package sizing, digitizing operations, and building dynamic R&D teams.

Companies are deploying digital technology to respond to growing complexities in the business environment, including rising operating costs and changes in the regulatory environment.

They are investing in technologies such as IOT, RPA, AI and machine learning for innovative plant solutions, smart machines etc.

Chemicals industry

Manufacturing shift

Innovation

Integrated supply chain

Portfolio restructuring

Circular Economy

Digitization

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India’s net imports for CPC segment in 2018 was ~INR 1.20 lakh cr. growing at a CAGR of 9% between 2015-18

-13 -12

-14

-17

2015 2016 2017 2018

India Net import# for Chemicals and Petrochemicals* (USD bn)

# Net Import= Export - Import* HS codes considered are 28, 29, 32, 38, 39, 4002, 54, 55 (Excludes Pharmaceuticals and Fertilizers)

► CPC net imports contributed 9% to India’s overall net imports in 2018

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Sub-category wise India Net import# for CPC* (USD bn) in 2018

CAGR (2015-18)

5% 11% 2% 6%15% 10% -2% -12%

Source: TradeMap

► In 25% of 4 digit HS codes for CPC, the net import gap is lower than INR -1000 cr, while only in 8% cases, it is higher than + INR 1000 cr

► PVC, Phosphoric products, Acyclic alcohols and their derivatives and ethylene and its polymers are the key import groups

► Colorants, pesticides and cyclic hydrocarbons are the key export groups