Frost & Sullivan report

Indian Chemical Industry and Mega Trends Impacting the Industry

Frost & Sullivan Presents an Exclusive Whitepaper on

Indian Chemical Industry


2© 2014 Frost & Sullivan

FOREWORD

The Indian chemicals industry is in a phase of growth where it is not only poised to be one

of the key markets globally but is also likely to emerge as a reliable supplier of quality chemicals

worldwide. Though at present, the Indian chemicals industry is less than 5 percent of the global

chemicals industry in size and per capita consumption levels are less than the global average

for most categories, it is likely to see a steady growth and continuous increase in the

penetration levels right up to 2020, provided suitable government impetus is provided. The

expansion thus envisaged in the sector also underlines the need to have more than five million

skilled professionals over the next five years.

Indian chemicals industry is currently pegged at US $36 Billion approximately, and is likely to

grow at a compounded annual growth rate of 10-12 percent over the next five years. Growth

will come from increase in domestic consumption, as well as rise in exports. Domestic growth

will be driven by increase in consumption and high growth in the end-user industries where

per capita consumption presently is low. Domestic demand of performance and agro chemicals

is likely to follow an accelerated growth path due increase in adoption levels and growing

consumer base. An evolving focus on regulatory compliances and sustainable chemistry

practices will enable the Indian industry to become a key manufacturing hub in the global map

in the years to come. Indigenous innovation will play an important role in making the industry

competitive vis-a-vis international companies.

We would like to thank ICC for giving Frost & Sullivan this opportunity to partner with them

for this event, and look forward to hearing industry stalwarts and thought leaders share their

opinion at this conference over the next two days. It was an enriching experience for Frost &

Sullivan to put this report together.

Chemicals, Materials & Foods Practice,

Frost & Sullivan – Middle East, North Africa and South Asia


3 © 2014 Frost & Sullivan

TABLE OF CONTENTS

Topics Page No.

1. Outlook for the Global Chemical Industry

a. Overview ..........................................................................................................................5

b. Key Trends ..........................................................................................................................6

2. Indian Chemical Industry .....................................................................................................8

a. Overview ..........................................................................................................................9

b. Key Characteristics ...........................................................................................................9

c. Key Segments ...................................................................................................................10

I. Base Chemicals: Overview ..................................................................................10

II. Base Chemicals: Key Trends ................................................................................10

III. Base Chemicals: Key Challenges .........................................................................11

i. Petrochemicals: Overview ...............................................................................11

ii. Petrochemicals: Key Trends .............................................................................11

iii. Petrochemicals: Key Challenges .....................................................................14

IV. Agrochemicals: Overview ....................................................................................15

V. Agrochemicals: Key Trends ..................................................................................15

VI. Agrochemicals: Key Challenges ..........................................................................18

VII. Specialty Chemicals: Overview ...........................................................................19

i. Dyes and Pigments: Overview ........................................................................20

ii. Dyes and Pigments: Key Trends ......................................................................20

iii. Dyes and Pigments: Key Challenges ...............................................................22

3. Mega Trends Impacting the Indian Chemical Industry ...................................................24

a. Energy/Resources ..........................................................................................................25

b. Technology Focus ..........................................................................................................25

c. Health and Wellness ......................................................................................................25

d. Infrastructure .................................................................................................................25

e. Globalization ..................................................................................................................25



Outlook of the Global

Chemical Industry



OVERVIEW

The global chemical industry (excluding pharmaceuticals) stood at US $3.07 trillion registeringa growth of 2.3 percent during 2013. On a regional level, Asia was the region driving growthin chemicals, and NAFTA bounced back from recession.

Exhibit 1: Region Wise Chemical Industry, Global Market, 2013

Europe continued to recover from secondarydepression, albeit at a sluggish pace.

NAFTA: Renewed CompetitivenessRiding on demand from light vehicles and arecovering construction sector, the USbounced back from recession, registering agrowth of 2.7 percent. The shale gas boom,continued to propel the chemical industry inthe US, rendering competitive advantage dueto lower gas prices. Looking ahead to 2015

and beyond, significant shale-driven chemical capacity is expected to come online and generatefaster growth.

Europe: Sector Progressing Out of RecessionThe European market appears to be emerging out of the secondary recession. However, therecovery is expected to remain tentative. Even though agrochemicals and cosmetics are pullingup the chemical sector, high volume segments such as petrochemicals continue to plunge intocrisis primarily due to high energy and feedstock costs. The persisting weakness in applicationmarkets such as automotive, manufacturing, and construction, is adding up to the manufacturerswoes.

Agrochemicals look steady due to demand from fertilizers and allied products. Additionally,Europe remains above the fray due to huge volumes of trade, originating mainly from Germany.

The European outlook for chemicals is expected to turn positive, mainly due to growth in thespecialty sector. Local production, however, is likely to face intense competition from productsfrom the US, which are riding high on cheap energy and feedstock prices.

Middle East: Value Addition is the KeyWith North America’s emergence in inexpensive feedstock, MENA’s leadership position is fading away. Suppliers, however, are promptly responding by adding value to basic petrochemicals.Additionally, major participants such as SABIC are in the process of investing in the US toleverage opportunities being thrown by shale gas. Manufacturers are continuing to invest inChina, signifying interest in the Asian market. Inspired by the shale gas story in the US, the regionis exploring its own shale gas opportunities. Development, however, is still in the nascent stage.

With the US’

renewed competitiveness,

Europe is expected to

witness further

challenging times ahead

Southeast Asia, along

with countries such

Mexico, Argentina etc.

are expected to emerge as

potential regions in

chemicals domain

52%

17%

23%

6%2%Asia

NAFTA

Europe

Latin America

Rest of the World

NAFTA: North American Free

US $3.07 Trillion

NAFTA: North American Free Trade AgreementSource: Frost & Sullivan analysis



MENA is also witnessing increased interest by global majors such as Dow and Exxon, withmulti-billion dollar projects expected to come in by 2016-2017. Some of the major investmentsinclude Sadara Chemicals (joint venture between Saudi Aramco and Dow Chemicals), a US$20 billion integrated chemical facility; a joint venture between Exxon and SABIC for rubberand elastomer in Al-Jubail; capacity expansion for PetroRabigh, a joint venture between SaudiAramco and Sumitomo Chemicals.

The chemical industry in MENA is expected to grow by 4.5 percent annually during 2013-2015, riding on robust growth in the non-oil GDP.

Asia: Emergence of Southeast AsiaAsia remains the growth pillar for global chemicals industry. Even though the region faced revived competition from North American manufacturers, Asia (excluding Japan) registered ahigh growth of 7.8 percent, cruising high on regional demand in automotive and constructionindustry.

While the steady local demand keeps market growth at a fast pace, challenges pertaining toovercapacities are looming large, especially in China. Slowdown in exports volume is likely tobe neutralized by strong demand locally, especially in Southeast Asia and China.

The Chinese chemical industry, which witnessed a slight slump in the past two years due toreduced investments in infrastructure, is likely to gain traction again and reach 8.5 percentgrowth during 2013-2015. Growth is likely to be onset by rebounding agrochemicals drivenby increased fertilizer consumption, fine chemicals, and specialty chemicals. Constructionchemicals are expected to witness a mild plunge following decreased investments in infrastructure.

Facing years of depression, the Japanese chemicals sector is looking up, aided by rigorous stimuli and fiscal policy by the new government. Increased chemical production coupled withthe depreciating yen, is likely to boost exports.

KEY TRENDS

Regional Shift: East Drives Demand, West Bringing Up SupplyWith recent developments in shale gas, the US has bounced back with internationally competitive supply. Proven shale gas reserves have positioned US as the region having highestfeedstock advantage globally. Promising opportunities thrown by the shale gas boom, has introduced a new wave of investments by the chemical industry in the region. Although experiencing pressure through higher taxes and spending cuts, the US market witnessed a 10percent surge in capital spending, valued at US $42.4 billion. During 2013, over 135 new chemical production projects (totally valued at over US $90 billion) were announced. Capitalinvestment is expected to grow at a healthy rate of 8 percent through 2016. Increasing capitalinvestment ensures higher production volumes. Demand, however, is expected to grow slowlygiven the maturity the region has attained. In such a case, the eastern and southern hemispherewith their robust growth outlook, are promising destinations. With some of the key industriessuch as textiles having already moved to the east, others such as agrochemicals, plastics, pharmaceuticals, and automotive components are fast moving to growing Asian economiessuch as China, India, etc.

Bulk/base chemicals

in the Asian markets

are expected to

undergo major

strategic changes



Regional Structuring of Chemical PortfoliosExhibit 2: Regional Shift in Chemical Portfolio

With the shift in demand trends, US and European producers are positioning themselves towards value added downstream products. Europe has been forced to close down capacitiesin commodity chemicals and realign focus towards specialty and service/functionality drivenchemicals. Asian markets, however, are adding capacities to their existing products with lesserforays in capital intensive downstream products.

Capacity UtilizationExhibit 3: Region Wise Capacity Utilization, Global Market, 2013

Facing secondary recession and intense competition, high capacity utilization remained thekey encouraging factor for European manufacturers. China, on the other hand, remained severely oversupplied due to slowdown in key exports markets.

75.2

79.2

65

77

USA Europe China IndiaCountry/Region

Util

izatio

n (%

)

Source: Frost & Sullivan analysis

Source: ACC, CEFIC, Frost & Sullivan analysis



Indian Chemical

Industry



India Overview: The Indian chemical industry was the second largest producer in Asia in terms of volume afterChina. The industry was pegged at US $136.5 billion for 2013, accounting for approximately 7percent of India’s GDP. The industry accounted for over 12 percent of total Indian exports.Base chemicals continued to be the largest segment accounting for over 35 percent of thetotal chemicals demand, followed by pharmaceuticals and specialty.

Exhibit 4: Segment Wise Chemical Industry Share, Indian Market, 2013

Over the last decade, the Indianchemical industry has strengthenedits competitiveness in agrochemicalsand pharmaceuticals segments,becoming one of the major exporters for these segmentsglobally. The industry also witnessed increased investmentsin the specialty sector, which ispoised to be the fastest growingsegment in India. Post the dip observed during 2013, key

end-user segments such as construction, automobile, packaging, and electronics are expectedto drive the demand immensely. Construction and automobiles are likely to grow at 12 percenteach, packaging at over 13 percent, electronics at 13 percent rendering a promising growth ofover 12 percent to the chemicals demand.

KEY CHARACTERISTICS

Capacity Utilization: Foreign Trade Impacting EfficiencyThe Indian chemical industry has experienced mixed efficiency in the past three years. Sub-segments of bulk chemicals such as petrochemicals and alkali chemicals have run their facilities at an average of 80 percent, whereas sub-segments in specialty such as agrochemicals,dyes, and pigments have witnessed a capacity utilization rate of 65-70 percent. Although localdemand, raw material prices, power and energy costs remain the primary factors impactingthe utilization rate, factors pertaining to trade such as demand fluctuations have affected theutilization rates adversely. For example, export oriented specialties such as pesticides, dyes,and pigments, etc. have observed a declining utilization rate post-recession. Manufacturers insegments with considerable imports, such as petrochemicals, alkali chemicals, etc. have managed to maintain around 80 percent utilization.

Policy and Promotion: PCPIRs Slated to be Investment DriversOver the past 15 years, the Indian Government has taken several measures to give an impetusto the chemicals industry. The government allows 100 percent FDI in the industry. Licensingrequirement is substantially flexible for the production of most of the chemicals including pesticides, dyes, organic, and inorganic chemicals.

Pharma, Agro and

Specialty chemicals

are the key segments

contributing towards

foreign

exchange reserve

With product quality

becoming the crucial

component of the

decision matrix for

customers,

regulations regarding

licensing are expected

to evolve further

21%

10%

20%17%

3%

29%Petrochemicals

Other Base Chemicals

Specialty Chemicals

Fertilizers

Agrochemicals

Pharmaceuticals

$136.5 Billion




The Government has introduced the Petroleum, Chemical, Petrochemical Investment Regions(PCPIR) Policy that focuses on an integrated approach to promote growth and investment inthe petroleum, chemicals and petrochemicals sectors through use of common infrastructureand support services. Raw material availability of Naphtha for the petrochemical and plasticindustry plays a critical role in PCPIR. PCPIR is designated to have a combination of productionprojects, public utilities, logistics, environmental protection, residential areas, and administrativeservices. Vishakhapatnam and East Godavari District in Andhra Pradesh, Bharuch in Gujarat,Paradip in Orissa and Cuddalore and Nagapattinam Districts in Tamil Nadu are the currentPCPIR projects. These PCPIRs have received investments worth US $10 billion for infrastructureand are expected to generate industrial investments of over US $75 billion.

Such positive measures have already started bearing fruit, with the Indian chemical industryreceiving FDI to the tune of US $8.8 billion during 2000-2013, with 75 percent of the inflowsbeing received in the last 3 years.

KEY SEGMENTS

Base ChemicalsOverview: Petrochemicals, man-made fibers, industrial gases, fertilizers, chlor-alkali, and otherorganic and inorganic chemicals, form the base chemicals segment. This segment accounts forover 50 percent of the total Indian chemical production.

KEY TRENDS:SUPPLY SIDE

Fragmented Structure: Barring the basic building blocks such as ethylene, propylene, and butadiene, etc., the supply side for other organic and inorganic chemicals is highly fragmented.Majority of Indian manufacturers operate on much smaller scales in comparison to their globalcompetitors. Such a scenario deprives the sector of the benefits of economies of scale anddomestic products are strained due to cheaper imports.

KEY TRENDS: DEMAND SIDE

Base Chemicals Trade:Organic Chemicals

Exhibit 5: Major Organic Chemicals Trade, India, 2008-2013

End to end

integration trend is

yet to take off in

India

Source: Department of Chemicals & Petrochemicals, Frost & Sullivan analysis

8231181

15622007 19691840

28103276 3315

4142

0500

10001500200025003000350040004500

2008-09 2009-10 2010-11 2011-12 2012-13

Exports

Imports

Year

Volu

me

(KT)



In organic chemicals, imports continue to exceed exports, even when local manufacturers arereeling under the pressure of tremendous overcapacity. The primary reason is attributed tocheaper imports from China.

KEY CHALLENGESOvercapacity: For the past four years, the base chemical segment has felt the pressure ofovercapacity, with the capacity utilization rate hovering around 60 percent for inorganic chemicals and at around 65 percent for organic chemicals. Sluggish domestic and exports demand; and increased imports from China and the Middle East are the major factors attributed to the persisting overcapacity. The capacities saw a jump of around 10 percent since2008, underlining the unpreparedness of the industry for the demand slump.

PetrochemicalsOverview: Petrochemicals are chemical products derived from petroleum. The main branchesof products are olefinic and aromatic, which are then processed onward into plastics, rubber,important industrial chemicals and intermediates, dyes, pharmaceuticals, fertilizers, and synthetic fibers. Petrochemicals’ manufacturing is an integrated set-up with many manufacturers/plants in a localized area sharing resources to maximize economies of scale.

Petrochemicals represent a growing market in India, with average CAGR from 2007 to 2013at 7.5 percent, in line with development initiatives in the Indian economy. India’s petrochemicalindustry is an oligopoly with four predominant players: Reliance Industries Limited (RIL), GasAuthority of India Limited (GAIL), Haldia Petrochemicals Limited (HPL), and Indian Oil Corporation Limited (IOCL). The Indian industry is also confined geographically to certainstrategic hubs such as Dahej, Gujarat; Kochi, Kerala; Panipat, Haryana and Haldia, West Bengal.The total demand for petrochemicals in India in 2012-13 was 32.5 million metric tons.

Major polymers manufactured in India include polypropylene (PP), polyethylene (PE), polyethylene terephthalate (PET), Ethylene, Purified Terephthalic Acid (PTA), Polyvinyl chloride(PVC), polystyrene (PS), etc. The largest application of petrochemicals in India is in polymers,which are used in packaging, automobiles, and construction end-use segments. Manufacturingcapacities in India are being augmented to support India’s rapidly growing demand and to reduce net import of polymers. The overall polymer industry in India is forecast to grow at10-11 percent in the next three years.

KEY TRENDS: SUPPLY SIDE

Downstream Integration: Indian petrochemicals manufacturers are increasingly investing inacquiring downstream products capabilities. Companies such as RIL, IOCL etc. are foraying indownstream products such as butyl rubber, styrene butadiene rubber, etc. Such steps are beingobserved as futuristic, towards increasing global competitiveness. Global leaders such as BASFhave integrated capabilities from basic petrochemicals to end specialty.

Strategic Alliances and Consolidation: The Indian petrochemicals segment has observed aslew of alliances such as OPAL (a joint venture between ONGC, Gujarat State Petroleum Corporation and GAIL), HMEL (joint venture between HPCL and Mittal Energy), RelianceSibur (joint venture between RIL and Sibur Petrochemicals) etc. The alliances are aimed atleveraging the feedstock/crude vis-à-vis petrochemicals/downstream capabilities of the participating companies.

Downstream

integration is

expected to play a

pivotal role in the

sustainability of

petrochemicals supply



Exhibit 6: PCPIR Projects, India

PCPIR: The PCPIR Policy is expected to revolutionize the petrochemical industry, provided it getsimplemented with absolute efficiency and intended purpose, with anchor investors being realanchors supporting the downstream chemical industry. Also, the timeframe for investmentsrealization is crucial.


Understanding the Indian Potential

Exhibit 7: Per Capita Polymer Consumption

Per capita polymer consumption in India is one of the lowest globally standing at nearly 1/10th

of the developed countries and less than 1/3rd of their developing counterparts. Such a lowconsumption average indicates a robust outlook for base chemicals, especially petrochemicals.

With IOCL’s and

RIL’s foray into

synthetic rubber,

dependence on

imports is expected to

go down

10

45

32

109

0 20 40 60 80 100 120

India

China

Brazil

USA

Kilograms

Source: APPCPIR, Gujarat PCPIR, Frost & Sullivan analysis

Source: Industry Estimates, Frost & Sullivan analysis



Trade:Exhibit 8: Major Petrochemicals Trade, India, 2013

The petrochemicals sector continues to rely on imports to meet the demand, especially insub segments such as polymers and synthetic rubbers.

Domestic Demand:• Olefins comprise ethylene, propylene, butadiene, styrene, ethylene dichloride, and vinyl

chloride monomer that are used in the production of several commercially important derivatives and intermediates. Olefins are forecast to grow at 8-9 percent CAGR until 2016.

• Fiber Intermediates include acrylonitrile, caprolactum, pure terephthalic acid and monoethylene glycol. This category is expected to grow at 5-7 percent CAGR until 2016.

• Synthetic fibers include polyester filament yarn (PFY). The overall segment is forecast to grow at 7-8 percent CAGR until 2016.

823

1181

1562

2007 19691639 1548 1639

21822487

0

500

1000

1500

2000

2500

3000

2008-09 2009-10 2010-11 2011-12 2012-13

Exports

Imports

Year

Volu

me

(KT)




Exhibit 9: Major Petrochemicals Demand Growth, India, 2013

• Para-xylene, orthoxylene, meta-xylene, benzene and toluene are used in the manufacture of chemical intermediates and are expected to grow at 8-9 percent CAGR until 2016.

• Carbon black witnesses its main applications in tyres and pigments, and is expected to grow at approximately 9 percent CAGR until 2016.

• Surfactant petrochemical derivatives include Linear Alkyl Benzene (LAB) and Ethylene Oxides (EO).

• Elastomers (rubbers) include Styrene Butadiene Rubber (SBR), Polybutadiene Rubber (PBR), Nitrile Butadiene Rubber (NBR) and Ethylene Propylene Diene Monomer (EPDM). This segment is expected to grow at 6-7 percent CAGR until 2016.

KEY CHALLENGES

Feedstock Cost and Margin Pressures: With the advent of shale gas in the US market, thecrude based base chemicals market is reeling under tremendous competitive challenges overraw material availability and prices. The US and MENA based manufacturers are leading thesegment with their renewed (continued in case of MENA) competency. Products from thesemarkets have increased price competition thereby increasing margin pressure on the domesticmanufacturers.

8113 8959 9913 11037

80708633

936210810

59576360

6699

71383388

34733663

3965

666697

731

764

406455

480

513

20902283

2485

2710

37293722

3947

5145

2011 2012 2013 20140

5000

10000

15000

20000

25000

30000

35000

40000

45000

Polymers Olefins Fibre Intermediates

Synthetic Fibers Surfactants Elastomers

CB and CBFS others

Fiscal Year

Volu

me

(KT)




AGROCHEMICALS

Overview: With the agricultural industry accounting for around 20 percent of the Indian GDP,agrochemicals segment assumes added significance in Indian economic growth. The agrochemicalsindustry stood at a little over US $4.3 billion during 2013, with a 5 year CAGR of 8 percentduring 2008-13. India is the fourth largest producer of crop protection chemicals globally, afterUS, Japan, and China. Key agrochemical segments are insecticides, herbicides, fungicides, biopesticides, and others.

Exhibit 10: Growth of Agrochemical Industry, Historic and Forecast, India, 2013


Brand Building and Awareness: Market participants are increasingly focusing on increasingawareness about products, through organizing farmers’ camp across the country. Also, companies are providing end-to-end solutions for complete requirements during a crop season.

Business Consolidation: Indian major such as Rallis has established strategic alliances withglobal participants such as DuPont, FMC, Bayer, Syngenta and Japanese major Nihon Nohayaku.Global leader Bayer is expected to acquire stakes in Kaveri Seeds. These alliances are targetedtowards increasing the geographical penetration and diversification of product portfolio.

Global Competitiveness: Indian participants are investing substantially in key componentssuch as R&D and distribution channels. Additionally, series of acquisitions globally, such asthose by United Phosphorus Ltd. (UPL) signify the thrust towards increasing the competitivenessin global markets.

Market is expected to

shift from insecticides

to herbicides in the

long run

1.55

2.05

2.93.2

3.9

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2009 2013 I II III

CAGR

2018Year

Valu

e (b

illio

n)





Market PotentialExhibit 11: Per Capita Pesticides Consumption

Per capita consumption ofagrochemicals in India is at0.6 kg/ha, one of the lowestglobally. With the increasingawareness, reach and surgingaccessibility, India is poised tobe one of the fastest growingmarkets for agrochemicals.

Horizontal ShiftExhibit 12: Agrochemicals Product Share, India, 2005 and 2013

Exhibit 13: Agrochemicals Product Share; (I) For India, 2020 (II) For Global, 2013

Herbicides are poised

to witness

tremendous

penetration,

especially in rice and

wheat crop protection




0.6

13

7

4

0 2 4 6 8 10 12 14

India

China

USA

Global

Kilogram/hectare

70%

13%

16%

1%2005

Insecticides

Herbicides

Fungicides

AgBio anOthers

65%

17%

15%

3% 2013

61%20%

15%4%

Insecticides

Herbicides

Fungicides

AgBio anOthers

23%

45%

25%

7%

(I) (II)



Indian demand for agrochemicals has traditionally been driven by insecticides. The reason isattributed to demand from cash crops such as cotton. However, with increasing research andawareness, various weeds dampening the growth of food crops have been recognized. Withthe objective to eliminate such weeds and increase the crop productivity, herbicides are experiencing the fast growth. The trend is to align globally where herbicides account for thelargest demand in the pie, in the long run.

Demand Distribution:Exhibit 14: Agrochemicals Demand Distribution, India, 2009 & 2013

Exhibit 15: Major Agrochemicals Exports, India, 2013

Agrochemicals have emerged as one of thefastest growing segments in exports supply from India. For the 2005-2012 period, exports from India have grown bya CAGR of over 13-14 percent. Thisgrowth is expected to further surge towards over 15 percent in the next 5years.

Exhibit 16: Major Agrochemicals Trade, India, 2013

Demand from Latin

American markets

highlights strategic

decisions such as UPL

acquiring Brazilian

major DVA Agro

Brazil


53%47%

2009

Domestic

Exports

48%52%

2013

Domestic

Exports

$2.95 Bn $4.23 Bn

72

8793

103110

14 1319 22 19

0

20

40

60

80

100

120

2008-09 2009-10 2010-11 2011-12 2012-13

Exports

Imports

Y

Volu

me

(KT)

26%

43%

8%

5%

9%

9% NAFTA

Latin America

Southeast Asia

Africa

Europe

Rest





KEY CHALLENGES

Overcapacity:

Exhibit 17: Capacity and Capacity Utilization Rate, Major Agrochemicals, India,2008-09 to 2012-13

Slump in the exports market coupled with recent slowdown in domestic demand, has broughtabout substantial overcapacity in the industry.

Lack of awareness for optimum product usage: In the existing distribution system, e-farmerspurchase the final product from retailers. The retailers, especially those situated away fromthe urban centers, are generally not proficient with product knowledge, to suggest a preciseproduct matching the farmer’s requirement.

Spurious Pesticides: Over 40 percent of the pesticides sold were spurious products and substandard pesticides, which apart from not having the desired effect on pests/insects haveadversely affected the crops. Spurious products come with tremendous margins forretailers/distributors which helps the manufacturers in increasing the penetration.

Growth of GM Seeds: The market for Genetically Modified (GM) seeds is gaining traction inIndia. These seeds have the immunity towards various adverse factors, thereby decreasing therequirement of agrochemicals.

The extent of

spurious products’

presence, signifies the

need for stringent

regulations Source: Department of Chemicals & Petrochemicals, Frost & Sullivan analysis

146 163200 209 210

7972

62 64 63

0

10

20

30

40

50

60

70

80

90

0

50

100

150

200

250

2008-09 2009-10 2010-11 2011-12 2012-13

Capacity

Capacity Utilization

Year

Volu

me

(KT)



SPECIALTY CHEMICALSIntroduction: Specialty chemicals are the fastest growing segment of the chemicals segmentin India. The segment comprises of sectors such as dyes and pigments, fine chemicals, paintsand coatings, construction chemicals, textile chemicals, water treatments chemicals, flavorsand fragrances, personal care chemicals, etc.

Exhibit 18: Evolution of Indian Specialty Chemicals Industry

TIM

ELI

NE

Supply Side Demand Side

Few Indian companies with

standalone units and importers

cater to the demand. Global

MNCs present only through

distributors/importers.

Low demand arising mainly

from agro and affiliated

industries. Growth in

construction and

automotive limited.

Global MNCs establish sales

offices. Indian participants

increase the manufacturing

base. Imports form a large

part of supply.

Construction and

automotive industry

starts gaining traction.

Global MNCs establish

foothold through joint

ventures. Indian participants

equip themselves with

greater technical knowledge.

Construction and

automotive industry

experience surge in

demand, driving the

demand for specialty

chemicals.

A slew of investments by

MNCs through

manufacturing set up and

acquisitions. Several

companies set up research

and development facilities.

India has positioned itself as

a major exporter in sub

segments such as Fine

chemicals, Agrochemicals,

dyes and pigments etc.

While the demand

continues to thrive on

growing construction and

automotive industries,

niche applications such

water treatment, flavors

and fragrances, oilfield

chemicals have emerged

as potential growth

drivers.

1980s-1990s

1990-2000

2000-2005

2005-Present




Overview: Indian specialty chemicals stood at US $27.3 billion during 2013 registering a 5year CAGR of 12 percent during 2008-2013. Specialty chemicals segment typically grows attwice the rate of GDP in a developing economy. The demand for specialty has largely beendriven by automotive and construction sectors.

Indian products have strong presence in exports markets as well. Export of specialty chemicalsfrom India is one of the fastest growing segments in Indian exports. Dyes and pigments alongwith the Active Pharmaceutical Intermediates (APIs) constitute the majority of specialty exports. Global competitiveness in terms of cost and quality of products has enabled Indianmanufacturers to successfully establish themselves in the exports market.

KEY SUB SEGMENTS

Dyes and PigmentsExhibit 19: Classification of Dyes

OverviewGlobal demand for dyes and pigments stood at US $28 billion during 2013. Indian revenuesfor dyes and pigments accounted for over 15 percent of the global sales, at US $4.3 billion.Over the past 10-15 years, the global dyes and pigments industry has witnessed a paradigmshift with production relocating from the US and Europe to China, India, and other SoutheastAsian countries. Indian dyes and pigments industry is marked by large presence of unorganizedsector, with over 1000 small scale units manufacturing dyes and pigments.


Fragmented Structure: The industry constitutes over 1,000 small scale manufacturers. Approximately 50 major producers are present in the industry.

Exhibit 20: Supply Structure, Dyes and Pigments Industry, India, 2013

Dyes and pigments,

along with

agrochemicals, form

the export driven bloc

in the specialty

domain

With the stringent

environmental

regulations,

consolidation likely

to happen with the

market share of

organized

participants poised to

increase

Reactive Direct VAT Disperse Others

Dye

Unorganized

- Approximately 50 companies - Global Competitiveness - Technology driven - Product Innovation and brand building

-Approximately 1000 companies -Lower price realization - Presence only in bulk segments

Organized

35% 65%





Industry consolidation in Western India: Around 90 percent of the dyestuff production is ac-counted for by states of Gujarat and Maharashtra. Apart from various incentives offered inthese states, concentration of major end users such textiles, paper etc. is the key factor forsuch a regional concentration in the dyestuff industry.


Application Split: Textile Drives the Demand

Exhibit 21: Demand by application, Dyes and Pigments Market, India, 2013

Demand Distribution: Production Thrives on Exports

Exhibit 22: Demand Distribution, Dyes and Pigments Industry, India, 2013

Indian products are majorly exported to the US, Europe, and Latin America. India has been one ofthe major exporters in the dyes and pigments segments, accounting for over 10 percent of theworld trade.

Exhibit 23: Dyes and Pigments Industry Value, India, 2008, 2013 and 2018

Dyes and pigments exports grew at a CAGRof over 13 percent during2008-2013, and are forecast to cross US $5billion by 2018.

65%15%

10%

10%

Dyes

Textiles

Paper

Leather

Others

51%

23%

9%

10%7%

Pigments

Inks

Coatings

Textiles

Plastics

Others

34%

66%

Demand Split

Domestic

Exports

S

$4.3 Bn

1.49

2.85

5.02

0123456

2008 2013 2018Year

Valu

e (B

illio

n)




Exports to grow at

faster rate than the

domestic demand



Demand Outlook: Exports share likely to increase further.

Exhibit 24: Dyes and Pigments Exports, India, 2008, 2013 and 2018

Scenario I: The industry continues to witness the sluggish growth witnessed in the past two years. Forecast: CAGR-7 percent

Scenario II: Growth resumes to 2011 level in the coming two years. Forecast: CAGR-9 percent

Scenario III: Overall economy recovers from the four year slump and higher penetration rates. Forecast: CAGR-12 percent

Demand for dyes and pigments are likely to be driven by segments such as inks, paints, andplastics. The textiles segment will remain the largest end user for dyes and pigments.

KEY CHALLENGES

Overcapacity:

Exhibit 25: Major Dyes and Dyestuffs Capacity and Capacity Utilization, India,2008-09 to 2012-13

Inks and paints have

witnessed one of the

fastest growths,

thereby directly

impacting the

demand for dyes



28

0.93

1.45

2.02.2

2.6

0

0.5

1

1.5

2

2.5

3

2008 2013 I II III

Valu

e (B

illio

n)

164188

218

252 252

67

79 78

69 68

40

45

50

55

60

65

70

75

80

85

0

50

100

150

200

250

300

2008-09 2009-10 2010-11 2011-12 2012-13

Capacity

Capacity Utilization

Volu

me

(KT)

(%)



As the exports demand gained traction during the mid-part of the last decade, manufacturersstrategized various capacity expansions, which were supposed to come in line by 2010-2012.The exports demand, however, slumped substantially due to global recession, forcing the manufacturers to run at lower utilization.

Capacity expansions

with anticipated

demand figures,

boomeranged and

resulted in

overcapacity



Mega Trends Impacting

the Chemical Industry



Mega Trend 1-Energy/Sources: Need for energy security is forcing many countries to reducetheir dependence on oil and move towards other sources. Further, the recent nuclear crisisin Japan will increasingly favor the use of renewable energy sources such as solar energy andwind energy, and enhance safety related products and governance.

Industry Focus - 2020:• Making chemicals available from starch or seed oil stock• Use of novel feedstock like algae• Smart grid infrastructure• Stress on more efficient use of resources

Mega Trend 2-Technology: Technology development across sectors like IT, telecom, robotics,and innovative materials will enhance the need for innovation in the chemicals space to keeppace with changing world, either to match with vendors or to the supplier base.

Industry Focus - 2020:• Nano - composites for food packaging and nano wires for Optoelectronics• Self-repairing plastic products• Smart factories with zero-emission technologies

Mega Trend 3-Health and Wellness: In most countries worldwide, per capita healthcarespending is rising faster than per capita income which is unsustainable. Focus on preventionleads to a rise in expenditure on products for weight management and functional foods/beverages.

Industry Focus - 2020:• Personal care nutricosmetics• Fortification products with enhanced compatibility of use• Lifestyle and ergonomics key aspects in materials design

Mega Trend 4-Infrastructure: Tremendous improvement in operational efficiency being theneed of the hour across the globe, a lot of stress is on getting the infrastructure right. Economic development is now directly related with the kind of infrastructure projects in place.

Industry Focus - 2020:• Trade across the globe becoming easier to trace and manage• Materials for more energy efficient buildings with improved life• Prolonged storage and transport life of perishable products

Mega Trend 5-Globalization: Globalization has resulted in increasing competition from developing economies. The key success factor is availability of low cost production facility orfeedstock. These markets have high impact from global trends which needs to be locally addressed.

Industry Focus - 2020:• Trade across globe, Middle East becoming next production hub• Europe will lead the global chemicals industry for regulatory compliance• Demand influence from different markets

By 2020, nearly half

of world electricity

will be produced in

emerging regions

Nanomaterial,

flexible electronics,

lasers; SMART

materials will drive

multiple applications



A Few Developments in Chemicals and Materials Space: Most of the development in terms of products or processes has been to address the changingneeds due to one or more of the Mega Trends.

Exhibit 26: Chemicals and Materials Industry Growth Cycle

Globally, we are seeing MNCs moving to re-align their product portfolio and business strategywith Mega Trends. For example, Dow Chemicals has a product suite catering to infrastructureand personal care industries. At an organization level also, we are seeing increasing emphasison aspects of sustainability and responsible manufacturing. BASF is the only industrial company that has regularly presented comprehensive and quantitative corporate carbon footprint statistics since 2008 and has recently announced ambitious environmental, health,and safety goals for its 2020 vision such as reduction of greenhouse gases by 25 percent permetric ton of sales product.

If current trends hold

by 2050, healthcare

spending will double,

with treatment

claiming only 20-30

percent of the total

spend vis-a-vis 50-60

percent in current

scenario

Around US $41

Trillion is expected to

be spent globally on

infrastructure related

projects

Growth Stage

Product MaturitySource: Frost & Sullivan analysis



GLOSSARY

1. Department of Chemicals & Petrochemicals: http://chemicals.nic.in/

2. Department of Fertilizers: http://fert.nic.in/

3. Chemicals and Petrochemicals Manufacturer’s Association of India: http://cpmaindia.com/

4. The European Chemical Industry Council: http://www.cefic.org/

5. American Chemistry Council: http://www.americanchemistry.com/

6. Dyestuffs Manufacturers’ Association of India: http://www.dmai.org/

7. Pesticides Manufacturers & Formulators Association of India: http://www.pmfai.org/home

8. Indian Paint Association: http://www.ipaindia.org/index.html

9. American Coatings Association: http://www.paint.org/index.php

DISCLAIMERThis White Paper prepared by Frost & Sullivan is based on analysis of secondary informationand knowledge available in the public domain. While Frost & Sullivan has made all the effortsto check the validity of the information presented, it is not liable for errors in secondary information whose accuracy cannot be guaranteed by Frost & Sullivan. Information hereinshould be used more as indicators and trends rather than representation of factual information. The White Paper is intended to set the tone of discussions at the conference inwhich it was presented. It contains forward-looking statements, par ticularly those concerningglobal economic growth, population growth, energy consumption, policy support for watersupply. Forward looking statements involve risks and uncer tainties because they relate toevents, and depend on circumstances, that will or may occur in the future. Actual results maydiffer depending on a variety of factors, including product supply, demand and pricing; politicalstability; general economic conditions; legal and regulatory developments; availability of newtechnologies; natural disasters and adverse weather conditions and hence should not be construed to be facts.

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