Business Today

Beyond China

Chemical and specialty chemical companies are revising their sourcing strategies
twitter-logoPB Jayakumar | Print Edition: April 19, 2020
Beyond China

It was a month ago. In a conversation on phone with a senior manager of a medium-scale chemical company on people returning from China and being tested at the airports for coronavirus, he said in hushed tones: "I am one of them who returned from Wuhan two weeks ago. Now I am in isolation and do not have to go to office for another two-three days." He explained that since most of the company's raw materials are long-term contracts with manufacturers in Hubei province, the management had sent him to renegotiate contracts and explore other options.

"Then life was normal there. There was no other option and I had to go," he reasoned.

But, one thing is abundantly clear. Once the Covid-19 virus storm passes, the Indian chemical and specialty chemical manufacturers could rethink their sourcing strategy. That's because till the crisis struck, these companies were relying heavily on two countries - China and the US - for sourcing raw materials. Continuing with the same strategy will push their business into the doldrums, say experts.

Over the past two months, chemical manufacturers have been working hard to change their source from China to other destinations. Wuhan, the epicentre of corona virus pandemic, happens to be a global hub for chemical production. China, in fact, dominated global chemical supply for almost two decades. But now, India's trade data shows a shift in imports.

"In carbon black, while trade with China decreased 8 per cent, it increased 13 per cent to South Korea. In phenol, trade with China (-8 per cent) and Taiwan (-10 per cent) fell, while with Korea it increased 28 per cent. Terephthalic acid trade with Korea fell 4 per cent, but gained 4 per cent to the US," notes Rohit Sinha, specialty chemicals analyst, Emkay Research. For chlorine, water treatment chemicals, melamine and chloroform, imports were down 25-50 per cent in recent months. The dependence on China remains for chemicals such as citric acid, dicyandiamide and para aminophenol.

However, chemical companies are paying a price for quickly ensuring continuity in supplies. An analysis of top 20 chemicals imported into India reveals that prices per kg have increased for 18 products in the year to date data for FY20 (up to end-February) versus FY19. Of this, prices of two products - acetic acid and ethylene glycol - went up over 30 per cent, for six chemicals the rise was 20-29 per cent and for 10 chemicals, up to 20 per cent.

Lost Opportunity

The coronavirus pandemic in China had thrown up an opportunity, but with the fast spread of the disease locally and the resultant lockdown in the country means chemical companies in India are now not in a position to leverage. "Fall in crude prices and ailing China should have helped the Indian chemical and specialty companies. Crude prices fell by half; they could have procured raw material cheaper by up to 80 per cent. But most companies are not in a position to translate that advantage of cheaper production due to the stalemate in the country caused by Covid-19," says Sudeep Maheshwari, Principal lead-Chemicals, Kearney India.

"We export to over 75 countries and shipments were going smoothly over the last two months despite slight delays. That may not be the case in the weeks ahead as many countries are in a full lockdown," says Unnathan Shekhar, MD, Galaxy Surfactants - a leading manufacturer of performance surfactants and specialty care products with annual revenue over Rs 2,700 crore.

"The Indian chemical sector needs to be future-ready... there is a need to strengthen domestic chemical production base. The industry needs improvement in feedstock allocation policy, government investments in chemical clusters, and simpler pollution compliance laws," says H.S. Karangle, Director General, Indian Chemical Council.

India has been working in this direction. There has been an attempt to establish petroleum, chemical and petrochemical investment regions (PCPIRs) at an investment of over Rs 8 lakh crore and with potential to employ 34 lakh people. But barring some investments in Dahej (Gujarat), the other planned PCPIRs have not even taken off from the blue-print stage, say industry experts.

Another measure announced has been the promotion of common infrastructure facilities in three bulk drug parks with investment of Rs 3,000 crore over the next five years. There is a plan to create a Production-linked Incentive Scheme for promotion of domestic manufacturing of critical key-starting materials, drug intermediates and active pharmaceutical ingredients (APIs) in India with financial implications of Rs 6,940 crore for the next eight years.

This will be a step forward because despite advantages in chemistry skills which helped the country become the generic pharmaceutical maker for the world (almost one-third of drugs consumed globally are made in India and 20 per cent in terms of volumes), India was dependent on China for over 70 per cent of basic raw materials and intermediates needed to make those drugs.

"This announcement will help revive India's API industry and help the sector regain the dominance lost over the years," says Satish Reddy, President, Indian Pharmaceutical Alliance; and Chairman, Dr. Reddy's Laboratories.

Pankaj Patel, Chairman, Zydus Cadila, says China has gained importance in fermentation-based APIs like antibiotics and vitamins and policy changes in India could help the country achieve self-reliance in this segment.

Meanwhile, experts are predicting a gloomy few quarters. It could take months for companies with exposure to severely affected countries to get their business back on track. "Although it is too early to evaluate the quantum of Covid-19 impact, some companies could face challenges," says Sinha of Emkay Research.


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