Page 121 - CW E-Magazine (13-5-2025)

Point of View

Near-term outlook for the chemical industry

Chemicals will remain essential building blocks of any future we build. Chemicals are not just an enabler of other industries, but also
essential to human life. It is hence important to nurture a robust chemical industry that makes as wide range of products as commercially
viable and/or of strategic importance.

India’s chemical industry punches disproportionately on the world stage, and lags far behind other economies. Though the industry’s
ranking in Asia is only behind China, it is a distant second. Investments in the industry have happened in drips, and mostly from local
companies. Big ticket projects, on the other hand, have been few and far between.

In the near-term, the chemical industry here faces several challenges – some from external factors and others from within.
Global chemical industry seeing monumental shifts
The global chemical industry is seeing monumental shifts – in demand, capacity build-up, operating rates and profitability.

The economic slowdown in the developed world, in part due demographic changes (declining and/or aging populations), is slowing chemical
demand. This has recently been exacerbated by the post-Covid slowdown in China – the world’s largest consumption and production centre
for chemicals – following the country’s retreat from the investment-led path that sustained economic growth for nearly three decades. As a
consequence, the global near-term demand growth for basic chemicals is expected to be lower than anticipated just a few years ago. They are,
for example, expected to be down about 0.5% annually for commodity polymers, which may not seem much, but is enough to crush profitability.

Geopolitics has also become a complication in an already-muddled scenario and will alter investment patterns and trade.

There is no good news on the supply side – most value chains in basic chemicals suffer from significant over-capacity. Nevertheless,
investments continue to be made in new projects, particularly in China, defying economic logic.

Consequent to these demand and supply side dynamics, several petrochemical products have reached capacity utilisation troughs,
and the anticipated recovery is only beyond 2030. Though the industry is used to the ups and downs of business cycles, this time seems
different – the trough is deep, and prolonged.

Fundamental innovation in the chemical industry is stalling and leading to rampant commoditisation of even so-called specialities. At the
same time, tightening regulations, originating mostly in Europe, is raising the costs of compliance and operations. Industry captains there
have sent out repeated pleas to governments for urgent reforms to unshackle new projects and expansions. If not, they warn, a hollowing out
of the chemical industry in Europe is inevitable.

From an investor perspective, the global chemical industry seems to have lost much of its sheen. From being an outperformer in terms
of rewarding shareholders for most of the last two decades, it is today a laggard. This will constrain the industry’s ability to raise resources
to fund large projects.

India’s chemical markets – demand a given, supply not so much
India remains a bright spot in terms of growth and will likely retain its pole position as the fastest growing large chemical market. It (along
with Africa at a later date) will come to drive global demand growth in the medium- to long-term.

However, in the near-term while the upward trajectory of growth of India’s chemical demand is a given (though one can quibble about
numbers), production growth is uncertain. In the last few years, much of the incremental demand for base chemicals has been met by imports,
despite some investments, including by refiners looking for better value realisations for their refined products, in select value chains. But
the pace of new projects is lagging demand growth, and the gap is expected to widen. The trade balance in chemicals – estimated at about
$30-bn of net imports – is a cause for worry.

The lack of integration is preventing broad value capture and is one of the reasons for poor competitiveness. The other reasons are
infrastructure inadequacies and inefficient & expensive logistics. Though there has been some progress on both fronts, it is by no means
adequate. Cluster-based development is the key to more efficient as well as safer chemical operations and India has been missing out on
this for far too long. Some efforts are ongoing to create chemical parks along the eastern and southern coastlines and will likely fructify in
the next few years. And not a day too soon.

Chemical Weekly May 13, 2025 121

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