Page 122 - CW E-Magazine (13-5-2025)

Point of View

Another worrying aspect of recent growth is that it has come at the cost of margins, for which the challenging external environment is
partly responsible. There are some signs of demand recovery in the fine chemicals business – feeding industries as diverse as pharmaceuticals,
agrochemicals, personal care ingredients, colorants, etc. – but margins here too are under pressure.

Petrochemical value chains are filling up, but not fast enough
Several propylene-based projects have been commissioned in the last couple of years, and more are expected to follow, with the olefin
coming from refineries and propane dehydrogenation projects. The first of the latter is likely to be commissioned in the next two years and
will be followed by at least one more, further augmenting the availability of this olefin. The obsession with polypropylene as the outlet for
propylene has diminished somewhat and projects for phenol & acetone, acrylate esters, and oxo-alcohols have been commissioned in the
recent past. The next two years will see some more.

On the ethylene front, imports of ethane all the way from the US will pick up steam. While it is now being done only by Reliance Industries
here, a few others have announced intent to follow suit. This will allow these cracker operators to benefit from an abundant, low-cost feedstock,
though the economics will be somewhat compromised by the costs associated with ferrying the hydrocarbon across oceans in custom-built
shipping vessels.

Sustainability related challenges particularly with respect to plastics will bend the demand growth curve for thermoplastics downward.
In addition to local regulations – such as ban on single use plastics, and mandates to incorporate specific levels of recyclate into rigid
packaging – international efforts to regulate consumption and possibly even production of plastics are ongoing. Some consensus is expected
to emerge from these discussions in a year or so.

Several value chains in India are still empty and could stay this way for multiple reasons for the near-term. For some (e.g., MDI), Indian
demand is still inadequate to support a world-scale plant. But this should correct in time, and those who invest ahead of the curve will reap
benefits of a first entrant. Lack of access to technology is also limiting the ability to invest in some value chains (e.g., alpha-olefins, acetic
acid). The workaround here is possibly through joint ventures and one such project (acetic acid) is now in planning. A third, and possibly the
most limiting factor, is poor competitiveness. This usually stems from a raw material disadvantage (e.g., methanol produced from natural
gas), and workarounds (such as using biomass or coal) are complex, expensive and unviable without strong fiscal and/or policy support.

Fine chemicals are a sweet spot – but change is coming here too
The fine chemicals industry – estimated at about $285-bn in 2024, with about 69% of output going to the pharmaceutical industry –
has seen a seemingly irreversible trend of outsourcing production from the western world to Asia (China and India, in particular). This has
been an important driver for growth in India’s chemical industry, and the competitive advantage that Asian firms have stems from the lower
capex and opex when building and operating multi-purpose plants. Today, a few hundred companies in India and China compete for business,
challenging western producers.

But the new-found desire for greater self-reliance in the US, EU and Japan could change the dynamics of the business. Governments are
keen to derisk supply chains – a weakness exposed harshly by Covid – and are prodding companies to ‘near-shore’, ‘friend-shore’ or localize
production. This is being aided by technology shifts, such as the use of biocatalytic systems and continuous process plants that allow safer and
more efficient operations. Whether a combination of policy measures and technological change will bring back a resurgence of fine chemical
manufacture in the western world will bear watching.

Tariffs – an opportunity?
The ‘reciprocal’ tariffs unleashed by the US on all its trading partners is the newest of the uncertainties plaguing the markets today. The
situation is evolving almost on a daily basis and businesses are being hard-pressed to take even routine decisions when it comes to trade. World
trade in chemicals is substantial and has served the industry well for the most part, but it has been upended for sure. The era of globalization
seems to be over, and bilateral arrangements will take its place. But they will not make up entirely for the benefits brought about by open-trade.

It is clear that China’s manufacturing industry is the prime target of the tariff moves, and in a sense other countries are collateral damage.
The tariffs imposed on India, or for that matter any other country, are less punitive than on China. If this differential is sustained – and it is a
big if – there could be opportunities for Indian companies to carve out market share from Chinese suppliers in the US market. China’s exports
of chemicals to the US are roughly 2.5x India’s, and theoretically this differential could be up for grabs. But much will hinge on the ability of
India’s chemical industry to scale up and do so in a responsible and sustainable manner. That is not a given!
Ravi Raghavan

122 Chemical Weekly May 13, 2025

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