According to McKinsey's report titled 'India: The Next Chemicals Manufacturing Hub,' the country's chemical industry has been a global outperformer in demand growth and shareholder wealth creation over the last decade.
"It now stands poised to play an increasingly dominant role in global consumption & manufacturing," it said. The sector is expected to grow at a rate of 11-12% between 2021 and 2027, and 7-10% between 2027 and 2040, tripling its global market share by 2040.
"India is expected to account for more than 20% of incremental global consumption for chemicals over the next two decades. Domestic consumption and demand are expected to increase from $170-180 billion in 2021 to $850-1000 billion by 2040, according to the report. Chemicals are used extensively in human life, from detergents to clothing and fragrances, insecticides to paints, and telecommunications to music and media.
According to McKinsey, the growing global demand for bio-friendly products could benefit India because it is one of the leading producers of many chemicals used in such products. "Triggered by the evolving geopolitical scenario and the trend to diversify from the existing core manufacturing markets; firms are seeking to make their supply-chains more resilient. "India could be a preferred destination due to its strong value proposition," it said.
"However, India will continue to rely on imports to meet its chemical needs. Only speciality is expected to be a net exporter of the sector's three main segments: inorganic, petrochemicals, and speciality. Both the petchem and inorganic segments will be import dependent due to limited cracker infrastructure and a scarcity of key feedstock and minerals."
"Changing geopolitical scenarios have led to many countries focusing on domestic self-sufficiency and localized supply chains in recent years. Benchmarking India's manufacturing competitiveness, on the other hand, reveals that India has a strong starting point compared to other key global chemical clusters, which could lead to India becoming the next chemicals manufacturing hub," according to McKinsey.
"India will be the fastest growing global demand centre for chemicals in the coming years, with domestic consumption set to grow at a 9-10% CAGR on the back of rising disposable incomes, a favourable demographic dividend, increasing global preference for biofriendly alternatives, and growing diversification of global chemical supply chains," the report stated. The specialty chemicals segment is expected to be a key driver of this expansion.
It has the potential to add more than $20 billion to India's net exports by 2040, a tenfold increase over the current total of $2 billion. According to McKinsey, benchmarking against six global chemical clusters reveals both India's strengths and areas for improvement as a global destination for chemical manufacturing. "Indian chemical companies often face obstacles in feedstock availability due to lagging cracker capacity and low access to building blocks and key minerals".
Furthermore, India faces a scarcity of skilled R&D talent, as well as delays in environmental and land approvals. "Despite this, India is cost competitive in several chemical segments due to low capital and operating expenses such as labour, utility, and overhead expenses, among other things," the report stated.
When combined with the promoters' focus on high profitability and a culture of process innovation, Indian chemical companies have one of the highest EBITDA per unit of fixed asset investment. "This is evident from multiple Indian firms' global leadership in segments such as agrochemicals, pharma intermediates, dyes and pigments, carbon black, and so on," it said.
Many sub-segments of India's chemicals sector provide opportunities for small-scale businesses. Specialty chemicals (agrochemicals, flavours and fragrances, cosmetic chemicals), inorganic chemicals (caustic, fluorine), and petrochemicals all have winning plays (C4, C6 and C8 derivatives). "These sub-segments score high on both cost competitiveness – a function of domestic feedstock availability, trade balance, capacity utilisation, scope of process and tech innovation – and market attractiveness – an indicator of market size, demand growth, and export potential," the report added.
