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Unleashing India’s Potential in
Downstream ChemicalsFICCI Summit on Global Chemicals & Petrochemicals
Presented byRajendra GogriChairman & Managing Director, Aarti Industries Limited12th November, 2019
Agenda
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01
02
03
Changing Global Scenario and India’s position
Catalysts for unleashing potential of the Indian chemical industry
Interconnections in the Chemical Value Chain
Agenda
3
01
02
03
Changing Global Scenario and India’s position
Catalysts for unleashing potential of the Indian chemical industry
Interconnections in the Chemical Value Chain
4
The two pillars of the chemical industry differ in important
ways but share a symbiotic relationship
Basic Chemicals (Downstream
Petrochemicals)
Intermediates & Specialty Chemicals
1 Nature of OperationsManufactured in large dedicated continuous plants or in refineries
Manufactured in batch or continuous multipurpose plants as per volumes
2 Value per UnitTypically less than $2 per kgGenerally greater than $2/kg and could
even go upto $100 or $1000 per kg
3 TechnologyStandard Technology is readily availableNo off-the-shelf technology; most
product development done in-house
6 Critical Success FactorsScale (size of available market) and
petrochemical feedstock at competitive ratesAccess to basic chemicals, R&D
investments, Product mix flexibility
4 Nature of EnterprisesLarge players with ability to make long-term investments; less labour intensive
Predominantly MSMEs with in-house technology; more labour intensive
5 Size of InvestmentHigh level of investment in line with size
of the plantsLevel of investment may vary depending
on process complexity
• Dyes, pigments and intermediates• Agrochemicals & intermediates• Pharmaceuticals & intermediates• Polymer additives• Surfactants• Rubber Chemicals• Flavours & Fragrances
Petrochemical Feedstock• Benzene, Toluene and
Xylenes• Ethylene and
Propylene• EO and PO
Basic Chemicals (Downstream Petrochemicals)
Intermediates & Specialty Chemicals
Basic Chemicals• Phenol and
Acetone• Aniline• Phthalic
Anhydride
Feedstock suppliers, intermediate manufacturers and B2C companies share a symbiotic relationship
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PetrochemicalsBasic
ChemicalsIntermediate
ChemicalsSpecialty
Chemicals
The Chemical Value Chain begins with Basic Chemicals and terminates with End-Application Products such as dyes & pigments, agrochemicals, polymers, etc.
• Investments in Basic Chemicals are viable only if there is production capacity in Intermediate Chemicals (irrespective of the size of demand for end-application products)
• Investments in Intermediate Chemicals can be viable only if reliable access to cost-competitive Basic Chemicals is available and end-application demand exists
• B2C companies will invest in local manufacturing only if intermediate chemicals are locally available. efficient local manufacturing can open up new avenues in the export market
• As long as basic chemicals and intermediates are available, the duty drawback and import duty structure should be such that end users (particularly exporters) prefer to purchase from domestic suppliers
A Chicken-and-Egg Situation
Feedstock SuppliersIntermediate
ManufacturersB2C Companies
Commodity Chemicals Manufacturers
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China has dramatically outpaced India in terms of chemical
manufacturing over the last decade…
China’s investment and R&D spend in chemicals over the last 10 years has far outpaced India and other countries
Source: WDI Data, SBI Caps
From a distant third player, China has become a global leader in the chemical industry
EU, 28%
USA, 22%
China, 13%
India, 2%
Japan, 7%
RoW, 27% EU, 15%
USA, 14%
China, 40%
India, 2%
Japan, 4%
RoW, 25%
Chemical Market Share in 2006 Chemical Market Share in 2016
Agenda
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01
02
03
Changing Global Scenario and India’s position
Catalysts for unleashing potential of the Indian chemical industry
Interconnections in the Chemical Value Chain
Structural changes in the Chinese chemical sector are
disrupting global supply chains
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Rolling 3-year CAGR of major basic chemicals in China is at a two-decade low
Increase in production costs and investment in effluent treatment has hurt ROCE for Chinese chemical firms
1 Starting 2015, the Chinese government announced strict pollution control norms and cracked down on polluting units
2 Number of active chemical units in China have declined from ~29,500 in 2010 to ~24,600 in 2016
3 In July 2018, the Chinese State Council unveiled an action plan to improve air quality by 2020
4 Shifting of units to dedicated industrial parks will disrupt supply chains and increase logistics costs in the near term
Source: SBI Caps
Why India is poised for growth in the chemical industry?
• India presents a large domestic market with expected growth in disposal incomes and consumption• Over the years, India has grown a critical mass in its intermediate & specialty chemicals sectors,
providing a ready ecosystem for undertaking chemical production at global scale
Rising Domestic Demand
• Given the disruption in China on account of the government crackdown on polluting industries as well as the ongoing US-China trade war, several multinationals are looking at alternate sourcing destinations to de-risk their supply chains
• India can be a neutral manufacturing location for US, China and rest of the world
Demand Pull from
Multinationals
• Wage rates in India are on an average 50% of the wage rates in China (though productivity is lower and other costs such as logistics, etc. partially offset this advantage)
• Skilled talent pool availability in India cannot be easily matched by other sourcing destinations (at present) for Vietnam, Thailand, Bangladesh, Mexico, etc.
Labour Advantage
• Recently announced changes in the corporate tax rates have made India a globally competitive tax regime
• GST implementation has reduced overall incidence of indirect taxes• India has moved up to 63rd place in the global Ease of Doing Business rankings
Tax Structure and Reforms
• Given the tightening of environmental norms and compliance in China, India is now on par with China with regard to environmental costs
Environmental Costs
Recent data already shows the shift towards India
10,452
13,078
16,106
-
5,000
10,000
15,000
20,000
FY17 FY18 FY19
Exports of organic and inorganic chemicals (Chapter 28 and 29) have grown by 24% per annum over the last 3 years
Exports of specialty chemicals (Chapters 30, 32 and 38) have grown by 11% per annum over the last 3 years
18,047 19,373
22,301
-
5,000
10,000
15,000
20,000
25,000
FY17 FY18 FY19
Source: DGFT, Import Data
Values in $m Values in $m
Agenda
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01
02
03
Changing Global Scenario and India’s position
Catalysts for unleashing potential of the Indian chemical industry
Interconnections in the Chemical Value Chain
A holistic policy framework can catalyse a virtuous cycle of growth in the chemical industry
Aid Financial Viability
Encourage Innovation
Reduce Time -to-Market
Duty Framework and Incentives
Infrastructure and R&D Ecosystem Feedstock Availability
Environment Protection
Policies
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PCPIR and their anchor units should prioritize feedstock availability for downstream chemicals
Current Business Context PCPIR policy has had limited success in driving
investments in downstream chemicals
Oftentimes, feedstock is not made available for downstream chemical units (Example: Deepak Phenolicssourcing propylene from south India for its recently commissioned phenol-acetone plant and not from the Dahej PCPIR anchor)
Space availability near the anchor is limited
Recommendation and ImpactRequire the anchor units in all PCPIRs to allocate certain
percentage of available feedstock for downstream chemical units at internationally competitive rates
Allocate adequate space around the anchor units in PCPIRs to downstream chemical units
Encourage movement of feedstock by pipelines to improve safety and avoid traffic congestion
Use the successes and learnings from Dahej to drive further development of the other PCPIRs
Create a Zero Liquid Discharge (ZLD) zone within PCPIRs with fast-track environment clearance
1 PCPIR Policy
Case Study: Growth through Collaboration
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• In the toluene to metolachlor value chain, lack of competitive and safe supply of ethylene was a missing link in India
• Reliance supported Aarti with ethylene via pipeline as well as supplied toluene (basic chemicals)• Aarti Industries established a value chain from toluene to Methyl Ethyl Aniline• UPL has set up manufacturing of metolachlor based on the available advanced intermediate
Toluene
Ethylene
Ortho Toluidine
Methyl Ethyl Aniline
Metolachlor
pipeline
Supply of $2.5-3m of ethylene from Reliance has enabled export opportunity of $60-75m for intermediates and agrochemicals and investment of $35-40m
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Custom Duty Rates should drive investment in basic chemicals
Current Business Context Basic chemicals attract 2.5% to 5% duty and specialty
chemicals have a 5% to 7.5% duty
Basic chemicals such as aniline, phenol, nitrotoluenes, chlorotoluenes, caustic soda, etc. still have sizable imports into India
Recommendation and Impact Increase duty on all chemicals across the board by 2.5%
for a period of 7-10 years (to avoid duty inversion)
Higher duty will provide better economic viability to basic chemicals to compensate lower scale at present, thereby accelerating the investment cycle across the chemical value chain
For domestic end-use industries such as textiles, auto, consumer goods, etc. chemicals is only 3-5% of total cost and hence the added duty will not lead to inflation
2 Custom Duty Review
Duty Drawback Rates should encourage exporters to buy-in-India
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1
Buy locally in India & avail duty drawback
2
Import under advanced license
Examples:• Aniline is currently imported under advance license by Aniline-derivative exporters despite RM being available
locally• India is surplus on Ortho anisidine but exporters still prefer to import while domestic producers end up
exporting at lower realizations
3 Duty Drawback Rate Rationalization
Current Business Context Mismatch in custom duty on raw material and drawback
rates on downstream product
Exporters prefer to import material under advanced license rather than buy locally under duty drawback scheme
Recommendation and Impact Increase duty drawback rates to at least 50% of the
import duty of the product’s key raw material
Duty drawbacks are WTO compliant
Despite domestic surplus, Exporters prefer to import under Advanced License owing to rate mismatch between custom duty and duty drawback
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Typical cost-benefit analysis where raw material customs duty is 7.5% and duty drawback rate is 1.5% on exported product
ItemAdvanced
LicenseDuty Drawback
(Today)Duty Drawback
(Proposed)Remarks
Imported Raw Materials ₹ 50 ₹ 53.75 ₹ 53.75Local RM assumed at import parity (duty inclusive). Customs duty assumed at 7.5%
Local Raw Materials ₹ 20 ₹ 20 ₹ 20RM, catalyst, solvents, etc. available locally
Utilities & Other inputs ₹ 10 ₹ 10 ₹ 10Same process irrespective of RM source used
Overheads ₹ 10 ₹ 10 ₹ 10 Manufacturing & Admin costs
Product Value ₹ 100 ₹ 101.5 ₹ 103.75 Including duty drawback
Profits ₹ 10 ₹ 7.75 ₹ 10Proposed duty drawback at 3.75% (half the import duty rate)
Purpose of Duty Drawback
• Encourage exporters to buy locally if material is available• Compensate exporters for duty incurred on locally-procured raw materials
Impact of Higher Duty Drawback
• Reduction in imports will save foreign exchange and improve trade deficit• Local industries can achieve better scale thereby improving employment and tax revenues
Proposal• Standard Rate for Duty Drawback for Exports should be at least 50% of the custom duty on key raw material
and raised to 3.75% across the board; specific cases can be considered separately
Procedural reforms are critical to capitalize on the current China situation and catalyse chemical investments and exports
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Current Business Context Obtaining the product mix approval itself takes 4-6
months
Industry player misses opportunity to exploit short term market opportunities which need adjusting product mix quickly
Recommendation and ImpactMoving to a product-agnostic effluent/emission-based
permission on intermediate products as the total effluent quality and effluent load remains constant
Technologically feasible as the IT infrastructure is in place to monitor emissions from chemical units remotely
Chemical firms can benefit from market opportunities as they emerge
Similar process being adopted by GPCB for dyes (grouped into 3 categories)
4 Product Agnostic Approval
Current Business Context The current rules do not permit any construction till
an Environmental Clearance (EC) is obtained.
Obtaining an EC can take anywhere between 9-12 months which considerably delays start of any greenfield expansion
Green space requirements being increased for existing units
Recommendation and Impact
Create ZLD zones with fast-track clearances
Allowance for a stage-wise clearance in which a firm may be allowed to begin construction after filing the application for locations where public hearing is not required (initially for ZLD units)
In situations where EC is not granted, the industry should be obligated to dismantle any construction at its own cost
Permit older units to have green spaces as per original plan
5 Accelerate EC Procedure
Promoting Innovation and Collaboration
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Current Business Context Adequate incentives not available to encourage
collaborative innovation at the industry level
Research institutes need to work in isolation or collaborate with individual industry players
Recommendation and ImpactChemical industry to contribute 25% of CSR corpus and
matched by the government to create a Chemical Innovation Fund
Results of R&D efforts funded through the Chemical Innovation Fund can be made open source for all industry players (similar system prevalent in China)
Enable smaller firms to benefit from technical expertise without spending efforts to reinvent the wheel
Foster collaboration among research institutes
6 Chemical Innovation Fund
Current Business Context Several products across the chemical value chain are
not made in India
Where even though competitive feedstock is available, it is largely on account of inadequate R&D or because of scale disadvantage
Recommendation and ImpactEncourage firms to introduce new products in India through
the Make in India initiative
Offer incentives for the first 3-5 years on commercial production through tax rebates or support on investment and R&D
This will motivate the industry to rapidly introduce high value products in India thereby accelerating commercial investment as well as reducing the import bill
7 Incentivize first-time Make In India
While we provide the right catalysts, it is important to avoid catalyst poisoning!
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• Comprehensive Environment Pollution Index (CEPI)-based order from NGT has made the chemical industry a whipping boy for pollution
• Entire Industrial Sector contributes a minor percentage of pollution in several areas identified as severely or critically polluted
• Aurangabad has only 11% contribution to air pollution from industry – CEPI score of 69.8 (Severely polluted)
• In Hyderabad, industry only contributes 7% of total air pollution – CEPI score of 75.4 (critically polluted)
• Expansion permissions in several industrial areas have been abruptly stopped till new norms are finalized – considerable delay, stuck projects and lost opportunity
• Several issues raised around methodology for computation of CEPI
• Share of industry in total pollution load in several areas is very low, which means further tightening is not going to significantly reduce pollution levels while adversely impacting investments, job growth and exports
• Such moves will also cause reputational damage to India as an alternate destination to China and scare away investments from abroad
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CEPI score in descending order for Industrial Areas/Clusters monitored during 2018
Source: NGT Order (July 2019)
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Air Pollution in Aurangabad – Share of Emissions from Industrial Sources
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Air Pollution in Hyderabad – Share of Emissions from Industrial Sources
Thank You
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