Niche research strengths drive specialty chemicals

Express Pharma provides an overview of the speciality chemicals market in India

The chemical industry is one of the most important manufacturing industries in India. According to a report from Cygnus Business Consulting and Research, the chemical industry accounted for three percent of Gross Domestic Product (GDP) and 17.6 percent of the manufacturing sector in 2005-06. During the same period, the industry was worth $30.59 billion, registering a growth of 10.23 percent over the previous year, with a CAGR of 8.68 percent over the last three years. The same report projected a growth rate of over ten percent in CAGR over the next three years as well, in line with the general positive trend in the manufacturing segment. Another growth driver is the pharmaceutical industry, a key segment of the chemical industry, which is in expansion mode after implementation of the TRIPS agreement.

The chemical industry has diverse categories like commodity chemicals (inorganic and organic), drugs and pharmaceuticals, plastics and petrochemicals, dye and pigments, fine and specialty chemicals, pesticides, agrochemicals and fertilisers. Of these segments, Indian players seem to have a special attraction for specialty chemicals, as these are high-value added chemicals, generally produced in smaller quantities, and used in industries ranging from pharmaceuticals to plastics. Therefore, capital outlay is smaller and entry barriers relatively lower.

According to the Global Industry Classification Standard (GICS), specialty chemical companies are those that primarily produce high value added chemicals used in the manufacture of a wide variety of products, including, but not limited to, fine chemicals, additives, advanced polymers, adhesives, sealant and specialty paints, pigments and coatings.

Specialty chemicals can be grouped according to their composition or usage. On the basis of composition, there are two categories—fine chemicals and performance chemicals. Fine chemicals are synthesis products, used as intermediates in the manufacture of various end products, ranging from pharmaceuticals to flavours and essences, from agrochemicals to detergents etc. These products have medium to low volume sales, but are priced higher compared to commodities. They are composition products described by their chemical-physical properties. Performance chemicals, on the other hand, could be mixtures of chemicals, designed for specific customers and applications. Depending on the use, the chemical industry is divided into traditional specialty chemicals used in textiles and leather treatment segments and the emerging specialty chemicals used in paper treatment, polymer intermediates, master batches, water treatment chemicals and electronic chemicals segments.

According to sources in the Indian Chemical Council (ICC), the largest section of the industry continues to be in the textile dyes and chemicals segment. The second in line, in terms of numbers, is leather chemicals and pigments. The dyestuffs segment has traditionally been one of the largest in the industry and continues to be crucial because of its forward and backward linkages with a number of other industries such as textiles, leather, paper, printing inks and food processing. Of this, the textiles and leather processing industries consume over 85 percent of all dyes manufactured. However, the dyestuffs segment has been gradually shrinking over the past three to four years and the future growth potential of this segment at about 1.5 to two percent is uninspiring.

ICC estimates that the specialty chemical industry outside the developed world constitutes just 11 percent of the global market. The market share of developing countries is about 20 percent of the fine chemical portfolio. Among performance chemicals, developed countries account for about 90 percent of the market. This clearly shows that in fine chemicals, countries like India and China have made an impact in the market.

A SWOT analysis of the specialty chemicals industry done by ICC reveals that the strengths of the Indian manufacturing segment dovetail with the requirements of this industry. The following explains why India is a key player in the global specialty chemicals market:

• Strengths: The specialty chemicals industry does not need large start up capital, but it does need a sufficiently deep pool of scientific manpower. Both factors favour India. Further, fine chemicals are driven by the pharmaceutical segment, which is witnessing galloping growth post-TRIPS, thanks to MNCs outsourcing manufacturing activities to lower-cost nations like India.
• Weaknesses: However, the way ahead is not smooth. India lacks facilitator institutions and operational modalities, which are required to bring Indian companies under one platform, to ensure competitiveness within the industry. Secondly, there is a perception that quality standards are lax and information dissemination is haphazard.
• Opportunities: As typical specialty products tend to be across a wide range, with smaller production quantities, but higher purity levels, opportunities include the introduction of new technology.
• Threats: Balancing the opportunities, the threats are that there is no quick enough payback to attract investors and this makes it more difficult to compete. Concept to commercialisation needs to be fast enough to maximise the economic benefits. There should be chemical advantages over current processes (higher yields, E-factor). Sufficient profitability is a must to overcome the costs of shutting down existing plants.

Future outlook

As expected, the Indian Fine Chemical Industry, which primarily caters to the pharmaceutical industry, is in a growth phase post-2005, after the product patent regime came into play. International pharma companies are today more willing to tie up with Indian companies to outsource fine chemicals for drugs in the pipeline. As more drugs lose patent protection in the next few years, Indian companies are positioning themselves to become preferred partners and suppliers to MNCs.

An important trend is that fine chemical companies are also using their leverage and supplying products to a spectrum of generic drug manufacturers making the same or similar APIs. According to sources in ICC, companies with niche and fundamental research strengths will thrive. The specialty industry is knowledge based and in order to survive in the global environment, Indian companies have realised that they have to become knowledge-based. Performance chemicals, in particular, require a dual focus on technology and customer needs.