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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Changing Global Scenario and India’s position

Catalysts for unleashing potential of the Indian chemical industry

Interconnections in the Chemical Value Chain

Agenda

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02

03

Changing Global Scenario and India’s position

Catalysts for unleashing potential of the Indian chemical industry

Interconnections in the Chemical Value Chain

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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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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

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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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Buy locally in India & avail duty drawback

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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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