Feedstock availability, difficult access to latest technology and unfavourable duty structures have led to muted investments resulting in a plethora of chemicals being imported in India across the value chain. The net imports have risen from USD 2.6 bn in FY08 to USD 13.8 bn in FY15. Imports of several chemicals and polymers today are equivalent to a global scale plant output. With chemical demand shifting towards Asia, and China reassessing its chemical industry play, it could offer opportunities for chemical companies to invest selectively in India. To top it, government’s enhanced focus on `Make in India` and several states making chemicals as one of the preferred industries will facilitate realizing such opportunities. To make the most of the USD 12 bn opportunity in petrochemical intermediates, we believe companies need to reassess their business model & manufacturing footprint.

1. Opportunities - Chemicals
Chemical Industry Digest. Annual - January 2017
OpportunityAreasinChemicalsforMakeinIndia
Manish Panchal, Charu Kapoor, Nihaal Jelkie
Abstract
Feedstock availability, difficult access to latest technology and unfavourable duty structures have led
to muted investments resulting in a plethora of chemicals being imported in India across the value
chain. The net imports have risen from USD 2.6 bn in FY08 to USD 13.8 bn in FY15. Imports of several
chemicals and polymers today are equivalent to a global scale plant output. With chemical demand
shifting towards Asia, and China reassessing its chemical industry play, it could offer opportunities
for chemical companies to invest selectively in India. To top it, government’s enhanced focus on
`Make in India` and several states making chemicals as one of the preferred industries will facilitate
realizing such opportunities. To make the most of the USD 12 bn opportunity in petrochemical inter-
mediates, we believe companies need to reassess their business model & manufacturing footprint.
70
Nihaal Jelkie, Associate Consultant -
Chemicals, TATAStrategic Management Group
Email: nihaal.jelkie@tsmg.com
Manish Panchal, Sr. Practice Head –
Chemicals, Life Science & SCM
TATAStrategic Management Group
Email: manish.panchal@tsmg.com
Charu Kapoor, Principal - Chemicals
TATAStrategic Management Group
Email: charu.kapoor@tsmg.com
Authors

2. Chemical Industry Digest. Annual - January 2017
Opportunities - Chemicals
71
Introduction
R
apid growth of end use industries, changing
lifestyle of consumers and rising discretion-
ary income are driving the consumer industry,
which have a trickle-down effect on their key enabler
which is the chemical industry. To satiate the ever in-
creasing demand for chemicals, net imports have risen
at 26% p.a. from USD 2.6 bn in FY08 to USD 13.8 bn in
FY15, while production has grown at 3.3% p.a. over the
same period.
Disproportionate rise in imports
India is a net importer of chemicals since feedstock
availability has historically been a woe of the indus-
try. As depicted in Figure 1, net imports of organic
chemicals and plastics have steeply risen in the past
decade largely driven by imports of products such as
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
26% 29% 9% 9% 16% CAGR
Plastics & Articles
thereof
Organic chemicals Inorganic
chemicals
Synthetic rubber &
factice
Misc chem
products
Net imports of chemicals FY 08 (USD bn) Net imports of chemicals FY 15 (USD bn)
Fig 1. Net imports of chemicals
1.33
6.62
0.94
5.70
2.02
3.71
0.57
1.04
0.35
0.99
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
-
3.1 3.9 3.6 4.1 4.9 5.5 MMT
9.8
3.3
10.9
4.2
11.3
4.1
12.2
4.5
13.0
5.3
13.7
5.8
6.7 7.0
7.7 8.1 8.1 8.2
FY 10 FY 11 FY 12 FY 13 FY 14 FY 15
Production Consumption Imports
Fig 2. Demand-Supply Gaps for petrochemical intermediates
polymers, methanol and petrochemical intermediates.
Lack of adequate technology and skilled personnel to
work with latest technology gap in specialized infra-
structure, relatively cheaper imports of certain prod-
ucts and unfavourable duty structures in some cases
have been the major contributors to rising imports of
chemicals in India.
The Indian petrochemical industry is growing
based on ethylene capaci-
ty additions around a lim-
ited number of oil refiner-
ies, unlike the US Gulf coast
or Jurong Island where large
chemical clusters with multi-
ple crackers operate and man-
ufacture intermediates and
further downstream chemi-
cals as well.
Fraught with challenges,
majority of international com-
panies have preferred to ship
products to India, rather than
develop / expand a manufac-
turing footprint within the
country.
around a limited number of oil refineries, unlike
the US Gulf coast or Jurong Island where large
chemical clusters with multiple crackers operate
and manufacture intermediates and further down-
stream chemicals as well.
>> The Indian petrochemical industry has been
growing based on ethylene capacity additions

3. Opportunities - Chemicals
Chemical Industry Digest. Annual - January 201772
Expanding Demand-Supply Gap in Petrochemical
Intermediates
Value chain integration and strategic linkages are
key to the overall attractiveness and economics of the
chemical industry. Petrochemical intermediates are
a major segment to ensure connectivity between up-
stream building blocks and the downstream specialty
chemicals. Despite surplus naphtha of over 7 MMTPA
within the country, large quantities of petrochemical
intermediates are still being imported. This has cre-
ated disconnect between the petrochemical building
blocks and the specialty chemical industry. As shown
in Figure 2, the Demand-Supply gap for petrochemi-
cal intermediates has been rising at 12% p.a. over the
past 5 years and stood at around 5.5 MMTPA in FY15.
TSMG estimates this gap could exceed USD 12 bn or 11
MMTPA by FY20.
Improving Ecosystem
To reduce the high current account deficit, the gov-
ernment intends to increase the share of manufactur-
ing from the current 16% of GDP to 25% of GDP by
2022. The government has decided to make the 22 re-
fineries in the country the nerve centres, while petro-
chemical complexes and crackers will surround them
to diminish logistical and infrastructural issues. While
commissioning activities in the Dahej PCPIR are un-
derway, the other 3 PCPIRs (as depicted in Figure 3)
Fig 3. PCPIR stages in India
134
300 1.150 750 600 200 350 300 200 120Typical Plant
Size (KT)
PVC PTA MEG Acetic Acid Styrene Ethylene Vinyl Phenol LAB
dichloride Chloride
Monomer
Import of Chemicals (KT; FY 15)
1800
1600
1400
1200
1000
800
600
400
200
0
1581
1046
1004
713
618
465
318
200
Fig 4. Import of key chemicals with their typical plant sizes
intermediates are still being imported. This has cre-
ated disconnect between the petrochemical building
blocks and the specialty chemical industry.
>> Despite surplus naphtha of over 7 MMTPAwithin
the country, large quantities of petrochemical

4. Chemical Industry Digest. Annual - January 2017
Opportunities - Chemicals
73
are under various stages of planning.
Further, states like Gujarat and Maharashtra are
providing incentives such as subsidized land costs
and relaxation in stamp duty exemption on the sale/
lease of land, power tariff incentives and special incen-
tive packages for mega projects. For instance, 2% sub-
sidy has been offered to big industrial units with actu-
al investments of up to `100 crore by the Gujarat gov-
ernment. The government recently lifted the morato-
rium for existing and new projects in Ankleshwar and
Panoli, prompting further investments in the region.
Opportunities to manufacture within India
Today, the per capita consumption of chemicals in
India is amongst the lowest in the world. Hence, de-
mand will continue to grow, with the potential for se-
lective manufacture under the Make in India cam-
paign. Plastics and organic chemicals could be inter-
esting categories, with strong latent demand stemming
from the flexible packaging industry, for instance. As
depicted in Figure 4, several petrochemical intermedi-
ates and polymers are being imported in India in large
quantities. Hence, setting up an economic size plant in
India for some of these products could be a possibili-
ty. Needless to say, the practicality and viability need
to be assessed and several factors need to be taken in-
to consideration to ensure that a sustainable compet-
itive advantage can be created. For selection of prod-
ucts and product groups to manufacture, entrepre-
neurs need to consider the following:
m Global supply-demand: With Asia becoming a
strong manufacturing hub for chemicals, the cost
benefit analysis of importing chemicals direct-
ly from these countries will need to be assessed.
However, for a large number of chemicals, local de-
mand itself has been growing in China, Korea and
Taiwan. This poses challenges to the direct import
of these chemicals since supplies from these coun-
tries could become expensive and irregular.
m Feedstock security: Availability of good quality
raw material domestically or import at internation-
al parity prices needs to be ensured. Naphtha pro-
duction in India has been rising over the years and
is currently in surplus. In India, over 80% of eth-
ylene and propylene is used for the manufacture
of PE and PP and other related polymers. A crack-
er operator could thus reserve a percentage of its
output of ethylene and propylene for the produc-
tion of their derivatives. Further, benzene being the
key raw material for aromatic intermediates, can
be utilized entirely through domestic production.
Also, pyrolysis gas can be used as feed for the ex-
traction of toluene and higher aromatics, which can
then be used for the manufacture of aromatic de-
rivatives. Regular supplies of raw material need
to be ensured. Further, during economic volatility,
companies should be equipped to process alternate
feedstocks such as petcoke gasification and biomass
conversion.
m Regulatory environment: The impact of FTAs on
imports should be evaluated for each product seg-
ment of interest. Thanks to FTAs signed with var-
ious countries, some chemical segments have in-
verted duty structures, making it cheaper to import
higher value downstream products. Further, de-
pendence on anti-dumping duties should be min-
imized. However, it is of interest to note that basic
customs duty (BCD) on propane, ethane, ethylene,
propylene, and butadiene is being reduced from 5%
to 2.5%.
m Competition: Evaluation of the level of consolida-
tion of the segment is key to assessing the feasibility
of investment. Further, several products which are
gradually being deemed as non-core in the western
part of the world could be of interest in the growing
Indian market. Assessment of technological prow-
ess of competition is also a key determinant. In ad-
dition, return on capital employed for existing play-
ers in India vis-à-vis global players would provide
a sense of competition within the industry and the
attractiveness of venturing into a given segment.
m Downstream market attractiveness: There is a
strong linkage of petrochemical intermediates with
world. Hence, demand will continue to grow.
>> Today, the per capita consumption of chemi-
cals in India is amongst the lowest in the
chemicals, which is the fastest growing segment in
the Indian chemical industry. Being a key enabler,
specialty chemicals are used across a large spec-
trum of consumption led industries, with segments
such as automotives, construction, FMCG growing
at a strong rate.
>> There is a strong linkage of petrochemical
intermediates with the market for specialty

5. Opportunities - Chemicals
Chemical Industry Digest. Annual - January 201774
the market for specialty chemicals, which is the fast-
est growing segment in the Indian chemical indus-
try. Being a key enabler, specialty chemicals are
used across a large spectrum of consumption led in-
dustries, with segments such as automotives, con-
struction, FMCG growing at a strong rate.
Possible Opportunity Areas
TSMG’s preliminary assessment highlights several
product groups for manufacture across the petrochem-
ical value chain.
1. Ethylene and Propylene derivatives: With invest-
ments in gas concentration units downstream of
FCCs, ethylene and propylene production can be
enhanced and be used for manufacturing petro-
chemical intermediates like MEG, EDC, vinyl chlo-
ride and acrylonitrile which are currently being im-
ported in large quantities. The consumption has
reached critical size in many C2 and C3 derivatives,
with a few expected to reach an inflexion point in
the medium term. This is an opportunity not only
for specialty chemical companies but also for pet-
rochemical players to integrate these derivatives in
their value chain.
2. Butylene derivatives: With butadiene and butylene
being chiefly available from steam crackers, PBR
and MEK can be interesting products to manufac-
ture. Butanol is largely imported in India but can be
produced from propylene and thus can be used for
the production of a variety of end products such as
butyl acetate and acrylates which are again import-
ed.
3. Aromatic derivatives: The domestic market for ar-
omatics is driven almost entirely by the demand for
polyesters (hence PTA), polyurethanes and resins.
Surplus benzene in India can be used for the pro-
duction of benzene derivatives such as cyclohexane,
cumene and nitrobenzene which find wide applica-
tions in polyurethanes, phenolic resins and nylon.
There are multiple products and segments that
could be selected, but carefully crafted evaluation
would help build a rational investment decision. The
key underlying thread for each of the areas discussed,
stems from the fact that refinery output need not be
used solely for fuels but for creating much more value
in the manufacture of further downstream products.
This can be corroborated from the government’s vision
of investing in a large refinery complex in Ratnagiri,
with output serving as feedstock for downstream com-
plexes. This is an opportunity that large MNCs can ad-
dress through co-investment with a refinery in India.
There are medium to large scale refineries in India that
could be willing to explore such a possibility.
Conclusion
The rapidly increasing gap in intermediates de-
serves a close assessment to unravel right opportuni-
ties. If adequately addressed, this will have a multipli-
er effect in specialty chemicals which is likely to cross
USD 50 bn by FY20. India stands as a prospective in-
vestment destination as it remains an under-penetrat-
ed potential market with strong latent demand stem-
ming from the consumption driven end use industries
and a push through `Make in India` initiative. Various
manufacturing opportunities across the chemical val-
ue chain exist which could be globally competitive
and provide the right entry options to build sustain-
able businesses. Success will depend upon right selec-
tion of product groups, location, and guaranteed feed-
stock availability. Furthermore, building strategic part-
nerships would help in minimizing challenges related
to infrastructure, complex regulatory processes, gain-
ing technology access and reducing time to market. In
our view, this opportunity could create a few new jew-
els in the Indian chemical manufacturing industry or
position itself as a global dominant player in select ar-
eas if it is effectively exploited.
Editor’s Note
Tata Strategic Management Group, setup in 1991, is the
largest Indian owned Management Consulting firm. We en-
hance client value by providing creative strategy advice, de-
veloping innovative solutions and partnering in effective
implementation.
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