Frost & Sullivan report

Indian Chemical Industry and Mega Trends Impacting the Industry

Frost & Sullivan Presents an Exclusive Whitepaper on Indian Chemical Industry

Indian Chemical Industry and Mega Trends Impacting the Industry

FOREWORD The Indian chemicals industry is in a phase of growth where it is not only poised to be one of the key markets globally but is also likely to emerge as a reliable supplier of quality chemicals worldwide. Though at present, the Indian chemicals industry is less than 5 percent of the global chemicals industry in size and per capita consumption levels are less than the global average for most categories, it is likely to see a steady growth and continuous increase in the penetration levels right up to 2020, provided suitable government impetus is provided. The expansion thus envisaged in the sector also underlines the need to have more than five million skilled professionals over the next five years.

Indian chemicals industry is currently pegged at US $36 Billion approximately, and is likely to grow at a compounded annual growth rate of 10-12 percent over the next five years. Growth will come from increase in domestic consumption, as well as rise in exports. Domestic growth will be driven by increase in consumption and high growth in the end-user industries where per capita consumption presently is low. Domestic demand of performance and agro chemicals is likely to follow an accelerated growth path due increase in adoption levels and growing consumer base. An evolving focus on regulatory compliances and sustainable chemistry practices will enable the Indian industry to become a key manufacturing hub in the global map in the years to come. Indigenous innovation will play an important role in making the industry competitive vis-a-vis international companies.

We would like to thank ICC for giving Frost & Sullivan this opportunity to partner with them for this event, and look forward to hearing industry stalwarts and thought leaders share their opinion at this conference over the next two days. It was an enriching experience for Frost & Sullivan to put this report together.

Chemicals, Materials & Foods Practice, Frost & Sullivan – Middle East, North Africa and South Asia

Š 2014 Frost & Sullivan

2

Indian Chemical Industry and Mega Trends Impacting the Industry

TABLE OF CONTENTS Topics

Page No.

1. Outlook for the Global Chemical Industry a. Overview ..........................................................................................................................5 b. Key Trends ..........................................................................................................................6 2. Indian Chemical Industry .....................................................................................................8 a. Overview ..........................................................................................................................9 b. Key Characteristics ...........................................................................................................9 c. Key Segments ...................................................................................................................10 I. Base Chemicals: Overview ..................................................................................10 II. Base Chemicals: Key Trends ................................................................................10 III. Base Chemicals: Key Challenges .........................................................................11 i.

Petrochemicals: Overview ...............................................................................11 ii. Petrochemicals: Key Trends .............................................................................11 iii. Petrochemicals: Key Challenges .....................................................................14 IV. Agrochemicals: Overview ....................................................................................15 V. Agrochemicals: Key Trends ..................................................................................15 VI. Agrochemicals: Key Challenges ..........................................................................18 VII. Specialty Chemicals: Overview ...........................................................................19 i.

Dyes and Pigments: Overview ........................................................................20 ii. Dyes and Pigments: Key Trends ......................................................................20 iii. Dyes and Pigments: Key Challenges ...............................................................22 3. Mega Trends Impacting the Indian Chemical Industry ...................................................24 a. Energy/Resources ..........................................................................................................25 b. Technology Focus ..........................................................................................................25 c. Health and Wellness ......................................................................................................25 d. Infrastructure .................................................................................................................25 e. Globalization ..................................................................................................................25

3

Š 2014 Frost & Sullivan

Indian Chemical Industry and Mega Trends Impacting the Industry

Outlook of the Global Chemical Industry

Š 2014 Frost & Sullivan

4

Indian Chemical Industry and Mega Trends Impacting the Industry

OVERVIEW The global chemical industry (excluding pharmaceuticals) stood at US $3.07 trillion registering a growth of 2.3 percent during 2013. On a regional level, Asia was the region driving growth in chemicals, and NAFTA bounced back from recession.

With the US’

Exhibit 1: Region Wise Chemical Industry, Global Market, 2013

renewed competitiveness,

6%2%

Europe is expected to witness further challenging times ahead

23%

Asia

Europe continued to recover from secondary depression, albeit at a sluggish pace.

NAFTA

US $3.07 Trillion

NAFTA: Renewed Competitiveness Riding on demand from light vehicles and a Latin America recovering construction sector, the US Rest of the World bounced back from recession, registering a 17% growth of 2.7 percent. The shale gas boom, continued to propel the chemical industry in NAFTA: North AmericanNAFTA: Free Trade NorthAgreement American Freethe US, rendering competitive advantage due Source: Frost & Sullivan analysis to lower gas prices. Looking ahead to 2015 and beyond, significant shale-driven chemical capacity is expected to come online and generate faster growth.

Europe

52%

Europe: Sector Progressing Out of Recession The European market appears to be emerging out of the secondary recession. However, the recovery is expected to remain tentative. Even though agrochemicals and cosmetics are pulling up the chemical sector, high volume segments such as petrochemicals continue to plunge into crisis primarily due to high energy and feedstock costs. The persisting weakness in application markets such as automotive, manufacturing, and construction, is adding up to the manufacturers woes.

Agrochemicals look steady due to demand from fertilizers and allied products. Additionally, Europe remains above the fray due to huge volumes of trade, originating mainly from Germany.

The European outlook for chemicals is expected to turn positive, mainly due to growth in the specialty sector. Local production, however, is likely to face intense competition from products from the US, which are riding high on cheap energy and feedstock prices.

Southeast Asia, along with countries such Mexico, Argentina etc. are expected to emerge as potential regions in chemicals domain

5

Middle East: Value Addition is the Key With North America’s emergence in inexpensive feedstock, MENA’s leadership position is fading away. Suppliers, however, are promptly responding by adding value to basic petrochemicals.

Additionally, major participants such as SABIC are in the process of investing in the US to leverage opportunities being thrown by shale gas. Manufacturers are continuing to invest in China, signifying interest in the Asian market. Inspired by the shale gas story in the US, the region is exploring its own shale gas opportunities. Development, however, is still in the nascent stage.

© 2014 Frost & Sullivan

Indian Chemical Industry and Mega Trends Impacting the Industry

MENA is also witnessing increased interest by global majors such as Dow and Exxon, with multi-billion dollar projects expected to come in by 2016-2017. Some of the major investments include Sadara Chemicals (joint venture between Saudi Aramco and Dow Chemicals), a US $20 billion integrated chemical facility; a joint venture between Exxon and SABIC for rubber and elastomer in Al-Jubail; capacity expansion for PetroRabigh, a joint venture between Saudi Aramco and Sumitomo Chemicals.

The chemical industry in MENA is expected to grow by 4.5 percent annually during 20132015, riding on robust growth in the non-oil GDP. Asia: Emergence of Southeast Asia Asia remains the growth pillar for global chemicals industry. Even though the region faced revived competition from North American manufacturers, Asia (excluding Japan) registered a high growth of 7.8 percent, cruising high on regional demand in automotive and construction industry.

Bulk/base chemicals in the Asian markets are expected to undergo major strategic changes

While the steady local demand keeps market growth at a fast pace, challenges pertaining to overcapacities are looming large, especially in China. Slowdown in exports volume is likely to be neutralized by strong demand locally, especially in Southeast Asia and China.

The Chinese chemical industry, which witnessed a slight slump in the past two years due to reduced investments in infrastructure, is likely to gain traction again and reach 8.5 percent growth during 2013-2015. Growth is likely to be onset by rebounding agrochemicals driven by increased fertilizer consumption, fine chemicals, and specialty chemicals. Construction chemicals are expected to witness a mild plunge following decreased investments in infrastructure.

Facing years of depression, the Japanese chemicals sector is looking up, aided by rigorous stimuli and fiscal policy by the new government. Increased chemical production coupled with the depreciating yen, is likely to boost exports.

KEY TRENDS Regional Shift: East Drives Demand, West Bringing Up Supply With recent developments in shale gas, the US has bounced back with internationally competitive supply. Proven shale gas reserves have positioned US as the region having highest feedstock advantage globally. Promising opportunities thrown by the shale gas boom, has introduced a new wave of investments by the chemical industry in the region. Although experiencing pressure through higher taxes and spending cuts, the US market witnessed a 10 percent surge in capital spending, valued at US $42.4 billion. During 2013, over 135 new chemical production projects (totally valued at over US $90 billion) were announced. Capital investment is expected to grow at a healthy rate of 8 percent through 2016. Increasing capital investment ensures higher production volumes. Demand, however, is expected to grow slowly given the maturity the region has attained. In such a case, the eastern and southern hemisphere with their robust growth outlook, are promising destinations. With some of the key industries such as textiles having already moved to the east, others such as agrochemicals, plastics, pharmaceuticals, and automotive components are fast moving to growing Asian economies such as China, India, etc.

Š 2014 Frost & Sullivan

6

Indian Chemical Industry and Mega Trends Impacting the Industry

Regional Structuring of Chemical Portfolios Exhibit 2: Regional Shift in Chemical Portfolio

Source: Frost & Sullivan analysis

With the shift in demand trends, US and European producers are positioning themselves towards value added downstream products. Europe has been forced to close down capacities in commodity chemicals and realign focus towards specialty and service/functionality driven chemicals. Asian markets, however, are adding capacities to their existing products with lesser forays in capital intensive downstream products.

Capacity Utilization Exhibit 3: Region Wise Capacity Utilization, Global Market, 2013 79.2

Utilization (%)

77 75.2 65

USA

Europe

China

India

Country/Region Source: ACC, CEFIC, Frost & Sullivan analysis

Facing secondary recession and intense competition, high capacity utilization remained the key encouraging factor for European manufacturers. China, on the other hand, remained severely oversupplied due to slowdown in key exports markets.

7

Š 2014 Frost & Sullivan

Indian Chemical Industry and Mega Trends Impacting the Industry

Indian Chemical Industry

Š 2014 Frost & Sullivan

8

Indian Chemical Industry and Mega Trends Impacting the Industry

India Overview: The Indian chemical industry was the second largest producer in Asia in terms of volume after China. The industry was pegged at US $136.5 billion for 2013, accounting for approximately 7 percent of India’s GDP. The industry accounted for over 12 percent of total Indian exports.

Base chemicals continued to be the largest segment accounting for over 35 percent of the total chemicals demand, followed by pharmaceuticals and specialty.

Exhibit 4: Segment Wise Chemical Industry Share, Indian Market, 2013

Pharma, Agro and Specialty chemicals are the key segments contributing towards foreign exchange reserve

Over the last decade, the Indian chemical industry has strengthened Petrochemicals 21% its competitiveness in agrochemicals 29% Other Base Chemicals and pharmaceuticals segments, Specialty Chemicals becoming one of the major $136.5 Billion Fertilizers 10% exporters for these segments globally. The industry also Agrochemicals 3% witnessed increased investments Pharmaceuticals in the specialty sector, which is 17% 20% poised to be the fastest growing segment in India. Post the dip Source: Frost & Sullivan analysis observed during 2013, key end-user segments such as construction, automobile, packaging, and electronics are expected to drive the demand immensely. Construction and automobiles are likely to grow at 12 percent each, packaging at over 13 percent, electronics at 13 percent rendering a promising growth of over 12 percent to the chemicals demand.

KEY CHARACTERISTICS

With product quality becoming the crucial component of the decision matrix for customers, regulations regarding licensing are expected to evolve further

Capacity Utilization: Foreign Trade Impacting Efficiency The Indian chemical industry has experienced mixed efficiency in the past three years.

Sub-segments of bulk chemicals such as petrochemicals and alkali chemicals have run their facilities at an average of 80 percent, whereas sub-segments in specialty such as agrochemicals, dyes, and pigments have witnessed a capacity utilization rate of 65-70 percent. Although local demand, raw material prices, power and energy costs remain the primary factors impacting the utilization rate, factors pertaining to trade such as demand fluctuations have affected the utilization rates adversely. For example, export oriented specialties such as pesticides, dyes, and pigments, etc. have observed a declining utilization rate post-recession. Manufacturers in segments with considerable imports, such as petrochemicals, alkali chemicals, etc. have managed to maintain around 80 percent utilization.

Policy and Promotion: PCPIRs Slated to be Investment Drivers Over the past 15 years, the Indian Government has taken several measures to give an impetus to the chemicals industry. The government allows 100 percent FDI in the industry. Licensing requirement is substantially flexible for the production of most of the chemicals including pesticides, dyes, organic, and inorganic chemicals.

9

Š 2014 Frost & Sullivan

Indian Chemical Industry and Mega Trends Impacting the Industry

The Government has introduced the Petroleum, Chemical, Petrochemical Investment Regions (PCPIR) Policy that focuses on an integrated approach to promote growth and investment in the petroleum, chemicals and petrochemicals sectors through use of common infrastructure and support services. Raw material availability of Naphtha for the petrochemical and plastic industry plays a critical role in PCPIR. PCPIR is designated to have a combination of production projects, public utilities, logistics, environmental protection, residential areas, and administrative services. Vishakhapatnam and East Godavari District in Andhra Pradesh, Bharuch in Gujarat, Paradip in Orissa and Cuddalore and Nagapattinam Districts in Tamil Nadu are the current PCPIR projects. These PCPIRs have received investments worth US $10 billion for infrastructure and are expected to generate industrial investments of over US $75 billion.

Such positive measures have already started bearing fruit, with the Indian chemical industry receiving FDI to the tune of US $8.8 billion during 2000-2013, with 75 percent of the inflows being received in the last 3 years.

KEY SEGMENTS

End to end integration trend is yet to take off in India

Base Chemicals Overview: Petrochemicals, man-made fibers, industrial gases, fertilizers, chlor-alkali, and other organic and inorganic chemicals, form the base chemicals segment. This segment accounts for over 50 percent of the total Indian chemical production.

KEY TRENDS:SUPPLY SIDE Fragmented Structure: Barring the basic building blocks such as ethylene, propylene, and butadiene, etc., the supply side for other organic and inorganic chemicals is highly fragmented.

Majority of Indian manufacturers operate on much smaller scales in comparison to their global competitors. Such a scenario deprives the sector of the benefits of economies of scale and domestic products are strained due to cheaper imports.

KEY TRENDS: DEMAND SIDE Base Chemicals Trade: Organic Chemicals

Volume (KT)

Exhibit 5: Major Organic Chemicals Trade, India, 2008-2013 4500 4000 3500 3000 2500 2000 1500 1000 500 0

4142 3315

3276 2810

2007

1840

1969

1562

Exports Imports

1181 823

2008-09

2009-10

2010-11

2011-12

2012-13

Year Source: Department of Chemicals & Petrochemicals, Frost & Sullivan analysis

Š 2014 Frost & Sullivan

10

Indian Chemical Industry and Mega Trends Impacting the Industry

In organic chemicals, imports continue to exceed exports, even when local manufacturers are reeling under the pressure of tremendous overcapacity. The primary reason is attributed to cheaper imports from China.

KEY CHALLENGES Overcapacity: For the past four years, the base chemical segment has felt the pressure of overcapacity, with the capacity utilization rate hovering around 60 percent for inorganic chemicals and at around 65 percent for organic chemicals. Sluggish domestic and exports demand; and increased imports from China and the Middle East are the major factors attributed to the persisting overcapacity. The capacities saw a jump of around 10 percent since 2008, underlining the unpreparedness of the industry for the demand slump.

Petrochemicals Overview: Petrochemicals are chemical products derived from petroleum. The main branches of products are olefinic and aromatic, which are then processed onward into plastics, rubber, important industrial chemicals and intermediates, dyes, pharmaceuticals, fertilizers, and synthetic fibers. Petrochemicals’ manufacturing is an integrated set-up with many manufacturers/ plants in a localized area sharing resources to maximize economies of scale.

Downstream integration is expected to play a pivotal role in the sustainability of petrochemicals supply

Petrochemicals represent a growing market in India, with average CAGR from 2007 to 2013 at 7.5 percent, in line with development initiatives in the Indian economy. India’s petrochemical industry is an oligopoly with four predominant players: Reliance Industries Limited (RIL), Gas Authority of India Limited (GAIL), Haldia Petrochemicals Limited (HPL), and Indian Oil Corporation Limited (IOCL). The Indian industry is also confined geographically to certain strategic hubs such as Dahej, Gujarat; Kochi, Kerala; Panipat, Haryana and Haldia, West Bengal.

The total demand for petrochemicals in India in 2012-13 was 32.5 million metric tons.

Major polymers manufactured in India include polypropylene (PP), polyethylene (PE), polyethylene terephthalate (PET), Ethylene, Purified Terephthalic Acid (PTA), Polyvinyl chloride (PVC), polystyrene (PS), etc. The largest application of petrochemicals in India is in polymers, which are used in packaging, automobiles, and construction end-use segments. Manufacturing capacities in India are being augmented to support India’s rapidly growing demand and to reduce net import of polymers. The overall polymer industry in India is forecast to grow at 10-11 percent in the next three years.

KEY TRENDS: SUPPLY SIDE Downstream Integration: Indian petrochemicals manufacturers are increasingly investing in acquiring downstream products capabilities. Companies such as RIL, IOCL etc. are foraying in downstream products such as butyl rubber, styrene butadiene rubber, etc. Such steps are being observed as futuristic, towards increasing global competitiveness. Global leaders such as BASF have integrated capabilities from basic petrochemicals to end specialty.

Strategic Alliances and Consolidation: The Indian petrochemicals segment has observed a slew of alliances such as OPAL (a joint venture between ONGC, Gujarat State Petroleum Corporation and GAIL), HMEL (joint venture between HPCL and Mittal Energy), Reliance Sibur (joint venture between RIL and Sibur Petrochemicals) etc. The alliances are aimed at leveraging the feedstock/crude vis-à-vis petrochemicals/downstream capabilities of the participating companies.

11

© 2014 Frost & Sullivan

Indian Chemical Industry and Mega Trends Impacting the Industry

Exhibit 6: PCPIR Projects, India

With IOCL’s and RIL’s foray into synthetic rubber, dependence on imports is expected to go down Source: APPCPIR, Gujarat PCPIR, Frost & Sullivan analysis

PCPIR: The PCPIR Policy is expected to revolutionize the petrochemical industry, provided it gets implemented with absolute efficiency and intended purpose, with anchor investors being real anchors supporting the downstream chemical industry. Also, the timeframe for investments realization is crucial.

KEY TRENDS: DEMAND SIDE Understanding the Indian Potential Exhibit 7: Per Capita Polymer Consumption USA

109

Brazil

32

China

45

India

10 0

20

40

60

80

100

120

Kilograms Source: Industry Estimates, Frost & Sullivan analysis

Per capita polymer consumption in India is one of the lowest globally standing at nearly 1/10th of the developed countries and less than 1/3rd of their developing counterparts. Such a low consumption average indicates a robust outlook for base chemicals, especially petrochemicals.

© 2014 Frost & Sullivan

12

Indian Chemical Industry and Mega Trends Impacting the Industry

Trade: Exhibit 8: Major Petrochemicals Trade, India, 2013

3000 2487 2500

Volume (KT)

2000

2182 2007 1639

1500 1000

1548

1969

1639 1562 Exports

1181

Imports

823

500 0 2008-09

2009-10

2010-11

2011-12

2012-13

Year Source: Department of Chemicals & Petrochemicals, Frost & Sullivan analysis

The petrochemicals sector continues to rely on imports to meet the demand, especially in sub segments such as polymers and synthetic rubbers.

Domestic Demand: • Olefins comprise ethylene, propylene, butadiene, styrene, ethylene dichloride, and vinyl chloride monomer that are used in the production of several commercially important derivatives and intermediates. Olefins are forecast to grow at 8-9 percent CAGR until 2016.

• Fiber Intermediates include acrylonitrile, caprolactum, pure terephthalic acid and monoethylene glycol. This category is expected to grow at 5-7 percent CAGR until 2016.

• Synthetic fibers include polyester filament yarn (PFY). The overall segment is forecast to grow at 7-8 percent CAGR until 2016.

13

© 2014 Frost & Sullivan

Indian Chemical Industry and Mega Trends Impacting the Industry

Exhibit 9: Major Petrochemicals Demand Growth, India, 2013 45000 40000

5145

3722

Volume (KT)

2710 764

3947

35000 30000

3729

25000

2090 666 406 3388

2283 697 455 3473

2485 731 3663

513

3965

480

7138 6699

6360

20000

5957 10810

15000 8070

8633

9362

10000 5000

8113

8959

11037

9913

0 2011 Polymers

2012 Fiscal Year 2013 2014 Olefins Fibre Intermediates

Synthetic Fibers

Surfactants

CB and CBFS

others

Elastomers Source: Frost & Sullivan analysis

• Para-xylene, orthoxylene, meta-xylene, benzene and toluene are used in the manufacture of chemical intermediates and are expected to grow at 8-9 percent CAGR until 2016.

• Carbon black witnesses its main applications in tyres and pigments, and is expected to grow at approximately 9 percent CAGR until 2016.

• Surfactant petrochemical derivatives include Linear Alkyl Benzene (LAB) and Ethylene Oxides (EO).

• Elastomers (rubbers) include Styrene Butadiene Rubber (SBR), Polybutadiene Rubber (PBR), Nitrile Butadiene Rubber (NBR) and Ethylene Propylene Diene Monomer (EPDM). This segment is expected to grow at 6-7 percent CAGR until 2016.

KEY CHALLENGES Feedstock Cost and Margin Pressures: With the advent of shale gas in the US market, the crude based base chemicals market is reeling under tremendous competitive challenges over raw material availability and prices. The US and MENA based manufacturers are leading the segment with their renewed (continued in case of MENA) competency. Products from these markets have increased price competition thereby increasing margin pressure on the domestic manufacturers.

© 2014 Frost & Sullivan

14

Indian Chemical Industry and Mega Trends Impacting the Industry

AGROCHEMICALS Overview: With the agricultural industry accounting for around 20 percent of the Indian GDP, agrochemicals segment assumes added significance in Indian economic growth. The agrochemicals industry stood at a little over US $4.3 billion during 2013, with a 5 year CAGR of 8 percent during 2008-13. India is the fourth largest producer of crop protection chemicals globally, after US, Japan, and China. Key agrochemical segments are insecticides, herbicides, fungicides, bio pesticides, and others.

Exhibit 10: Growth of Agrochemical Industry, Historic and Forecast, India, 2013 4.5 3.9

4

CAGR 3.5

3.2 2.9

Value (billion)

3

Market is expected to shift from insecticides to herbicides in the long run

2.5 2.05 2 1.55 1.5 1 0.5 0 2009

2013

I

Year

II

III

2018 Source: Frost & Sullivan analysis

KEY TRENDS: SUPPLY SIDE Brand Building and Awareness: Market participants are increasingly focusing on increasing awareness about products, through organizing farmers’ camp across the country. Also, companies are providing end-to-end solutions for complete requirements during a crop season.

Business Consolidation: Indian major such as Rallis has established strategic alliances with global participants such as DuPont, FMC, Bayer, Syngenta and Japanese major Nihon Nohayaku.

Global leader Bayer is expected to acquire stakes in Kaveri Seeds. These alliances are targeted towards increasing the geographical penetration and diversification of product portfolio.

Global Competitiveness: Indian participants are investing substantially in key components such as R&D and distribution channels. Additionally, series of acquisitions globally, such as those by United Phosphorus Ltd. (UPL) signify the thrust towards increasing the competitiveness in global markets.

15

Š 2014 Frost & Sullivan

Indian Chemical Industry and Mega Trends Impacting the Industry

KEY TRENDS: DEMAND SIDE Market Potential Exhibit 11: Per Capita Pesticides Consumption Global

4

USA

7

China India

0.6 0

2

4

6

8

10

Kilogram/hectare

12

Per capita consumption of agrochemicals in India is at 0.6 kg/ha, one of the lowest globally. With the increasing 13 awareness, reach and surging accessibility, India is poised to be one of the fastest growing 14 markets for agrochemicals.

Source: Industry Estimates, Frost & Sullivan analysis

Herbicides are poised to witness tremendous penetration, especially in rice and wheat crop protection

Horizontal Shift Exhibit 12: Agrochemicals Product Share, India, 2005 and 2013 1%

2005

3%

2013

Insecticides 15%

16% Herbicides 13%

17% Fungicides 65%

70% AgBio an Others

Source: Frost & Sullivan analysis

Exhibit 13: Agrochemicals Product Share; (I) For India, 2020 (II) For Global, 2013

Insecticides 4%

7%

15%

23%

Herbicides 25%

20%

61%

Fungicides 45%

AgBio an Others

(I)

(II) Source: Frost & Sullivan analysis

Š 2014 Frost & Sullivan

16

Indian Chemical Industry and Mega Trends Impacting the Industry

Indian demand for agrochemicals has traditionally been driven by insecticides. The reason is attributed to demand from cash crops such as cotton. However, with increasing research and awareness, various weeds dampening the growth of food crops have been recognized. With the objective to eliminate such weeds and increase the crop productivity, herbicides are experiencing the fast growth. The trend is to align globally where herbicides account for the largest demand in the pie, in the long run.

Demand Distribution: Exhibit 14: Agrochemicals Demand Distribution, India, 2009 & 2013

2013

2009

47% $2.95 Bn

Domestic

53%

52%

$4.23 Bn

48%

Exports

Exports

Demand from Latin American markets highlights strategic decisions such as UPL acquiring Brazilian major DVA Agro Brazil

Domestic

Source: Frost & Sullivan analysis

Exhibit 15: Major Agrochemicals Exports, India, 2013 9%

NAFTA

9%

26%

Latin America

5%

Southeast Asia

8%

Africa Europe Rest

43%

Agrochemicals have emerged as one of the fastest growing segments in exports supply from India. For the 2005-2012 period, exports from India have grown by a CAGR of over 13-14 percent. This growth is expected to further surge towards over 15 percent in the next 5 years.

Source: Frost & Sullivan analysis

Exhibit 16: Major Agrochemicals Trade, India, 2013 120

110

103 100

Volume (KT)

80

93

87 72

Exports

60

Imports

40 20

14

13

19

22

19

0 2008-09

2009-10

2010-11

2011-12

2012-13

Y Source: Department of Chemicals & Petrochemicals, Frost & Sullivan analysis

17

Š 2014 Frost & Sullivan

Indian Chemical Industry and Mega Trends Impacting the Industry

KEY CHALLENGES Overcapacity: Exhibit 17: Capacity and Capacity Utilization Rate, Major Agrochemicals, India, 2008-09 to 2012-13 90

250

80

79 200

72

70

The extent of spurious products’ presence, signifies the need for stringent regulations

Volume (KT)

62

64

63

150

60 50

100

200 146

209

210

40 30

163

Capacity Capacity Utilization

20

50

10 0

0 2008-09 2009-10 2010-11 2011-12 2012-13

Year Source: Department of Chemicals & Petrochemicals, Frost & Sullivan analysis

Slump in the exports market coupled with recent slowdown in domestic demand, has brought about substantial overcapacity in the industry.

Lack of awareness for optimum product usage: In the existing distribution system, e-farmers purchase the final product from retailers. The retailers, especially those situated away from the urban centers, are generally not proficient with product knowledge, to suggest a precise product matching the farmer’s requirement.

Spurious Pesticides: Over 40 percent of the pesticides sold were spurious products and substandard pesticides, which apart from not having the desired effect on pests/insects have adversely affected the crops. Spurious products come with tremendous margins for retailers/distributors which helps the manufacturers in increasing the penetration.

Growth of GM Seeds: The market for Genetically Modified (GM) seeds is gaining traction in India. These seeds have the immunity towards various adverse factors, thereby decreasing the requirement of agrochemicals.

© 2014 Frost & Sullivan

18

Indian Chemical Industry and Mega Trends Impacting the Industry

SPECIALTY CHEMICALS Introduction: Specialty chemicals are the fastest growing segment of the chemicals segment in India. The segment comprises of sectors such as dyes and pigments, fine chemicals, paints and coatings, construction chemicals, textile chemicals, water treatments chemicals, flavors and fragrances, personal care chemicals, etc.

Exhibit 18: Evolution of Indian Specialty Chemicals Industry

1980s-1990s

Supply Side

Demand Side

Few Indian companies with standalone units and importers cater to the demand. Global MNCs present only through

Low demand arising mainly from agro and affiliated industries. Growth in construction and

distributors/importers.

Global MNCs establish sales offices. Indian participants increase the manufacturing base. Imports form a large

1990-2000

automotive limited.

Construction and automotive industry starts gaining traction.

2000-2005

2005-Present

TIMELINE

part of supply.

Global MNCs establish foothold through joint ventures. Indian participants equip themselves with greater technical knowledge.

A slew of investments by MNCs through manufacturing set up and acquisitions. Several companies set up research and development facilities.

India has positioned itself as a major exporter in sub segments such as Fine chemicals, Agrochemicals, dyes and pigments etc.

Construction and automotive industry experience surge in demand, driving the demand for specialty chemicals.

While the demand continues to thrive on growing construction and automotive industries, niche applications such water treatment, flavors and fragrances, oilfield chemicals have emerged as potential growth drivers.

Source: Frost & Sullivan analysis

19

Š 2014 Frost & Sullivan

Indian Chemical Industry and Mega Trends Impacting the Industry

Overview: Indian specialty chemicals stood at US $27.3 billion during 2013 registering a 5 year CAGR of 12 percent during 2008-2013. Specialty chemicals segment typically grows at twice the rate of GDP in a developing economy. The demand for specialty has largely been driven by automotive and construction sectors.

Dyes and pigments, along with agrochemicals, form the export driven bloc in the specialty domain

Indian products have strong presence in exports markets as well. Export of specialty chemicals from India is one of the fastest growing segments in Indian exports. Dyes and pigments along with the Active Pharmaceutical Intermediates (APIs) constitute the majority of specialty exports. Global competitiveness in terms of cost and quality of products has enabled Indian manufacturers to successfully establish themselves in the exports market.

KEY SUB SEGMENTS Dyes and Pigments Exhibit 19: Classification of Dyes Dye

Reactive

Direct

VAT

Others

Disperse

Source: Industry Estimates, Frost & Sullivan analysis Overview Global demand for dyes and pigments stood at US $28 billion during 2013. Indian revenues for dyes and pigments accounted for over 15 percent of the global sales, at US $4.3 billion.

Over the past 10-15 years, the global dyes and pigments industry has witnessed a paradigm shift with production relocating from the US and Europe to China, India, and other Southeast Asian countries. Indian dyes and pigments industry is marked by large presence of unorganized sector, with over 1000 small scale units manufacturing dyes and pigments.

KEY TRENDS: SUPPLY SIDE

With the stringent environmental regulations, consolidation likely to happen with the market share of organized participants poised to increase

Fragmented Structure: The industry constitutes over 1,000 small scale manufacturers.

Approximately 50 major producers are present in the industry.

Exhibit 20: Supply Structure, Dyes and Pigments Industry, India, 2013

- Approximately 50 companies - Global Competitiveness - Technology driven - Product Innovation and brand building

65%

Organized

Š 2014 Frost & Sullivan

35%

-Approximately 1000 companies -Lower price realization - Presence only in bulk segments

Unorganized

Source: Frost & Sullivan analysis

20

Indian Chemical Industry and Mega Trends Impacting the Industry

Industry consolidation in Western India: Around 90 percent of the dyestuff production is accounted for by states of Gujarat and Maharashtra. Apart from various incentives offered in these states, concentration of major end users such textiles, paper etc. is the key factor for such a regional concentration in the dyestuff industry.

KEY TRENDS: DEMAND SIDE Application Split: Textile Drives the Demand Exhibit 21: Demand by application, Dyes and Pigments Market, India, 2013

Dyes

Pigments 7%

10% Textiles

10%

Inks

10%

Coatings

9% Paper

51%

15% Leather

65%

Textiles Plastics

23%

Others

Others

Source: Frost & Sullivan analysis

Demand Distribution: Production Thrives on Exports

Exports to grow at faster rate than the domestic demand

Exhibit 22: Demand Distribution, Dyes and Pigments Industry, India, 2013 Demand Split Indian products are majorly exported to the US, Europe, and Latin America. India has been one of the major exporters in the dyes and pigments 34% segments, accounting for over 10 percent of the $4.3 Bn Domestic world trade.

Exports

66%

Source: Frost & Sullivan analysis S

Value (Billion)

Exhibit 23: Dyes and Pigments Industry Value, India, 2008, 2013 and 2018 6 5 4 3 2 1 0

5.02

Dyes and pigments exports grew at a CAGR of over 13 percent during 2008-2013, and are forecast to cross US $5 billion by 2018.

2.85 1.49

2008

Year

2013

2018 Source: Frost & Sullivan analysis

21

Š 2014 Frost & Sullivan

Indian Chemical Industry and Mega Trends Impacting the Industry

Demand Outlook: Exports share likely to increase further.

Exhibit 24: Dyes and Pigments Exports, India, 2008, 2013 and 2018 3

2.6

Value (Billion)

2.5

28

2.2

2.0

2 1.45

1.5 0.93

1 0.5 0

2008

2013

I

II

III

Source: Frost & Sullivan analysis

Scenario I: The industry continues to witness the sluggish growth witnessed in the past two years.

Forecast: CAGR-7 percent

Inks and paints have witnessed one of the fastest growths, thereby directly impacting the demand for dyes

Scenario II: Growth resumes to 2011 level in the coming two years.

Forecast: CAGR-9 percent Scenario III: Overall economy recovers from the four year slump and higher penetration rates.

Forecast: CAGR-12 percent Demand for dyes and pigments are likely to be driven by segments such as inks, paints, and plastics. The textiles segment will remain the largest end user for dyes and pigments.

KEY CHALLENGES Overcapacity: Exhibit 25: Major Dyes and Dyestuffs Capacity and Capacity Utilization, India, 2008-09 to 2012-13 300

85 79

78

252

252

69

68

80

250 218 67 164

188

70 65

150 60

100

(%)

Volume (KT)

200

75

Capacity Capacity Utilization

55 50

50 45 0

40 2008-09 2009-10 2010-11 2011-12 2012-13 Source: Frost & Sullivan analysis

Š 2014 Frost & Sullivan

22

Indian Chemical Industry and Mega Trends Impacting the Industry

As the exports demand gained traction during the mid-part of the last decade, manufacturers strategized various capacity expansions, which were supposed to come in line by 2010-2012.

The exports demand, however, slumped substantially due to global recession, forcing the manufacturers to run at lower utilization.

Capacity expansions with anticipated demand figures, boomeranged and resulted in overcapacity

23

Š 2014 Frost & Sullivan

Indian Chemical Industry and Mega Trends Impacting the Industry

Mega Trends Impacting the Chemical Industry

Š 2014 Frost & Sullivan

24

Indian Chemical Industry and Mega Trends Impacting the Industry

Mega Trend 1-Energy/Sources: Need for energy security is forcing many countries to reduce their dependence on oil and move towards other sources. Further, the recent nuclear crisis in Japan will increasingly favor the use of renewable energy sources such as solar energy and wind energy, and enhance safety related products and governance.

By 2020, nearly half of world electricity will be produced in emerging regions

Industry Focus - 2020: • Making chemicals available from starch or seed oil stock • Use of novel feedstock like algae • Smart grid infrastructure • Stress on more efficient use of resources Mega Trend 2-Technology: Technology development across sectors like IT, telecom, robotics, and innovative materials will enhance the need for innovation in the chemicals space to keep pace with changing world, either to match with vendors or to the supplier base.

Industry Focus - 2020: • Nano - composites for food packaging and nano wires for Optoelectronics • Self-repairing plastic products • Smart factories with zero-emission technologies Mega Trend 3-Health and Wellness: In most countries worldwide, per capita healthcare spending is rising faster than per capita income which is unsustainable. Focus on prevention leads to a rise in expenditure on products for weight management and functional foods/ beverages.

Nanomaterial, flexible electronics, lasers; SMART materials will drive multiple applications

Industry Focus - 2020: • Personal care nutricosmetics • Fortification products with enhanced compatibility of use • Lifestyle and ergonomics key aspects in materials design Mega Trend 4-Infrastructure: Tremendous improvement in operational efficiency being the need of the hour across the globe, a lot of stress is on getting the infrastructure right.

Economic development is now directly related with the kind of infrastructure projects in place.

Industry Focus - 2020: • Trade across the globe becoming easier to trace and manage • Materials for more energy efficient buildings with improved life • Prolonged storage and transport life of perishable products Mega Trend 5-Globalization: Globalization has resulted in increasing competition from developing economies. The key success factor is availability of low cost production facility or feedstock. These markets have high impact from global trends which needs to be locally addressed.

Industry Focus - 2020: • Trade across globe, Middle East becoming next production hub • Europe will lead the global chemicals industry for regulatory compliance • Demand influence from different markets

25

© 2014 Frost & Sullivan

Indian Chemical Industry and Mega Trends Impacting the Industry

A Few Developments in Chemicals and Materials Space: Most of the development in terms of products or processes has been to address the changing needs due to one or more of the Mega Trends.

If current trends hold by 2050, healthcare spending will double, with treatment claiming only 20-30 percent of the total spend vis-a-vis 50-60 percent in current scenario

Growth St age

Exhibit 26: Chemicals and Materials Industry Growth Cycle

Product Maturity

Source: Frost & Sullivan analysis

Around US $41 Trillion is expected to be spent globally on infrastructure related projects

Š 2014 Frost & Sullivan

Globally, we are seeing MNCs moving to re-align their product portfolio and business strategy with Mega Trends. For example, Dow Chemicals has a product suite catering to infrastructure and personal care industries. At an organization level also, we are seeing increasing emphasis on aspects of sustainability and responsible manufacturing. BASF is the only industrial company that has regularly presented comprehensive and quantitative corporate carbon footprint statistics since 2008 and has recently announced ambitious environmental, health, and safety goals for its 2020 vision such as reduction of greenhouse gases by 25 percent per metric ton of sales product.

26

Indian Chemical Industry and Mega Trends Impacting the Industry

GLOSSARY 1. Department of Chemicals & Petrochemicals: http://chemicals.nic.in/ 2. Department of Fertilizers: http://fert.nic.in/ 3. Chemicals and Petrochemicals Manufacturer’s Association of India: http://cpmaindia.com/ 4. The European Chemical Industry Council: http://www.cefic.org/ 5. American Chemistry Council: http://www.americanchemistry.com/ 6. Dyestuffs Manufacturers’ Association of India: http://www.dmai.org/ 7. Pesticides Manufacturers & Formulators Association of India: http://www.pmfai.org/home 8. Indian Paint Association: http://www.ipaindia.org/index.html 9. American Coatings Association: http://www.paint.org/index.php

DISCLAIMER This White Paper prepared by Frost & Sullivan is based on analysis of secondary information and knowledge available in the public domain. While Frost & Sullivan has made all the efforts to check the validity of the information presented, it is not liable for errors in secondary information whose accuracy cannot be guaranteed by Frost & Sullivan. Information herein should be used more as indicators and trends rather than representation of factual information. The White Paper is intended to set the tone of discussions at the conference in which it was presented. It contains forward-looking statements, par ticularly those concerning global economic growth, population growth, energy consumption, policy support for water supply. Forward looking statements involve risks and uncer tainties because they relate to events, and depend on circumstances, that will or may occur in the future. Actual results may differ depending on a variety of factors, including product supply, demand and pricing; political stability; general economic conditions; legal and regulatory developments; availability of new technologies; natural disasters and adverse weather conditions and hence should not be construed to be facts.

COPYRIGHT NOTICE The contents of these pages are copyright © Frost & Sullivan Limited. All rights reserved.

Except with the prior written permission of Frost & Sullivan, you may not (whether directly or indirectly) create a database in an electronic or other form by downloading and storing all or any part of the content of this document. No part of this document may be copied or otherwise incorporated into, transmitted to, or stored in any other website, electronic retrieval system, publication or other work in any form (whether hard copy, electronic or otherwise) without the prior written permission of Frost & Sullivan.

27

© 2014 Frost & Sullivan

Auckland Bahrain Bangkok Beijing Bengaluru Bogotá Buenos Aires Cape Town Chennai Colombo Delhi/NCR Detroit

Dubai Frankfurt Iskander Malaysia/Johor Bahru Istanbul Jakarta Kolkata Kuala Lumpur London Manhattan Mexico City Miami Milan

Mumbai Moscow Oxford Paris Pune Rockville Centre San Antonio São Paulo Seoul Shanghai Shenzhen Silicon Valley

Singapore Sophia Antipolis Sydney Taipei Tel Aviv Tokyo Toronto Warsaw Washington, DC

Frost & Sullivan (I) Pvt Ltd., Tower – VI, 4th Floor, Solitaire Corporate Park, Chakala, Andheri (East) Mumbai – 400 093 (INDIA) P: +91 22 6160 6666 F: +91 22 2832 4713 www.frost.com

Frost & Sullivan, the Growth Partnership Company, works in collaboration with clients to leverage visionary innovation that addresses the global challenges and related growth opportunities that will make orbreak today’s market participants. For more than 50 years, we have been developing growth strategies for the Global 1000, emerging businesses, the public sector and the investment community. Is your organization prepared for the next profound wave of industry convergence, disruptive technologies, increasingcompetitive intensity, Mega Trends, breakthrough best practices, changing customer dynamics and emerging economies?

For information regarding permission, write to: Ajit Nafde Program Manager, Chemicals, Materials & Foods Practice, Frost & Sullivan E: ajitn@frost.com | P: +91 22 6607 2049 | C: +91 98202 62322