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[Key Points | Financial Year '02 | Prospects | Sector Do's and dont's]

  • The Indian chemicals sector produces a range of products that can be broadly classified into two categories - organic chemicals and inorganic chemicals.
  • Major organic chemicals include chemical groups like organic acids (formic/acetic acid), anhydrides (acetic anhydrides) and alcohols (methanol). Inorganic chemicals include chemical groups like the chlor-alkali group (caustic soda, soda ash), inorganic acids (sulphuric acid, hydrochloric acid) and industrial gases (chlorine, argon).
  • The domestic industry functions on a lower scale of operation, and cannot exploit economies of large-scale operation. This coupled with the capital-intensive nature of the industry translates into a higher unit cost of production.
  • Power is a critical constituent of the domestic industry in view of the obsolete processes employed by Indian units. Erratic nature of power supply, combined with the higher unit cost of power, has an adverse impact on profitability.
  • The sector is a cyclical, capital-intensive commodity sector where pricing power of the players is under constant threat except possibly for specialty chemical manufacturers. However, even these cannot escape the economic down cycles. Moreover, capacity utilisation of Indian plants is lower at 70%, when compared to that of Korea and Japan where it is at higher at 85-90%.

Key Points

  • Supply
  • There is oversupply in some segments of the industry particularly organic chemicals.
  • Demand
  • Cyclical, in line with economic swings.
  • Barriers to entry
  • The industry is capital intensive.
  • Bargaining power of suppliers
  • Very low for domestic companies, as in case of many products, imports work out cheaper.
  • Bargaining power of customers
  • Relatively high in view of cheaper imports.
  • Competition
  • Manufacturers compete on prices.

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Financial Year '02

  • Overall the outlook for carbon black manufacturers remained challenging. However, with a strong recovery in the auto sector towards the latter part of the year, there seems to be a sharp reversal of fortunes for carbon black manufacturers. Carbon Black prices remained stable, after witnessing extreme volatility over the last two years.
  • On the other hand, input costs remained more or less stable. Thus, benefiting from strong improvement in realizations and stable input costs, major carbon black manufacturers reported an encouraging margin improvement. Volume growth, which was lackluster at 2%, is also expected to improve in the current year in line with the pick up in the auto sector including commercial vehicles.
  • Even the paints industry witnessed a robust growth of 8% with encouraging improvement in margins. Titanium oxide, which forms almost 30% of the raw material, costs for paint manufacturer remained stable during the year mirroring the trend in crude oil. Margin improvement was on the back of stable titanium oxide prices. However, the paints sector witnessed a robust growth of 8%, which led to increased demand for titanium oxide over 6% during the year.

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  • The demand supply situation for carbon black is nearing equilibrium. While supply is close to 317,000 tonnes, demand is matching is around 3,05,000 tonnes per annum. The industry is working aggressively to reduce its dependence on the automobile sector and exploring export markets. However, strong crude oil prices, which forms one of the major costs for Carbon black manufacturers could put a pressure on margins.
  • Paint industry is expected to post strong double-digit growth rate in the current year. Margins are expected to record a mild improvement. Movement in crude oil prices is likely to directly impact the profitability of the industry.
  • Competition from cheaper imports however, continues to be a matter of concern for the other segments of the sector notably oxo-alcohols, which have witnessed sustained dumping from Poland, South Korea, Indonesia and Russia. Currently, only the total requirement of Titanium oxide is met through domestic production. With Tata Steel setting up a plant to manufacture titanium oxide, dependence on imports is likely to reduce considerably.

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