HomeBusiness20% Returns vs 6%: How India Dominated Global Chemistry (Until Now)

20% Returns vs 6%: How India Dominated Global Chemistry (Until Now)

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For the past decade, the Indian chemical industry has been a global leader in creating shareholder wealth and developing demand. Nevertheless, global headwinds have recently disrupted this momentum.

Between 2014 and 2023, Indian chemical companies demonstrated superior performance in comparison to their global counterparts, with total shareholder returns (TSR) increasing at an annual rate of 20%, as opposed to the global average of 6%.

The better performance was influenced by various factors. There was a steady growth in income, higher profit margins, and an increase in valuation ratios. Anticipated growth in domestic demand is projected to increase from $170-180 billion in 2021 to $850-1,000 billion by 2040.

India’s compelling value proposition as a favored manufacturing location is attributed to the relocation of global supply chains. Indian companies significantly reduced expenses in comparison to comparable international centers – with infrastructure costs up to 70% lower and material costs 3-4.5 times lower. Despite facing economic challenges from 2016 to 2019, when India’s GDP growth decelerated, the chemical industry consistently maintained a Compound Annual Growth Rate (CAGR) of 17%. The outperformance was driven by a rise in revenue until 2014, and in the past five years, it was further supported by margin expansion, multiple increases, and sustained revenue growth.  

Nevertheless, this trend reversed between 2020 and 2023, as the average TSR growth rate for Indian chemical companies decreased to 9 percent as a result of declining margins. In India, the chemical industry is also used to generate superior returns compared to the associated upstream and downstream segments in the value chain. However, this trend has also experienced a decline over the past three years.

As per McKinsey, a variety of factors contribute to the decreasing competitiveness of Indian chemical corporations. The initial two are the result of overcapacity in critical export markets and stagnant global demand. The chemical industry has experienced a 4% annual decline in exports over the past two years, resulting in a burgeoning trade deficit. India’s chemical exports to North America experienced a substantial decline in year-over-year (y-o-y) growth, from 21% (between 2019 and 2021) to 2% (from 2021 to 2023). Europe and Asia–Pacific (APAC), which collectively comprised approximately half of India’s chemical exports, also experienced substantial declines in year-over-year market growth (from 11 percent to 1 percent in Europe and from 10 percent to 4 percent in APAC).

In 2030, the utilization of several products in Europe may fall below 70% due to overcapacity, which is a result of the stagnation of demand abroad and the persistence of high capacity at home. Driven by the current demand-supply dynamics in China, the present decline in demand in APAC could result in oversupply and reduced utilization until 2025. Petrochemicals are anticipated to be exported by China in the near future, as it has been a net importer thus far. Chinese consumption has experienced a roughly 15% decrease in the past year. The subsequent decrease in export prices is exerting pressure on chemical companies in India.

Volatility in commodity prices is the third factor. Market volatility has been precipitated and exacerbated by geographic unrest, global overcapacity for a few substances, and demand-supply dynamics in China. For instance, petrochemical margins have declined in the past two years as a result of low capacity utilization and increasing feedstock prices. These challenges may become more severe as a result of the ongoing oversupply.

Although headwinds are a prevalent backdrop, the performance of all companies has not been consistent. Despite the volatility of the global economic outlook, certain organizations have distinguished themselves by fortifying their competitiveness and resilience.

Frontier India News Network
Frontier India News Networkhttps://frontierindia.com/briefs
Frontier India News Network is the in-house news collection and distribution agency.

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