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Indian Chemical Industry The China Factor! Loss to One, gain for the other!

News Room | July 25, 2018

The world is crippling today with the rising fear to mounting environmental concerns. The need to act for the betterment of the world against ‘Climate Change’ gave rise to the need of the famous Paris Agreement. Of the many countries severely facing the issue of the poor environment, China has been the one to be amongst the most vulnerable countries. The country, since the beginning of the century, has been facing concerns about the rising pollution.

Until 2016, the economic growth made the environment outcry overlooked. By 2016, China was facing alarming levels of poor air quality readings in major cities like Beijing, Tianjin and Xian. In Beijing, the annual average levels of PM2.5 remained at 80 micrograms per cubic centimeter which indicates pollution levels were very high, especially against 2016 target of 60 micrograms by the government. On the new years eve of 2017, the northern China was covered by smog making it difficult for people to move out of house, disruption in schools, flights and port operations. It was then, the Chinese president Xi Jinping requested the local officials to not just focus on the GDP numbers as their performance indicators but also on the environment factors.

Since then, the Chinese have taken a number of steps to curb down on the pollution. A special police force to deal specifically with environmental offences was established. The Chinese Government also undertook a series of environmental inspections of production companies. These inspections led to the enforcement of meeting the standards for controlling pollution. Any non-compliance led to permanent closedown of industries or requirement to upgrade the equipment and machinery compliant to the norms. The government went on to create dedicated industrial parks and announce a timeline for the relocation of plants identified in the inspection. The requirement of relocation led to the closure of plants, especially those that were small, not profitable and those running on outdated technology. The establishment of new plants also meant the permission to operate, that too in a highly monitored environment, would increase the gestation time for the company’s cash generation. Other measures like requirement of Volatile organic compounds treatment, water treatment and new environmental tax added to the trouble by increasing production costs. The aforesaid measures have also consolidated the whole Chinese chemical industry by eliminating technology redundant capacities and all the small players with lack of capital to adhere to the new environmental norms. Looking at the impact on the global chemical supply chain, the temporarily dried-up supply from China substantially increased the prices for the chemicals.

India has been one of the key beneficiaries from the strict implementation of environmental norms and safety standards by China. The softening of exports by the global leader has created a window of opportunity for the Indians. With the reduced import of specialty chemicals from China in India, the domestic manufacturers are enjoying the released home demand. The biggest advantage for the Chinese manufacturers was lower cost of production which has now been increased post the newer and stricter norms, giving the Indian companies cost advantage. The paradigm shift of chemical industry from the west to Asia in search of low labour costs and raw material availability with the trade gap created due to softening of China’s exports offers India huge opportunities to capture on the market for agro-chemicals, specialty chemicals, dyes and pigments. As
mentioned earlier about the rising prices of chemicals in the global market following the clamp down on Chinese chemical industry, the realisations for the Indian companies have improvement. This has led to the rise in EBITDA margins for Indian companies and has also provided them bargaining power, more resources and cushion to expand capacity.

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Pratik PoddarFundamental Research

Pratik Poddar is a Fundamental Research Analyst at Narnolia Research. His forte is finding next growth ideas in mid cap stocks universe. He is a member of Institute of Chartered Accountants of India.

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