Right from the moment we wake up in the morning till the end of the day, we deal with hundreds and thousands of chemicals on a daily basis. Toothpaste, soaps, shower gels, deodorants, clothes, various kinds of packages, processed food, automobiles, buildings we live in – specialty chemicals are used in making each of the them. From ordering Swiggy to sitting in an Uber – most parts of our day involves us using a specialty chemical.
Specialty chemicals are specific products providing a wide range of effects on which various industries rely on. They are recognized for what they do and the kind of solution they provide to meet customer application needs. For example, caramel manufactured from sugar is a commercially produced specialty chemical. Caramel coloring is extensively used in manufacturing of soft drinks and confectionery items.
The size of the industry is pegged at $25.0 billion. The industry has multiple sub-segments, the largest one is paints and coatings, which accounts for about 20% of the industry size. Specialty polymers are the next biggest segment and contribute 13% of the industry size.
List of sub-segments and end-user industry is as below:
Specialty chemicals industry is expected to grow at a CAGR of 13% over the FY15-FY20 period leading to a market size of $52 billion by 2020, which is primarily driven by domestic consumption. Growth drivers for the industry are:
- India’s middle class is fast expanding, leading to dramatic change in demand for items like food, clothing and transportation. This growth in end user industry has been primarily driving demand for specialty chemicals
- Apart from allowing 100% FDI into the sector, Government’s “Make in India” initiative is expected to provide impetus to infrastructure creation and facilitate rapid flow of FDI into sector
- National Chemical Policy is expected to be released soon, the policy is expected to promote research & development in the industry as well as provide enabling environment and infrastructure for the industry.
- A technology upgradation fund of $100 million will be setup during the 12th five year plan (2012-2017), in order to allow companies to undertake modernization programmes
- 4 Petroleum, Chemicals and Petrochemicals Investment Region (PCPIR) are being implemented in Andhra Pradesh, Gujarat, Odisha and Tamil Nadu. Each PCPIR is a specifically delineated investment region having an area of about 250 sq km. Kerala, Karnataka and Maharashtra are new applicants for PCPIR. This is expected to give a major boost to manufacturing chemicals locally
Other factors that make specialty chemicals industry attractive:
- Specialty chemical industry is knowledge driven & oligopolistic in nature. Companies that manufacture such chemicals need to have process expertise as well as research and development capability. The industry is also capital intensive. Combination of these factors act as entry barriers, allowing incumbents to retain competitive advantage
- These chemicals are high value specialized products used in specific proportions by manufacturing industries. Manufacturing industry approves the product after a lot of testing and then accordingly designs its production process. Hence, customer stickiness is very high, leading to predictability of revenue
- End product price is decided through negotiation. Thus, increase in cost of raw materials is passed onto the end user. This allows companies to maintain their margins
Chemicals have become especially important to the growth of the overall economy – and it’s the key reason why the entire sector has witnessed tremendous growth in recent years. They also present an interesting and fairly overlooked investment opportunity, which is why we’ve created the Specialty Chemicals smallcase.
The Specialty Chemicals smallcase has a historical CAGR of 37.43%, and includes stocks like Vinati Organics, Asian Paints, Aarti Industries, and Pidilite Industries (the makers of Fevicol).