The 1,312 km long Narmada River awaits us as we steadily, yet meticulously approach it. The sun is about to set; the fishermen have docked their fishing boats on the riverbank. Our driver is carefully maneuvering the car on a narrow bridge as we trudge past a steady stream of oncoming traffic.
The chemical cluster of Ankleshwar that we are leaving behind is spread over an area of 1,600 hectares with 1,700 units, which manufacture a diverse range of chemicals, pesticides, pharmaceuticals, bulk drugs, petroleum products, engineering, textiles, plastics, rubber and packaging. The Gujarat Industrial Development Corporation (GIDC) set up the Ankleshwar Industrial Estate in the 1970s. Ankleshwar has had a long history, and the cluster has faced a series of challenges during its 46-year long existence. More than half the companies in this cluster are chemical units. With a total turnover of around Rs.10,000 crore, the cluster generates employment for about 2 lakh people. In terms of exports too, Ankleshwar contributes 35% to the state’s exports.
Battle for survival
In November, 2016 the Union Minister for Environment and Forests, Anil Madhav Dave announced lifting of moratorium on further expansion activity and new investments, which were put in place after the cluster was deemed a ‘critically polluted zone’ in 2010. This helped the Chinese companies gain market share, both in the domestic and global market. During this period, companies in the chemical hub found it difficult to compete and saw a decline in their sales. Production was flat while manufacturing costs doubled over the last five to six years.
Restricted from scaling their business or leveraging any economies of scale, certain chemical companies started facing a crisis as they tried to match China’s competitive pricing. Jatin Gandhi, director, Modheshwari Chemicals, which manufactures ammonium chloride and whose revenue stand at a modest Rs.6 crore now, says his business has become unviable. “In FY10, there were 23 units within the cluster that were processing ammonium chloride. Today, only three of us remain. China’s competitive intensity has not only eroded our market share and profits, but has also created a shortage of raw materials. Ammonium chloride is a derivative that we process from the effluent discharge of chemical companies. However, Chinese imports have hurt production of all chemical units and has thus reduced the availability of raw material.” Gandhi feels that the government should immediately impose anti-dumping duty on China to bring a much-needed relief to his business.
Having stated the above, not all news has been bad for chemical companies in Ankleshwar. For instance, after the moratorium was put in place, the companies started investing in environment-friendly measures in order to get the moratorium lifted. According to Haresh Patel of Maruti Chemicals, who also heads the Environment Committee at Ankleshwar Industries Association (AIA), the industry has invested about Rs.750 crore in environment-friendly measures so far. AIA also plans to set up a common effluent treatment plant (CETP) to help small units comply with the environmental regulations and continue their production without much hindrance. “The initial capacity of this plant will be 7.5 MLD (million litres per day), and is due to be completed in six months. Further 7.5 MLD will be added in the next phase by one year,” says Patel. They hope to have the plant up and running within one and a half years. The government would be putting in 60% of the total investment required while the industry would chip in the rest.
Level-playing field
The industry feels that lifting of the moratorium will now give them the freedom to compete with Chinese competitors and regain some of their lost share. Some of them can finally go ahead with their forward or backward integration plans.
Chandu Kothia, director at Shree Ganesh Remedies, tells us about his expansion plans. “We are presently purchasing materials like dimethylamino ethanol and diethylamino ethanol, which we can process in-house. We have all the permissions and we have the space. So, we can start our backward integration programme.” The company, which manufactures bulk drugs, started its operations in 2004 and has a turnover of Rs.16 crore.
Some of them however, remain cautious and are waiting for the official word before they embark on their expansion plans. “We have complied with the government’s environmental norms over the past five years; this means we have had to incur additional costs. But, we have not been allowed to increase our production and improve our profitability. The government has made the announcement, but there has been no official circular issued yet,” says Rajesh Dudhat, CEO of the Kohinoor Group, one of the largest domestic suppliers of rhodamine basic violet 10, which is used to make the gulal used in Holi and to create the colour of the manja used during the kite-flying festival of Makar Sankranti. Dudhat feels although the announcement has been made, the government can still dilly-dally and waste a year before issuing an official circular that effectively lifts the moratorium. While his company’s revenue, which is currently Rs.200 crore, has de-grown in the past five years, Dudhat has managed to maintain his margins at 10-11%. He says that he has done so by reaching out to the government and flagging off the importers that are bringing chemicals to India at under-valued prices to evade import duties.
“Certain importers were selling at much lower prices than ours to evade duties. When we collected names of these importers and handed over the list to the Ministry of Finance and Customs, the officials then restricted the importers. So, the demand for our products has been strong. We have also done some price hikes,” Dudhat points out.
While moratorium has affected one and all, the Modi government’s demonetisation policy has had limited impact on chemical companies. Certain small units in Ankleshwar’s industrial belt saw fewer employees turn up for work. These units are facing some difficulty since it’s increasingly challenging for employees to open bank accounts. Moreover, the cash-crunch has added to their woes because of an inability to carry on with their day-to-day operations. With delayed payments and a slump in demand from user industries, some plants are working at 40-50% capacity. For Dudhat’s dye-making firm, the end users are from the textile industry. But, since textile sales have dampened, Kohinoor’s sales have also taken the hit by almost 10-20%. To account for the loss, Dudhat has tweaked his operating strategy by letting certain customers to make payments within 90 days instead of 60 days earlier.
Maruti Chemicals’ Patel, which manufactures active pharma ingredients (APIs) that is used in making formulations, tells us that some of his workers have gone back to their villages as they are finding it difficult to withdraw their wages from bank accounts, and this could add to the rising labour costs. While raw material and power costs have remained stable for chemical manufacturers in Ankleshwar, their labour costs have gone up in the past one-year period.
However, most manufacturers are not too worried about the impact of demonetisation. At best, they feel it will be a short-term impact on business. The focus is now on leveraging the long-term opportunity that the moratorium’s removal gives them.
Ray of hope
While the intense competitive pressure show no signs of abatement, the possibility of the Goods and Services Tax (GST) being implemented is giving hope to some companies. “We pay excise duty on our sales, but we are not able to pass it on to the end-user since our clients are small; they don’t levy excise duty on their products. If we decide to pass on the excise duty, we will lose our competitive pricing,” says DS Singh, director at Dexo Chem Laboratories. Dexo Chem supplies fine and specialty chemicals that are used in research labs in pharma companies and in chemistry labs in schools and colleges. He adds that once GST is in force, he wouldn’t be bearing the current 10-12% loss owing to excise duty.
Finally, chemical companies want a level-playing field in order to be competitive — both in the domestic and the international markets. The companies in the cluster strongly believe that the industry needs a uniform inter-state policy. For instance, while there were restrictions on the expansion plans of plants in Gujarat, they feel companies operating in Maharashtra probably dealt with less stringent norms and that allowed for operational expansion. Additionally, only their companies paid the price for the environmental damage they caused. “There shouldn’t be a relaxed framework, say for Maharashtra and a tighter one for Gujarat. This distorts the competitive landscape,” adds Singh. Dudhat, however believes that unlike Gujarat, chemical firms in Maharashtra have not faced any restriction on expansion activities.
The companies also want to spend lesser time to get approvals for their new products. “It takes us around two years to get a clearance from the government to start making a new product. The process needs to be streamlined so that we can save time,” says Patel. On the other hand, it just takes a day or two for Chinese manufacturers to get clearance for exporting their products to India. This has put Indian manufacturers, who are already fighting an uphill battle, at a distinct disadvantage.
Mahesh Patel, general secretary, Ankleshwar Industries Association and director, Pragna Chemical Industries (dye and bulk drug business), observes that the next generation doesn’t want to continue the business after seeing their parents struggle to keep their business alive. “Our children say we don’t want to live a similar life,” he remarks.
However, the companies believe they will be able to compete effectively with China with a little support from the government. “When I joined this business in 1996, we had to stop production of meta-phenylenediamine as China had started dumping the same product into our market. This made me rethink our business strategy and the idea of exports as a business opportunity struck me. We decided to integrate fully and adopt the latest technology to scale our exports business. Today, our products are used in 36 countries. Adoption of technology is a must, but government backing is needed to support the industry in a highly-competitive environment,” believes Dudhat.
Better days ahead
The cluster might be in for some good news with global environmental norms getting stricter thereby forcing some Chinese players to exit the business altogether. In fact, nearly 1,182 Chinese companies have been shut down recently due to the pollution caused along the Xinjiang river.
Analysts feel that China’s crackdown on polluting units and imposing strict environmental norms and safety standard is going to further bring down capacities in China, thus benefitting the Indian chemical industry in both domestic and export markets. The cost of production of specialty chemicals in India works out to be 10-15% lower than that of China after factoring in the cost of complying with environmental norms and safety standards. Against earlier estimates of 9% per annum growth rate till 2020, specialty chemicals in China are expected to post a slower growth of around 5-7%. Further, the Indian government’s focus on Make in India and smart cities (leading to higher demand for chemicals used in water treatment plants and construction), could be key triggers for the industry. Chemicals constitute more than 13% of India’s total exports and that has barely grown over the past couple of years. With China on the back foot now, exports should gain momentum in the coming year.
As we leave the cluster, there is a sense of optimism that FY18 will prove to be a boon for the chemicals hub. While the moratorium may have put them out of the race against the Chinese, the local businesses are hopeful of regaining some lost ground in the coming year. Chemicals, being a commodity business, is price-sensitive and the competitive advantage in this business comes from economies of scale. Finally, companies can look forward to the level-playing field that they had always craved for.
