Securing competitiveness in India’s chemical industry

For a decade, the Indian chemical industry has been a global outperformer in demand growth and shareholder wealth creation. However, global headwinds have recently interrupted this momentum. Chemical companies in India could navigate these challenges and enhance their future prospects by boosting their competitiveness.

Indian chemical industry: Interrupted momentum

Indian chemical companies performed better than their global counterparts with strong total shareholder returns (TSR) growing at an annual rate of 20 percent between 2014 and 2023, compared to the global average of 6 percent. This changed, however, between 2020 and 2023, when average TSR growth for Indian chemical companies dipped to 9 percent due to falling margins. While the chemical industry also used to deliver better returns than the associated upstream and downstream segments in the value chain in India, this trend, too, has seen a downturn in the past three years.¹TSR analysis based on data from Corporate Performance Analytics by McKinsey.

The effect of global headwinds

Multiple factors explain the declining competitiveness of Indian chemical companies. The first two are the fallout of stalling global demand and of overcapacity in key export markets. In the past two years, the chemical industry has faced a widening trade deficit with exports declining 4 percent annually.²UN Comtrade, ITC Trade Map. Year-on-year (y-o-y) growth of India’s chemical exports to North America dropped significantly, from 21 percent (between 2019 and 2021) to 2 percent (from 2021 to 2023). Europe and Asia–Pacific (APAC), which accounted for about half of India’s chemical exports, also saw steep dips in y-o-y market growth (from 11 percent to 1 percent in Europe, and from 10 percent to 4 percent in APAC).³UN Comtrade, ITC Trade Map.

Overcapacity in Europe could drag utilization below 70 percent by 2030 for several products, as capacity remains high at home and demand stalls abroad.⁴IHS-Markit, WTS-HIS-Markit, McKinsey Economics Analytics Platform. Declining demand in APAC could lower utilization and prompt oversupply till 2025, driven by the current demand-supply dynamics in China.⁵Chemical Insights by McKinsey. In the near term, China is expected to become a net exporter of petrochemicals while it has so far been a net importer. Over the past year, Chinese consumption has declined by nearly 15 percent. The consequent cut in export prices is pressuring chemical companies in India.

The third factor is commodity price volatility. Geographical unrest, global overcapacity for a few chemicals, and demand-supply dynamics in China have caused and aggravated market volatility. For example, over the past two years, petrochemical margins dropped due to rising feedstock prices and falling capacity utilization. These challenges could intensify with continuing oversupply.

While the headwinds are a common backdrop, the performance of all companies has not been uniform. The global economic outlook has turned volatile, but some companies have differentiated themselves through building their resilience and competitiveness.

Focus areas for India’s chemical leaders

Over the past few years, chemical companies in India have emphasized growth and capital excellence. However, securing a competitive advantage in a volatile market could require a broader approach that builds in functional excellence and streamlines margin expansion. In this context, company leaders could focus on five proposed priorities:

1. Building functional excellence in every pocket of the organization: Indian chemical companies can build this muscle, especially through digital and analytics-based performance improvement that could increase their annual EBITDA by 400 to 500 basis points.
2. Internationalization and becoming truly global: In a macroenvironment of stalling global demand, Indian companies could still seek out new value pools. Toward this, they could build or acquire a suite of institutional capabilities such as global business development, customer access channels, local legal entities, supply chain infrastructure (warehouses, depots, et cetera), application development setups, and deep regional regulatory understanding. Doing so could help companies increase overall annual revenue by 10 to 30 percent.
3. Accelerating innovation: As they globalize, Indian chemical companies could focus on both application-based innovation and new product development, particularly import substitution. This could also potentially increase annual revenue by around 5 to 10 percent.⁶Mehdi Miremadi, Chris Musso, and Jonas Oxgaard, “Chemical innovation: An investment for the ages,” McKinsey, May 1, 2013. A sharp focus on innovation and research has helped incumbent chemical companies create differentiation between them and their competitors.
4. Sustainability as a dual play—defense and offense: As the industry accelerates toward decarbonization to meet stricter regulatory requirements and changing customer expectations, companies could proactively develop an offense play where they build green alternatives based on green feedstock and formulations while also investing in bio-based opportunities.
5. Deepening and globalizing their talent pool: Companies could equip themselves with the right skill set and capabilities across functions such as research and development, technical sales, and shop-floor operations.

Of these, the first two, improving functional excellence using digital tools, and adopting truly global strategies, could help to enhance margins in the near term. The remaining ideas could ensure the continued relevance and competitiveness of these companies. Such priorities could help the Indian chemical industry to shape the future of chemical companies and potentially meet the ambition of a US $1 trillion chemicals market by 2040.⁷“India: The next chemicals manufacturing hub,” McKinsey, February 28, 2023.