The global chemical industry has shown phenomenal growth in 2005. The impetus generated in 2004 was carried over in 2005 in most of the regions. Production in North America was below 2004 levels because of two industry-damaging hurricanes, which resulted in large price increases for most chemicals-especially organics. In the past and at present, the chemical industry is still concentrated in three areas of the world- Western Europe, North America and Japan (the Triad). The European Community remains the largest producer area followed by the US and Japan.

The traditional dominance of chemical production by the Triad countries is being challenged by changes in feedstock availability and price, labor cost, utility cost, differential rates of economic growth and environmental pressures. Instrumental in the changing structure of the global chemical industry has been the growing participation of developing countries and regions such as the Middle East, South East Asia, Nigeria, Trinidad, Thailand, Brazil, Venezuela, and Indonesia.

The chemical industry is the most globalised of all manufacturing industries and the globalization is still in progress. The driving factors for the trend are the need for improvement of profitability by reducing production costs and proximity to markets. Companies choose location for a specific operation based on the levels of trade between countries and high competition for markets.

Present scenario
In 2005, the global chemical industry had to deal with natural disasters such as hurricanes in the US and surging crude oil prices which pushed up petrochemical feedstock prices. In 2005, according to the American Chemistry Council (ACC), global chemical industry grew by 3.9 per cent in volume terms. In terms of value, the global chemical industry is estimated to have grown by about 4.8 per cent y / y to USD 1,310 billion compared with 5.5 per cent y / y in 2004 (figure 3.1).


Market segmentation
The global chemical industry is diverse and heterogeneous comprising several segments that are largely unrelated to one another. The key segments that make up the industry are:

o Commodity chemicals
o Specialty and fine chemicals
o Fertilizer and agrochemicals
o Industrial gas

In 2005, commodity chemicals accounted for a major share of 54 per cent of the total market while specialty and fine chemicals segment constituted 33 per cent. Fertilizers and agrochemicals together had a 9 per cent while industrial gases accounted for the balance 4 per cent.

The commodity chemicals segment constitutes more than 50% of the share of the global chemical market simply due to the fact that the high volume consumption chemicals are the commodity chemicals like polymers. The use of the commodity chemicals in the end user industries is also significantly higher than the other chemicals. On the other hand consumption of specialties, agrochemicals and industrial gases is significantly lower than the commodity chemicals.

According to BASF, in 2006 the world chemical production growth is expected to be 3 per cent with Asia (excluding Japan) accounting for highest growth of 7.1 per cent followed by South America and the US with 3.8 and 2 per cent growth rate respectively.
China's emerging presence as importer, processor, consumer, and exporter of industrial chemicals will reshape the economics of the industry. It is forecasted to become the third largest chemical producing country by 2006, behind the US and Japan, but ahead of Germany.

The biggest challenge the chemicals industry is going to face in 2006 is the rapidly advancing prices of oil and natural gas which is used as energy and feedstock purposes. The profitability of companies will depend on whether they are able pass on this high raw material cost to end use consumers or not.


Growth drivers

The chemicals industry is an industry that touches every part of our life. It also provides the needed raw materials to many other industries. The industry has grown at a compounded annual growth rate (CAGR) of 3.3 per cent from 1999 to 2004. The major growth drivers identified for the industry are industrial demand and growing economy; substitution of conventional materials; international trade; and growing Chinese chemicals industry.


Issues and challenges

The global chemicals industry, which provides the needed raw materials to many other industries, faces tough challenges. One of the major issues is the tightening of regulations to check the environmental hazard posed by the chemical industry. For example, the first reading of the Registration, Evaluation and Authorization of Chemicals (REACH), the legislation for ensuring chemical safety was passed in the European Parliament on November 2005, and the Council of Ministers approved it on December 2005. Some of the other identified issues and challenges are volatile energy and feedstock prices, WTO and the chemical industry, and cost reduction.


Indian scene

The Indian chemical industry comprises basic chemicals including petrochemicals, fertilizers, inorganic chemicals and other industrial chemicals; specialty chemicals; and agrochemicals.

The chemical industry in India is highly fragmented and widely dispersed with western India accounting for 45-50 per cent. Bulk chemicals are dominated by large players. Both large and small players are into fine and specialty chemicals. India has a large chemical industry with a sizeable presence in a number of sub-sectors comprising dyes and pigments, organic chemicals, inorganic chemicals, agrochemicals, and specialty and performance chemicals. The chemical industry accounts for 12.5 per cent of India's total industrial production and 16.2 per cent of the total exports from the Indian manufacturing sector.

Market size: The Indian chemical industry was estimated to be USD30 billion in 2005, growing at 11 per cent compared with the previous year (figure 7.22). The industry has grown at a CAGR of 8 per cent between 2001 and 2005.

Industry performance: The chemical industry performed well in 2005, getting the required thrust from the Indian government's ambitious program to improve infrastructure. Organic and chemicals, agrochemicals, coatings, dyes and pigments, soaps and cosmetics, fertilizers and specialty chemicals had a sizeable share of the overall market in 2005. According to American Chemical Council (ACC), overall chemical production in India grew 10.4 per cent y / y in 2005.


Critical success factors

The chemical industry is an industry where the manufacturing plants are big, distribution network covers the globe and huge sums are spent on research. A company that operates in this industry should focus on the factors that are critical for its success in-order to sustain and succeed in the market.


Future outlook

In 2006, it is expected that the positive economic trends will continue in most regions and this will drive the chemical industry growth. In 2005, according to ACC, the global chemical production is estimated to have grown by 3.9 per cent y / y, whereas in terms of value, the industry is estimated to have grown by 4.8 per cent y / y. Apart from the overall economic impetus; there are various other factors that continue to drive the industry. These include growing demand from end user industries, international trade and demand from emerging markets.

(The author is with Cygnus Business Consulting & Research, Hyderabad)