Can the chemical end-user industries get back on track?

Over the past few years some of the emerging countries have contributed to the tune of two thirds of the global GDP. Over the past ten years, emerging countries have bought more of the exports from developed countries, increasing their share from 25% to 50%. Consider that in recent years, China alone has consumed about half of the world’s cement, steel, iron and coal, lifting the commodity prices.
 
After a decade long of high growth, there are signs that the tide of growth is receding. For example, HSBC has cut his forecast for Indian economic output to 4% for the Indian fiscal year through the end of next March, from a previous forecast of 5.5. It also cut its forecast for the following fiscal year to 5.5%, from 6.6%. India GDP growth was 8% in 2007.
 
Growth in emerging economies inevitable: A myth?
There are a number of reasons why emerging markets are beginning to retreat. The consensus among economists is that some have lost sight of keeping up reforms that boost productivity and innovation in the private sector. In the golden years of the past decade, there was hype about BRICs. The overconfidence in the good years led some developing country leaders to assume that their countries progress was inevitable. This was certainly the case in India.

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The story of emerging countries was a simple one: good policies by emerging countries attracted investment capital, and then the boom in asset prices pulled in more capital. Emerging countries enjoyed capital inflows of about $1 trillion each year. Then, some developing countries began to overspend. Easy credit planted the seed of problems just like in developed countries. Others have to cope with rising currency values, which weakened exports competitiveness.
 
When the sentiment turned against developing markets, capital inflows began to retreat. Assets prices fell. Interest rate rose. Currency values tumbled, raising costs of energy and inputs for production, while increasing inflation risks. As growth prospects dimmed, more capital moved out.
 
Slowing economy, rising inflation
Brazil, Turkey, South Africa and India have been hit particularly hard in the present climate. Their currencies have fallen on average by 14% since May. In India, the sharp drop in the Rupee has driven up the Indian cost of crude oil, priced in dollars and almost entirely imported. Considering that in India raw materials for end users industries such as paints, coatings, pigments and plastics industries can represent up to 60% net sales, this puts a dent in the probability of those companies. This is coupled with high inflation. The middle class is spending less, the automotive industry is out of breath.

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One would expect that exporters like pigments manufacturers could benefit from a cheaper rupee. However poor roads, heavy regulations and restrictive labour laws have left India with a manufacturing sector that, although stronger than a decade ago, still struggles to compete with China and other East Asian economies. Indian companies rely heavily on import for materials and equipment that they cannot buy within India, and the costs of those imports are surging as the rupees falls, limiting gains in Indian competitiveness. In anticipation of weak sales, Indian companies are buying less material for future production and are keeping smaller inventories of finished goods on hand, in anticipation of weak sales.
 
Rising middle class: A new growth paradigm
There are many opportunities and the potential for the growth of the chemical end user industries is there. It calls for companies to recognise that there is a new paradigm at play. According to McKinsey, about 400 emerging markets cities will account for almost half of the expected growth between 2010-25. The rise in the middle class in many emerging countries offers opportunities for many of those companies in paints, coatings, pigments and plastics industries. Already about 2 billion people in developing countries earn $3,000-$20,000 per year and collectively possess $12 trillion in purchasing power. This means that there would be new pattern of south-to-south trade, logistics and supply chains. This is smoothing that companies need to recognise and for the government to shift its policies to put the growth of private business at the forefront. 
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The author is an Independent Consultant based in Chapel Hill, NC, USA, and was recently Vice President - Technology at Asian Paints Ltd, Mumbai, India. He is a member of the American Chemical Society and Product Development Management Association.