Interview

Sustainable Growth: Key Focus Area for Chemical Industry

Posted on 21 January, 2010 | Tags:

Gujarat Alkalies and Chemical Limited (GACL) has bagged the National Energy Conservation Award for fifth consecutive year and the reason why so, you realize as you step inside the factory premises of GACL. Sitting in his plush office, Guruprasad Mohapatra (IAS), Managing Director, GACL talks about the economic revival after the meltdown, GACL's integration philosophy, growth strategy and future plans to become more than Rs 4000 crores company in an exclusive interview with Mittravinda Ranjan of Chemical Engineering World

 

- Guruprasad Mohapatra

Indian economy is not isolated from the global economy. How much time in your opinion may the economy take to emerge completely from the shadow of the meltdown?
Agreed to the point that Indian industry is not isolated with respect to global recession but simultaneously the economy is not export driven as the exports from India consist of the order 20-30 percent. Outsized population and domestic demand against availability are the advantages that remain with domestic industry. Within this GACL is less affected as its exports turn over constitutes only 10 percent of its total turn over.
Per capita utilization of most of the products has been low in India; thus the domestic demand had not declined severely working in the favor of manufacturers for domestic sector while the recession was at its peak. But the demand devastation in the West effected in accessibility of surplus supply in the domestic market.
Nevertheless, various signs of recuperation and improvement have been observed in demand. As in case of basic chemicals presently there are no production cuts indicating that recovery is underway. To a certain extent revival of India will depend on recovery of US and European markets however currently it is difficult for me to comment or predict a definite timeline for complete economic revival.

What are the major challenges for the chemical industry that need to be tackled for its sustainable growth?
Sustainable growth is one of the key focus areas of the chemical industry and essential part of the growth strategy in today's competitive environment that expands beyond the boundaries. Purchasing power and an ability of purchaser are the major challenges for the global and domestic industry, whereas internationally, purchasing power shall advance with the upward trend in US economy. Globally, industry has been facing the challenge to reduce the environmental footprint and gradually adopting green technologies to mitigate impact on the environment.  In the current business environment, the industry has to be cost competitive and at par on scales of economy with the global industry. This is a message that comes from China as production at massive scale results in substantial cost reduction.
Indian caustic soda industry is already competitive in terms of cost and scales of economy. Indian caustic industry is fairly good as caustic manufacturers in India are using environment friendly, energy efficient membrane technology. GACL is one of the market leaders in caustic soda and holds around 18 percent of market share.  Though the lattest trend is to put up plants of more than 2000 TPD capacity, still the average size of caustic soda production is about 500 TPD, whereas GACL has production capacity of  1250 tonnes per day at both the production facilities in Dahej and Baroda.

How did downturn impact the businesses of GACL during the last year and what strategies did GACL adopt to bolster the affect?
Due to global meltdown GACL mainly had an impact with respect to price realization, as the imports were available at dumped price from US and Europe.  GACL was affected by prices but possibly maintained the production and sales volume. The impact of the global meltdown has its direct bearing on the product pricing and margin/realizations on all products, which is observed from our eroded financial results of Q-I and II of the current financial year. The company has sustained and maintained its presence in the market with the same level of quantitative sales even at unaffordable prices with strategic cuts in other costs. The company anticipates the situation to improve in coming quarters.

Which are the major export markets and products for GACL?
Primarily GACL is not an export-oriented company with an annual sales return of Rs 15,00 crores out of which only 10 percent is generated from exports. Though export is not our key focus, export close to Rs 150 crores of products is done, which include Aluminum chloride, Hydrogen peroxide, Caustic soda flakes, Polyaluminum chloride, Chlorinated Paraffin Wax, Caustic Soda Flakes and Prills all over the world to various countries in Africa, South East Asia, Australia and Europe.

What are the businesses plans of GACL during the next two quarters in the current financial year?
The global recession has affected the bottom line of the country due to depressed price, as already mentioned. GACL is determined to additionally boost its production over the preceding year and is making efforts for improved price realization along with reduction in production cost.  Further it has taken steps for debottlenecking and outsourcing to enhance its top line as well.
Of its total turn over GACL's export turn over is around 10 percent and we were thus affected to some extent in our export performance.  However, with additional efforts, this shortfall could be taken care. Now with the likely upturn in global economy, we expect the things to be normal by middle of next year.

May we have your comment on the growth in production and demand of caustic soda in the Indian market and if imports are required to bridge the demand supply gap?
In India supply and demand of Caustic Soda is uniformly balanced, indeed the imports are  not required  to meet the demand of caustic in the domestic sector. The imports in the country, which were around 7-8 percent, can be handled by increasing the operating rates by domestic caustic soda manufacturers.  Currently, the capacity utilization of domestic industry is lesser than 80 percent.
However, during the period March 2009 to September 2009, the imports had gone up by three times due to lower prices prevailing in US and Europe with their compulsion to produce Caustic Soda for meeting growing Chlorine demand to manufacture Ethylene Dichloride (EDC) and Polyvinyl Chloride (PVC). Ever since there had been a vigorous demand of caustic in India and China, enormous quantities of caustic were being dumped.   Now we understand that the prices of Caustic Soda in US and Europe have increased and there may not be any additional dumping to India.

What is your take on Indian government's import-export policy on caustic soda?
Indian Government follows guidelines for antidumping in line with the WTO regulations. The procedures by WTO are complicated and the time period to process such cases is long but we do follow these very closely.
GACL had approached the Directorate General of Safeguard Duty earlier this year along with other domestic caustic soda manufacturers to impose safeguard duty on the illegal imports into the country. At the moment, 15 percent safeguard duty is recommended by DG- Safeguard on imports of caustic soda lye into the country, irrespective of the country of origin. But the notification from Finance Ministry is still awaited.
Illegitimate dumping of caustic soda in India has resulted in undue margins that are causing injury to the domestic caustic soda manufacturers. Apart from caustic soda, Government is taking measures to curb dumping of other chemicals like Methylene chloride, Phosphoric acid, Potash Group of products, Chloromethanes etc. I feel that time to process the issues related to dumping of chemicals should be reduced so that the domestic industry does not suffer for long periods.

What is the current scenario of availability of Phosphoric Acid in the country?
GACL is a major producer of phosphoric acid where sugar industry is one of the  major consumer but currently due to lesser sugarcane production this year, there is slowdown in the demand of this product.  As a result we are carrying huge inventories of this product. In fact due to dumping of imported material we are running the plants at lower capacities.  Product prices have reduced drastically pertaining to the demand destruction in the domestic market. Previously, we sold phosphoric acid at Rs 70,000 per tonne but the prices have now dropped by 40 percent due to drop in the rock phosphate price and dumping of imported material. Also the price of Rock phosphate, which is the raw material for phosphoric acid sky-rocketed from USD 86 to USD 480 per tonne due to acceleration in demand have also reduced because of the recessionary trend.

Please tell us about the expansion plans of GACL in the near future?
As quoted earlier, our growth strategy is very much focused on domestic market and we have planned expansions of Rs 2500 crores during the next three years. GACL is the market leader in producing caustic soda and we hold around 18 percent of market share. Against 1250 tonnes per day of caustic soda production at our complex in Baroda, we are investing Rs 800 crores to set up another facility to produce 900 tonnes per day of caustic soda at our new facility in Dahej. We will continue to maintain our lead in the market with this expansion and our market share in the domestic industry will mount to 20 percent. 
We are investing Rs 450 crores to set up 150-mw captive power plant. We had entered a joint venture deal with Dow Chemicals on a 50: 50 partnership basis to produce Chloromethane group chemicals. The project will be set up at the cost of Rs 780 crores. The engineering activities have been geared up. No changes have been made to the original joint venture agreement and the engineering work is closer to completion. The plant is expected to be on stream by September 2012. In Dahej, we are commissioning 15000 tonnes per annum capacity bleaching powder project at investment of Rs 12 crores and calcium chloride powder facility in Baroda at an investment of Rs 10 crores. 
We are setting up a manufacturing facility to produce 8000 tonnes per day of Hydrazine at an investment of Rs 80 crores. Strategically, this project is very important, as Hydrazine demand is primarily met through the imports in the country and once commissioned project will substitute for imports flowing into the country. Honorable Chief Minister Shri Narendra Modi recently laid the foundation stone for the new Hydrogen Peroxide facility in Dahej, which will be capacity addition by another 14000 MTA on 100% basis.  GACL is also setting up a Polyols unit of 1, 50,000 tonnes per annum manufacturing facility with an investment of Rs 900 crores in Dahej. We are also broad basing the product basket and offering new products for domestic market that are currently being imported and will substitute for imports.

How will these projects help GACL increase their market share in Global and domestic markets?
As mentioned earlier for any new project GACL takes a close look at the demand growth pattern in the domestic market. With the strategic planning, GACL will continue to maintain its leadership in the caustic soda industry in the domestic market and market share will move up from 18 to 20 percent.
We are adding new products like Hydrazine Hydrate, Bleaching Powder, Polyols etc., and many more to our product basket, as broad basing our basket we will be less open to vagaries of caustic soda because of cyclic demand and cost fluctuations. These products have strong demand in India and GACL is a strong brand name and is recognized in the industry for reliability, safety and environmental compliance. With a well-established dealer's network I do not see any difficulty in selling these products in India.

How is the demand-supply situation of Hydrogen Peroxide in India?
Current demand of Hydrogen Peroxide hovers around 16000 MT on 50 percent basis per month. There are four manufacturers in India and the imports range between 300-500 MT per month. Demand of Hydrogen peroxide is growing at rate of 10 percent per annum and few sectors like refineries are likely to be the new users in the due course of time. We expect the total production from the expanded facility to be sold in the country.

GACL is adding capacities to manufacture phenol. How does that fit into the growth strategy?
Presently close to 70 percent of phenol requirement is met through imports. There are very few indigenous phenol manufacturers in India and there is a demand deficit of 80000 tonnes per annum in the country. Phenol is a product in the entire value chain comprising of phenol, bisphenol and polycarbonate. We have planned 1.57,000 tonnes per annum of phenol and 80,000 tonnes will be used captive to manufacture polycarbonates, since maximum value addition is taking place in polycarbonates. Balance 75,000 tonnes will be sold in the domestic market.
GACL has entered the mega joint venture deal with GNFC and GSFC to set up world-class facility in Dahej. Three companies have signed the MoU of Rs 10,000 crores during last Vibrant Gujarat summit. Once commissioned, this project will be an important step towards import substitution and with this joint venture we plan to do entire value chain rather than just ending with phenol.
This JV plans to set up three groups of products, first EDC and PVC, second of synthetic rubber and third one phenol, bisphenol ending with polycarbonate.

What do you have to say about the demand of chloromethane group chemicals in the domestic market?
India is a net importer of Chloromethanes and the market is growing at a rate of 10 percent.  Steady growth of Pharma sector in the country has given boost to the demand of these chemicals in the country. Chloromethanes project planned with Dow Chemicals is expected to be on stream by 2012 and the total production is expected to be absorbed in the country. Surplus product if any can be exported through Dow. 
Chloroform, Methylene chloride and Carbon tetrachloride are the basic products of chloromethane group and presently, large part of demand is met though imports.
We foresee a healthy demand of methyl chloride in pharma, epoxy and paints sector. The market is expected to grow at a rate more than 10 percent for methylene chloride, whereas carbon tetrachloride is anyways going to be phased out. Presently, imports into the country are of the order 80,000 to 1,00,000 tonnes per annum. GACL will add capacities of 2 lakh tonnes per annum to manufacture chloromethanes.

How is GACL going about the new products and does GACL plan to take the route of acquisitions as the company has already started outsourcing many products?
 We have added new products to our portfolio such as Calcium chloride; Toluene based derivatives, Chlorinated Paraffin Wax (CPW) and Aluminum chloride by out sourcing.
Albeit GACL is setting up its own manufacturing facilities to produce Calcium chloride, Polyols, Hydrazine although we have also outsourced manufacturing of some of these products on contract to small manufacturers in Gujarat at cost plus margins.
We have already outsourced manufacturing of Benzyl chloride, a toluene based derivative to a manufacturer in Gujarat and have started promoting the product. The producer buys chlorine from GACL and manufactures the product under our brand name.
CPW manufacturing has also gained a contract and this product is manufactured under the brand name of GACL at manufacturing facilities in Ahmedabad and Baroda. Chlorine is used along with heavy natural paraffin as raw material to manufacture CPW. Aluminum chloride is also being manufactured through contracting mode under the brand name of GACL.
GACL is not constrained with limitations on working capital, has the capacity to hold large inventories and sustain pressure during the rough times. Whereas the SMEs find it difficult to sustain during unstable market conditions. GACL has taken the initiative to support the growth of SME sector in the state. All the outsourced products manufactured under our brand name of comply with the quality and environmental norms as per GACL standards. This is a win-win situation for GACL and SMEs and also this would boost growth of industries in Gujarat. We plan to expand through expansions and diversifications. We have been looking at new projects and have added few products to improve the company's top line.
Please throw some light on initiatives taken by GACL towards energy conservation and Clean Development Mechanism.
GACL is the first PSU to have switched over from naphtha to gas in 2008-09 and monetized first lot of CER's worth Rs 16.57 crores. Other CDM projects in the pipeline include a project on energy conservation / steam optimization in Dahej, there are two windmill projects of 26MW and 39 MW each and a steam optimization project in Vadodra. These projects are at various stages of approval and these require Validation and Verification at various Stages. GACL has taken various initiatives towards energy conservation and is recipient of National Energy Conservation Award 2008 for five consecutive years.

With new projects in the basket, how will the top line of GACL grow and what are the company's plans for the future?
The investment of Rs 2600 crores will increase the current turnover of Rs 1600 crores to Rs 4000 crores by 2012-13. This will be a significant quantum leap as this kind of growth is normally not common with the companies of our size.  But yes, timely completion of these projects is a major challenge however, I do not see any problem in that as GACL does not have any issues related with credibility, competence and funds.  The projects have been devised in such a way that their turnover increases three times the current value. We aim to become more than Rs 4000 crores company by 2012-13.