Despite India’s growing chemical industry, domestic manufacturing of organic chemical phenol remains almost negligible and is woefully short of the volumes required by consuming industries. Importers have taken notice of the demand-supply gap and are making the most of it. Question is, how good is the idea of importing phenol? The Dollar Business analyses.
By Anishaa Kumar | November 2017 Issue | The Dollar Business
The use of phenol around the world goes way back to the 1800s where it was the earliest form of anaesthetic. In the early 1900s the soap industry too started using phenol due to its slightly aromatic and acidic qualities. Also referred to as Carbolic acid, phenol is a transparent to light pink chemical which is available in the form of a liquid or a powder.
Today, phenol and its derivatives find use in the manufacturing of many household items like disinfectants as well as in the chemical industries as intermediaries. Industries where it has growing demand include pharmaceuticals, plywood, laminates and resins. Curiously, despite the growth in these industries, India manufactures only a fraction of the phenol that it consumes.
Ajay Kapur, Managing Director of Noida-based Shubham Chemicals and Solvents Limited says, “In India, the local manufacturers are not able to compete with imports vis-a-vis prices and their production is also not consistent. On the other hand, the demand is increasing by 8-10% every year, hence import volumes are also on the rise.” Janak Ladhani, Managing Director of Mumbai-based Sonkamal Enterprises, agrees that as user industries keep rapidly growing it is natural that the demand for phenol will increase and in the absence of capacity building in domestic phenol manufacturing imports are the only option.
According to data from ICIS Market News & EY Analysis, the global supply to demand gap is expected to narrow down from 0.7 MT surplus in FY2016 to 0.3 MT in FY2020. The Indian phenol market is also expected to see an upward growth in the coming days. Data from ICIS and the International Conference on Indian Petrochem indicate that the Indian phenol market will see a growth of 64.7% to Rs.28 billion in FY2020 from Rs.17 billion in FY2012.
When it comes to imports, according to the London-based IHS Markit, India and China have shown the most impressive increase in imports of phenol over the last 10 years due to unprecedented growth in user industries.
We love to Import
Despite a gaping demand-supply gap, manufacturers have not been able to grab the opportunity. Available data suggests that unless India invests in capacity building the dependence on import of phenol will continue to increase in the foreseeable future. For instance, India produced just 82 kilotonne (KT) of phenol in CY2012, while the demand for the same in that year was 248 KT. In CY2015 while the demand had grown to 300 KT, India managed to produce only 82 KT of phenol. ICIS forecasts a demand of 411 KT in CY2020 and in the absence of more manufacturing units, it is but obvious that imports of phenol will shoot up. In FY2013, India imported phenol worth $257.10 million, which increased to $300.20 million in FY2015. Though imports witnessed a y-o-y decline of 16.7% in FY2016 (mostly due to the global economic slowdown), it was followed by a 16.4% y-o-y increase in FY2017.
A major boost in demand for phenol has been attributed to a growth in user industries, particularly plywood and laminates. Kapur of Shubham Chemicals says, “There has been a tremendous growth in the plywood and laminate industry in the last five years, thanks to the infrastructure boom. This in turn has led to a growth in demand of phenol.”
Of supplies and taxes
When it comes to sourcing countries, India’s main sources of phenol include Thailand, China, South Korea, US, Singapore and Taiwan. In FY2017, while imports from Thailand were the largest in terms of value, South Korea topped the list when it came to import volume. According to Kapur, Saudi Arabia too is slowly emerging as a viable source for India’s phenol imports.
A major issue being faced by importers of phenol has been the imposition of anti-dumping duty. For Indian importers like Virendra Shah, Director of Ahmedabad-based Veer Chemicals, countries like South Korea and Taiwan are the most reliable sourcing destinations not only because of the quality of phenol manufactured in these countries but mostly because of the low or no anti-dumping duty imposed on imports of phenol from suppliers based in these countries. Currently, there is no anti-dumping duty on the import of phenol from some manufacturers in South Korea. Interestingly, despite India having free trade agreements with various source countries like South Korea, phenol has been placed in the excluded list in the treaty, meaning that there is no reduction in duties. In the global market, Belgium maintains its lead as the largest exporter of phenol. Germany, Netherlands, Belgium, India and China are the biggest importers of the product. While India is the world’s fourth largest importer of phenol, Germany leads from the front.
Despite there being a great opportunity for manufacturers of phenol, large-scale domestic producers of the product remain limited – so much so that currently there are only two major manufacturers of phenol in India i.e. Hindustan Organic Chemicals Limited (HOCL) and SI Group India. Importers and trade analysts predict that a domestic manufacturing resurgence remains a distant dream. Ladhani of Sonkamal Enterprises says that “though in 2018 a few new manufacturers are expected to begin production, the extent to which they will reduce imports is questionable.”
Phenol is a versatile industrial organic chemical which is used to produce a wide variety of chemical intermediates, including bisphenol-A, phenolic resins, etc.
Currently, domestic manufacturers cater as much as they can to the domestic market and only a small percentage is exported. Though the latest data shows an increase in export, the figure stands at less than 5% of the total annual imports. According to a report by McKinsey & Company, one of the main reasons for the negligible domestic production, despite the increased domestic demand, has been the constraints in the petrochemical industry in India such as absence of high-level investments, challenges in the supply value chain, disproportionate use of petroleum intermediaries and absence of better and advanced technology. Further, according to Shah, “the higher cost of production of phenol in India acts as a catalyst to greater imports.”
Volatility at play
Having read so far you may think that importers of phenol have a smooth ride. Disappointingly, this business too has its own set of challenges. Like most other chemicals, the toxicity and volatility of phenol is a major hurdle. Since phenol in its pure form is toxic and reactive, importers are required to follow a strict protocol. But Shah says that this is less of a challenge now than earlier as the foreign exporters usually follow all the protocols while exporting in barrels and when imported in bulk phenol goes to the Kandla Port where it is stored in appropriate tanks. The safety protocol, however important, has an impact on the cost of phenol as storage and transportation is expensive. This in turn impacts the overall profits margins.
Another issue is the constant fluctuation in prices due to an imbalance in supply and demand ratio. As phenol is mostly produced from petroleum and coal tar, fluctuations in crude oil prices also impact the overall price of the product. Having said that, on an average, import of phenol can fetch a 2-4% margin. This, importers like Shah say, could see a decline given that the laminate industry, which is one of the main consumers, has not seen any fresh investments of late. Further, as per Kapur, phenol is a high turnover and highly price-sensitive product which requires huge investments in inventories. This makes this a risky investment. Hence, importers, be it new or experienced, need to be well-informed of the consumer preferences. No doubt, like any industry, the risks are many. But opportunities definitely outweigh risks in this business. With demand on the rise, investing in importing phenol may just be worth the risk.
TDB: What is the status of domestic production of phenol?
Ajay Kapur (AK): There are just two major domestic producers of phenol in the market and they find it difficult to compete with importers in terms of pricing. The capacity in India is a fraction of the total demand. Hence, there is a huge scope for domestic manufacturers. A high capacity plant is coming up in Gujarat. But will it be able to compete with foreign players remains a big question.
TDB: Which countries are the biggest suppliers of phenol to India? Have Indian importers also been exploring any new sourcing destinations of late?
AK: I have been in this business for the last 28 years and have been importing phenol for the last 25 years. The main countries from which we import phenol are US, Brazil, Taiwan, Korea and China. Recently, there has been an increase in capacity in China and a new plant has come up in Saudi Arabia.
TDB: What are the varied uses of phenol? Which industry is the biggest consumer of this product?
AK: Phenol finds its usage across industries such as plywood and laminate, wire, enamel paints, pharmaceutical, amongst others. However, the largest consumer of phenol has been the plywood and laminates industry. There has been a tremendous growth in the plywood and laminate industry in the last five years, thanks to the infrastructure boom. This in turn has resulted in growth in imports.
TDB: How has implementation of GST impacted import business?
AK: There were a lot of unorganised units in plywood and laminate industry that were giving a tough competition to the organised players. With the introduction of GST, the composition of the industry has changed and we can clearly see the number of organised units going up suddenly. This will help stabilise prices which, I believe, in turn will provide the much-needed boost to industry.
TDB: What assistance do importers of phenol receive from the government? What are the biggest challenges in importing? What measures can be introduced to overcome these challenges?
AK: There is no assistance that importers receive from the government. The biggest challenge in importing phenol is inadequate storage space at ports. The storage capacities needs to be increased in western ports and new facilities must be installed in eastern ports to handle growth in bulk imports.
TDB: Do crude prices impact import?
AK: Prices of phenol are linked to crude and benzene prices in the international market. Any fluctuation in prices of these commodities in international markets affects the price of phenol.
TDB: How do you see the imports business changing over the next few years?
AK: If there is an increase in capacity and new plants enter the fray next year, the demand for imported phenol is likely to become subdued.
TDB: You have been majorly importing from Taiwan and South Korea. What makes these countries an attractive source of supply?
Virendra Shah (VS): We have been importing only from Taiwan and South Korea. We don’t even bother to look at any other country as there are anti-dumping duties on phenol import from other low-cost production hubs. The anti-dumping duty varies from country to country and supplier to supplier. Luckily, there is no anti-dumping duty levied on imports from the South Korean suppliers we source phenol from. Further, there is more customer acceptance for phenol from these two countries. Overall, there are minor differences, both in terms of quality and packaging, between products. Though phenol is imported in both crystallised-powder and liquid form, we import only the crystallised form.
TDB: What are the reasons for continuous increase in imports of phenol?
VS: The primary and most important reason is that domestic manufacturers, such as Hindustan Organic Chemicals Ltd. (HOCL), have not been able to supply enough phenol to meet the domestic demand for the product. Further, the higher cost of production of phenol in India acts as a catalyst to greater imports.
TDB: What challenges do importers face in this business?
VS: On the contrary, importing phenol has become easier for a number of reasons. We can now order in bulk and this makes import cheaper and easier. The basic customs duty is also considerably low at 10%, though IGST is charged at 18%. As far as safety is concerned, foreign manufacturers are taking sufficient precautions while packaging and shipping the product. So, that’s not a worry anymore. Once a consignment reaches an Indian port, it can be stored at a bonded warehouse without payment of duty. Things have definitely changed for the better over the last few years.
TDB: What margins can one expect?
VS: Currently, we are receiving price quotations of around $1,100 per metric tonne (MT) if brought in barrels (1 barrel is equivalent to 200 kg) and around $1,025 per MT if imported in bulk. The selling price in India at present is around Rs.80-85 per kg. Although importing phenol may not look like a very profitable proposition, as of now, but the prices in the domestic market keep fluctuating based on the domestic production situation and a profit of 2-4% is obtainable.
TDB: Your advice to new importers?
VS: It is important that they have a proper understanding of the product and the market. The market is open to all kinds of players, but a proper understanding of consumer behaviour, point of consumption, etc., always comes in handy.
TDB: How do you foresee the future?
VS: There has been no new investment in sectors such as laminates and plywood which are major users of phenol. This could prevent the import market from growing further.