Chemicals Update: India – An Up-and-Coming Global Economic Power

At the end of February, India’s government reported a blowout GDP growth in 4Q 2023 of 8.4%, beating all estimates. It became clear later that this “dazzling” achievement was due to data distortion. Based on the more accurate measure of gross value added, the GDP had grown around 6.5% in real terms.

But whatever the number, it shows that India’s economy is growing fast, setting it apart from the rest of the world – and this growth is accelerating – supported by a surge in investment by 10.6% in the quarter from a year ago. The big increase in investment suggests there’s an ongoing pickup in capex momentum.

The other fast-growing sector in India’s GDP is manufacturing which recorded an increase of 11.6% in the fourth quarter, down from an average of 14.4% the previous three quarters. Where does the increased manufacturing output go? Looking at the 4Q data, private consumption rose 3.5% from a year ago, while government expenditure contracted 3.2%, so while domestic consumption is an outlet for the manufacturing sector, there is more to it.

Recent data shows that India is slowly chipping away at China’s dominance in electronics exports in some key markets, as manufacturers diversify supply chains away from China. And it is not only electronics that is rapidly growing – for example, the production of electric rikshaws and solar panels is another booming sector. Combined with India’s relatively young population, ongoing urbanisation and expansion of the middle class, the country seems set on a path to become the next global growth engine.

How does all this affect the chemicals shipping market?

While India is growing rapidly on strong domestic and international demand, it still lacks the capacity to produce enough of the chemicals, needed for all this growth. Construction and appliances production alone use about 20-25% of all chemicals that are produced. Even though India has been expanding its domestic capacity, it would take some years until capacity catches up with demand.

At the same time, China is struggling with overcapacity in chemicals production and is facing challenges in achieving its growth targets amid a deteriorating property sector, high debt and high outflows of foreign capital. As a result, China has not only reduced imports but has turned into a significant exporter of many chemicals. Quite often, Chinese exports are competitively priced, as many of the production facilities are among the newest and most efficient. Always cost-cautious, India has been a natural outlet for these exports, as evident from the solid flows of chemicals from the past several months. Added to an already tight market from the Red Sea and Panama Canal disruption, these strong export flows into India have kept the tonnage on the Far East southbound market tight, making it prone to high volatility in the freight rates when sudden additional demand for vessels materialized such as in 2H February when China released its CPP export quota and flooded the market with requirements.

In the near term, this dynamic will likely continue playing a major role in the Asian market. It could also be periodically reinforced by low palm oil and chemicals demand from China (as is currently the case), making it challenging for owners to reposition tonnage back into the Far East. For now, freight rates in Asia will very much depend on what happens in the major economies of China and India.

By Plamen Aleksandrov, Market Researcher, Chemicals, SSY