Bengaluru: Prashant Mehra has had to make some of the toughest decisions of his 30-year career since the US and Israel attacked Iran, throwing global supply chains into disarray. As the head of chemical conglomerate SRF Ltd’s performance films and foils business, he has had to hunt for raw material to keep his plants running and client orders fulfilled. The Gurugram-based division makes plastic packaging for fast-moving consumer goods (FMCG) companies, sourcing up to 100 raw petrochemicals from West Asia, China and Europe.
“We bought raw materials from all over the world, as far as South America, at whatever price they were available, because we wanted to keep the plants running,” says Mehra. “We were lucky; many of our industry peers have had to shut their plants for want of raw materials.”
Vishal Sharma, CEO of Godrej Chemicals, says SMEs in the chemical supply chain have been hit hardest. Godrej Chemicals’ dependence on petrochemicals is largely restricted to sulphur and ammonia, and the company has cut back on the production of products that need them. “The biggest impact has been on working capital requirements. They have doubled. We are a big company, so we can deal with it, but our SME suppliers are in great pain. Cash is the number one issue for them,” he says.
Prashant Patel, a businessman in Gujarat’s chemical belt, is a case in point. His company, RK Synthesis, supplies chemicals to the textile, pharma, agriculture, and cosmetics firms. “Most of our suppliers want immediate payment. Before that, they would provide credit for 60-90 days,” says Patel. “Even if the war ended today, the supply would take a year to stabilize. We can’t turn away from clients, so we may have to borrow more from banks.”
Clients have resisted accepting price hikes or renegotiation of contracts. Many chemical manufacturers and traders have seen a drop in demand from clients when contracts are renegotiated.
“The challenge for the intermediate industry is that while their input cost has gone up due to the higher petrochemical prices, quite often their product selling prices are fixed for a longer period, especially where their customers are large FMCG companies,” says Argus’ Kulkarni.
Jaimin Vasa, owner of Vasa Pharmachem in Gujarat, has a runway of two to three months left. His company makes chemicals for the food, pharma, and nutraceutical industries. Vasa has not been able to pass on all cost increases to his customers due to the fear of losing long-term business. “Customers have reduced orders, cancelled orders, and delayed orders. We are maintaining production at 70% versus 90-100% before the war. These are testing times,” says Vasa.
Manish Reenegusia’s Om Speciality Chemicals, which supplies chemicals specially made for textile makers in Maharashtra and Gujarat, has seen demand plunge by 30-50%. He says he has been reasonable in passing on prices to customers. “I have stopped visiting clients across the textile belt. Once I go there, they threaten to discontinue business. They are putting pressure on us and are threatening to move to local suppliers,” he says.
Mitigation efforts
Petrochemical companies in emerging Asian countries are facing similar cost pressures as well as feedstock shortages, impacting their capacity utilization.
China, however, is in a much better position than India, not only due to its larger strategic oil reserves but also because it has a large coal-to-petrochemicals industry based on domestic coal.
With no such large-scale operation, despite having abundant coal supplies, India’s petrochemical industry remains at the mercy of crude oil volatility. Since crude oil-linked raw materials form a significant part of the chemical sector’s cost structure, sharp swings in crude prices disrupt procurement planning and margin visibility. Oil prices have oscillated between $90 and $126 per barrel following the outbreak of the Iran war. Before the war, they were at around $70 a barrel.
In an effort to ease the burden on businesses, in April, the government exempted 40 critical petrochemical products from customs duty until June 30, and allowed minimum quantities of propane, butane, propylene, and butenes, for critical sectors such as petrochemicals.
This month, the central government approved an emergency credit line guarantee scheme (ECLGS) to support small enterprises. The Scheme will provide additional credit up to 20% of peak working capital utilized during the fourth quarter of the last fiscal year.
The government has also finally approved a ₹37,500 crore ($3.92 billion) scheme for coal gasification to convert domestic coal into synthetic gas (syngas). This initiative reduces reliance on imported petrochemicals, liquefied natural gas (LNG), and fertilizers by channelling India’s vast coal reserves into cleaner industrial and chemical applications.
In addition, the Centre has also begun assessing the feasibility of locally manufacturing more than 200 petrochemical products that currently rely heavily on imports, according to an Indian Express report, to reduce external dependence.
While helpful, these measures may not be enough to ease the pressure being felt across sectors.
To buy or not to buy?
Even before the war broke out, the Indian chemical industry was facing pricing pressure because of overcapacity in China and consequent dumping in India, as well as the upheaval caused by US tariffs.
How it emerges from the latest crisis will depend on how quickly the conflict is resolved and a lasting peace takes hold. The shaky ceasefire that has been in place has made procuring cheap raw material tough.
“The biggest problem is when to buy and when not to buy. One day, you hear the deal (to end the war) is done or about to be done, and crude crashes. The next day, you see Iran sending a drone to the UAE, so crude prices go up again,” said SRF’s Mehra.
For now, SRF has rationalized its product lines to protect margins. It is focusing on high-volume products while stopping production of some products where raw material is either not available or too expensive. And that has meant long hours for industry veteran Mehra. “We are so import-dependent. Every day is a new struggle,” he laments.