It’s the mother’s milk of the $5 billion Indian paint industry and offers lucrative margins for prospective importers

Shakti Shankar Patra | @TheDollarBiz 

Summer is when Hyderabad gets an embarrassing addition to its nickname. With the mercury consistently soaring into the 40s in April, May and June, the city has lately been called the City of Pearls of Sweat! But for S.Y. Gangadhar, owner of a small paint manufacturing unit in Amberpet area of the city and Chairman of the Indian Small Scale Paint Association (Andhra Pradesh), this summer is different. With his daughter’s wedding just days away, Gangadhar doesn’t have the luxury to discuss the weather or the heated election campaign for that matter. He is a very busy man, shuttling between wedding shopping and his modest manufacturing unit. What has brought a smile to his face though is the plethora of options, at various price ranges, that are available in the market for almost everything – from invitation cards to grains of rice. How he wishes such options were available to him in his paint business!

Incredible India

Paint is a raw material intensive industry. For every rupee of sales, paint manufacturers spend about 60 paise on raw materials. Apart from several petroleum-based raw materials, the industry consumes titanium dioxide (TiO2) in a very big way. In fact, TiO2 accounts for about 25% to 30% of the total raw materials consumed by a paint manufacturer. Although estimates suggest that India has one of the world’s largest deposits of ilmenite and rutile, which are used for the commercial production of TiO2, it is heavily dependent on imports. The trend was not always like this though. A decade back, India was a net exporter of TiO2 (see histogram) – a fact almost forgotten by a large section of even industry insiders. But while demand grew manifold in the last decade, domestic production failed to keep pace, resulting in increased dependence on imports. And with not much of capacity expansion planned in the near term, this trend is only likely to get stronger. At the same time, with rising dependence on imports, TiO2 producers from varied geographies are now tapping the Indian market. Countries like the Czech Republic, South Korea and Ukraine, nowhere in the scene 10 years back, are now among the top countries from which India imports TiO2 (see pie chart).

TiO2 is a naturally occurring oxide of titanium, with a refractive index second only to diamond. It is resistant to discolouration under ultra-violet light, is thermally stable, non-flammable and non-toxic. Because of a unique blend of these qualities, it has gained wide acceptance as a pigment. Other than the paint industry, which consumes about 60% of the total TiO2 produced globally, it is also extensively used in the making of plastic, paper, ink, rubber, certain pharmaceuticals and cosmetics. In fact, TiO2 is now being increasingly used as a tattoo pigment as well.

David and Goliath

The $60 billion market cap behemoth DuPont E I De Nemours & Co, popularly known as just DuPont, is by far the biggest producer of TiO2 in the world. With production facilities at Altamira in Mexico, DeLisle in Mississippi, Edgemoor in Delaware, Johnsonville in Tennessee and Kuan Yin in Taiwan, DuPont commands a 20% global market share of the white pigment. Among other major TiO2 producers are Kronos Worldwide, with multiple production facilities in Germany and Western Europe; Tronox, with facilities in the U.S., South Africa and Australia; the Saudi Arabia based Cristal Global and Huntsman Corporation. As compared to this, the only prominent Indian producer of the popular pigment is Kollam-based Kerala Minerals and Metals and a few very small operators like the BSE-listed Kilburn Chemicals. Add to this the fact that Indian demand for TiO2 is expected to grow at a CAGR of 8% to 9% and it becomes very clear that the dependence on imports is only going to rise over the next few years.

Chinese conundrum

A peculiar aspect of India’s TiO2 imports is the fact that virtually none of the end users are open about their use of Chinese imports. This, when China has consistently remained at the top of the list of countries from which India imports TiO2. In fact, in FY14, India imported more TiO2 from China than the next two countries – Ukraine and Germany – combined (see pie chart). But for reasons, which probably stem more from prejudice, one doesn’t get this sense while talking to end users. This is particularly surprising since most accept that Chinese TiO2 is substantially cheaper (sometimes as high as 35%) as compared to its western counterparts. Speaking to The Dollar Business, S.K. Mishra, General Manager (R&D), Shalimar Paints said, “We mostly procure TiO2 from DuPont and Cristal Global but occasionally buy it from local producers like Kerala Minerals and Metals.” Other than inferior quality, a poor supply chain is one of main reasons why we don’t use Chinese TiO2, Mishra added when asked for the reasons for his aversion to China. “They just don’t show up.”

However, the recent economic slowdown and the plunge in the Indian rupee has forced many an end user of TiO2 to look towards China, or at least come out in the open about their use of it. This, since the difference in prices between western TiO2 and comparative grades produced in China, continue to remain too high to ignore, particularly in a recessionary economy. Another reason for India’s rising imports of TiO2 from China is the remarkable improvement in its quality. Speaking to The Dollar Business, Ramakanth V Akula, former president of Indian Paints Association said, “Over the last 3-4 years, even the large paint manufacturers in India are increasingly using TiO2 imported from China. While pricing has got to do a lot with this new trend, a marked improvement in the quality of Chinese TiO2, has made the case for it more compelling.” He expects the Indian paint industry to continue to grow in the high teens – the rate at which it grew between 2002 and 2012 – and believes the slowdown in the last couple of years was an aberration. When asked if he expects any changes in the duty structure for imports from China after the formation of a new government, he said, “We just don’t produce enough TiO2 in this country. Most large paint manufacturers import about 90% of the TiO2 they use. It would be suicidal to hike duties on imports.”

The epicenter

As is the case with most Chinese products, TiO2 produced by firms based in China has always been seen with suspicion. Things got worse recently when a U.S. jury convicted a California-based businessman of selling DuPont’s TiO2 trade secret to China’s state-owned Pangang Group. But this hasn’t stopped the Chinese juggernaut. According to estimates, 29% of TiO2 nameplate capacity is now based in China. This, as compared to just 13% in 2005. When it comes to incremental supply, China’s dominance stands out even more. As per estimates, more than 60% of the incremental supply in the next few years will come from China. Companies like the Shandong-based Shandong Doguide Group, which claims to be Asia’s largest producer of TiO2, Henan-based Luohe Xingmao and Jiangsu-based Wuxi Haopu Titanium are at the forefront of this tectonic shift, which will see close to a million metric ton of fresh capacity in China. As compared to this, the total capacity build up in rest of the world is expected to be just 350,000 metric tons.

Margin call

Various rutile grades of TiO2, used in exterior paints, are currently being quoted by Chinese first-line manufacturers in the 12,000 – 12,600 CNY/MT range. Assuming a USDCNY rate of 6.2, a USDINR rate of 60, freight & insurance cost of $70/MT and applicable duties, the final cost for an importer in India adds up to anything between Rs. 156,596/MT and Rs. 164,153/MT (see table). This, at a time when it is retailed in Indian in a range of about Rs. 185,000/MT and Rs. 190,000/MT, thereby providing a profit margin in the range of 16% to 20%. At the same time, Kerala Minerals and Metals sold various grades of rutile TiO2 in the range of Rs. 187,000/MT – Rs. 191,000/MT in the month of April. Since Kerala Minerals and Metals and Chinese producers mostly compete in the same market, the proximity of their prices are only logical.

Similarly, anatase grade TiO2, used in interior paints, is currently being sold by Chinese producers in the 10,200 – 10,800 CNY/MT range. Assuming the same USDCNY rate of 6.2 and USDINR rate of 60, this translates to, post freight and applicable duties, anything between Rs. 133,927/MT and Rs. 141,483/MT. Given the going rate of Rs. 150,000/MT to Rs. 160,000/MT for it in the Indian retail market, margins of more than 15% are there for the taking for any prospective importer.

As for Gangadhar, after realising that the difference in quality of TiO2 between western and Chinese brands has significantly eroded in the recent past, he has vowed to ignore cynics and give Chinese brands a re-look. “I will try to convince other members of my association and may be one day, all of us will collectively import TiO2 directly from China,” he said grinning, while holding a fancy Chinese-made invitation card in one hand.