The federal budget 2007-08, though expected, did not provide any relief to most of the industries, particularly the basic industries, which are currently facing higher production cost and unfavourable tax regime, placing their products in a non-competitive and disadvantageous position versus the imports.
Chemicals industry, for example, has been overburdened with the taxes, as per the provisions of the current year's budget, whereas, in fact, there was a need to extend fiscal and financial incentives to this vitally important sector.
Ironically, this happens at a time when the Japan International Cooperation Agency (JICA), based on a study, has recommended to the government to support and strengthen chemicals industry. The recent study suggests that the chemicals sector should be allowed tax benefits, low-interest loans, good infrastructure and investment-friendly incentives, which have been denied to the sector so far.
The poor performance of the industry is reflected in the fact that not only the sector remained stagnant during recent years, it suffered regression (negative growth). There was an outflow of foreign direct investment (FDI) from the sector recorded to the mark of (-) US $39 million, during July 2005-April 2006 alone, whereas the country attracted a net overall inflow of US $2,225 million FDI during the same period.
Nonetheless, the situation has not alarmed the policymakers as the investment policy continues to place chemicals sector at lowest priority of investment, if any, in spite of the sector offering substantial opportunities for expansion and investment. Unfortunately, the investment, foreign as well as domestic, is invited by the government in industrial sector extending fiscal and financial incentives covering only traditional textile, automobiles and light engineering areas, as re-asserted in the Pakistan Investor's Guide 2007 released by the Board of Investment.
SIGNIFICANCE OF THE INDUSTRY Globally, chemicals industry is recognised as the "mother of industries" since it is vitally important for industrial development and self-reliance, as a major raw material provider.
Many of the chemicals are part of our daily life, whereas others are the main constituents of practically all the manufacturing processes. Industrial chemicals, in solid, liquid and gas form, are commonly used in pharmaceuticals, rubber, soap and detergent, cosmetic and toiletry, food and beverages, cement, ceramics, glass, sugar, pulp and paper, iron and steel, oil and gas, leather and tanneries, coatings and inks, polishes and cleaners, adhesives and glue, textile and engineering industries, to name only a few.
Almost seventy percent of the overall industrial chemicals - basic, formulated and intermediates - are consumed by the manufacturing sector. For this reason growth of industrial chemicals sector world-wide is directly proportional to the growth of overall manufacturing sector.
During the years 2006-07 and 2005-06, the overall manufacturing sector, which is the second largest sector of national economy, registered a growth of 8.45% and 9.90%, respectively. In comparison, there was negative growth of industrial chemicals sector during the period.
The broad and varied ranges of chemicals are classified and sub-classified as agricultural chemicals (such as fertilisers and pesticides), petrochemicals (like lubricants, oils, grease), explosives, paints and allied industries, industrial gases, absorbents, acids, alcohol, ammonium compounds, hydroxides, catalysts, organic chemicals, inorganic chemicals, oxide compounds, adhesives and sealant, cosmetic chemicals, metallurgical chemicals, general chemicals, specialty and fine chemicals and numerous solvents, stearates, resins, plastics/polymers, etc.
The organic chemicals are organic acids, carbon tetrachloride, chemical colour, dyes, organic pigment, ethylene glycol, phenol, styrene, vinyl chloride, etc. On the other hand, inorganic chemicals include inorganic acids, aluminium hydroxide, calcium chloride, inorganic chemical colour, chloride of lime, chlorine, fluoride, fluorine salt, hydrochloric acid, hydrogen peroxide, nitric acid, nitrite, phosphoric acid, inorganic pigment, sodium bicarbonate, sodium carbonate, sodium hydroxide, sulphuric acid, zinc oxide, zinc peroxide and sodium.
PRESENT STATUS In Pakistan the chemicals industry is narrow-based and concentrated in a few segments only, and at present, there are about 20 companies listed on the Karachi Stock Exchange. There are a number of units producing paints and varnishes in the organised and non-formal sector.
While some segments of chemical industry have received due attention, others remain neglected and in spite of increased demand over years no attention has been paid by the government to improve policy structures and environments for their growth.
The industrial chemicals manufacturing group is one of those. The industry's highlights are the sole multi-national company namely ICI Pakistan, which has major share of the market, and two joint ventures with the European firms; Dynea Pakistan and Wah Nobel Chemicals. Engro Asahi Polymer and Chemicals Ltd has established a PVC plant in Karachi, in collaboration with Mitsubishi of Japan, with an installed capacity of 100,000 tons per year.
The plant, first of its kind, will play a pivotal role for the development of domestic chemicals industry as PVC is raw material for a number of chemicals.
Chemical industry primarily comprises blending and formulation industry mostly based on imports of basic and intermediate chemicals, whereas the production facilities for basic chemicals are in effect very limited in the formal sector. Sodium carbonate, commonly known as soda ash, which is among the top ten inorganic chemicals produced in the world, and sodium hydroxide, commercially termed as caustic soda, are the main outputs of the industry that are essential raw materials for various industries.
There has been major expansion in this segment in last few years, meeting the total domestic demand. During the last ten years (1996-97 to 2005-06) production of soda ash increased from 247,000 tons to 297,300 tons in 2004-05, registering a nominal growth of 20%, and to 238,500 tons during first 9 months of 2005-06. Also, its production suffered negative growth for three years during this period.
Likewise, caustic soda production increased from 118,200 tons in 1996-97 to 206,700 tons in 2004-05 and 161,200 tons in 2005-06 (July-March), but demonstrated negative growth for a year during this period.
DOMESTIC PRODUCTION The local industry produces a diversified range of chemicals such as polyol (used by downstream polyurethane industry), heat treatment chemicals, sodium bicarbonate (used in textile and leather industries), pure terephthalic acid (PTA) (used in polyester industry), urea resin and melamine resin (used in particle-board, chip-board and lamination industry), moulding compounds like formaldehyde and aminoplast resins (used in electrical accessories and dinner set production), guar gum and guar meal, gelatin, sulphuric acid, hydrochloric acid, acetic acid, stearic acid, glycerin, PET (polyethylene terephthalate) resin, dyeing chemicals etc.
Statistics about production and sales of various chemicals in the country are not available category-wise. It has, however been observed that production of sulphuric acid, another major raw material for various industries, remained stagnant during last 15 years. Its production by the local industry was recorded 93,500 tons in 1990-91, 92,300 tons in 2004-05 and 72,000 tons during first 9 months of 2005-06, registering negative growth for six years.
Production of chlorine gas in 2005-06 (July-March) was 14,100 tons compared to 9,400 tons recorded during the whole 1996-97 year. Production of alkaloid chemicals is almost negligible after the closure of Sind Alkalis Ltd Petrochemical intermediate products manufactured locally are PVC (polyvinyl chloride), synthetic fibers, aromatics (benzene, toluene and xylene), purified terephthalic acid (PTA) carbon black, phthalic anhydride, maliec anhydride, di-octylphthalate (DOP), formic acid, acetic acid, etc.
The industrial chemicals industry in Pakistan is currently passing through difficult times. According to the recent reports, at least six chemicals production units have closed down, while the remaining are facing hardships of various kinds to survive. A typical example of the indifferent attitude of the government towards the chemicals industry is cited that of reduction of pre-budget 10% import duty on PET bottle resin to 5% in the 2007-08 budget.
This is in negation of the committed policy of the government to allow 10%-15% duty differential over the raw material duty applicable to local plastic resin production. PET resin, which is used to make pet pre-forms that are blown into PET bottles, is made from petrochemical raw materials, viz. PTA and mono ethylene glycol.
These bottles are used for potable water, soft drinks and other applications. This is pioneering industry, with an installed capacity of 120,000 tons per annum. Current domestic demand is limited to 50,000 tons annually, however, the demand is increasing rapidly as a result of higher consumer usage of PET containers. Balance product is being imported. During 2005-06 Pakistan's PET total exports amounted to $90 million. World over the demand for PET resin is growing manifold resulting in additional investments in the industry.
FUTURE PROSPECTS Logically, domestic market for industrial chemicals is growing rapidly therefor but Pakistan continues to depend heavily on imports to meet its demand of chemicals. Import of chemicals in 1997-98 amounted to Rs 52 billion that tripled, in volume and value, in 2004-05, registering imports of Rs 160 billion or US $2.5 billion.
During July 2005-March 2006 total import of chemicals amounted to Rs 156 billion. Import of chemicals-related products constitutes 20 percent of total import bill.
People's Republic of China is the major supplier of industrial chemicals to Pakistan at present. However, in the year 2004, the USA exported chemicals to Pakistan valuing US $98 million and Australia supplied to the level of US $59 million, among the Western sources.
The huge imports of industrial chemicals show the importance and need for developing local industry. This sector lacks diversified production of basic chemicals, whereas a few can be produced in Pakistan using indigenous minerals.
Currently, detergent active agents valuing two billion rupees are being imported and thus there is a potential for setting up a production facility for raw material for the detergent industry, like dodecyl benzene and tri-decyl benzene sulfonate. Likewise, methanol is being imported to the extent of 50,000 tons annually valuing Rs 600 million. During the year 2005, polymers/other plastics alone were imported to the level of over Rs 48 billion.
The long list of chemicals required for various applications justifies additional investment in the sector in a big way. The list includes analytical chemicals, anodising chemicals, aroma chemicals, aromatic chemicals, automotive chemicals, battery chemicals, boiler water treatment chemicals, brewers chemicals, brick-makers chemicals, ceramic chemicals, cleaning chemicals, coating chemicals, construction chemicals, cosmetics chemicals, dehydrating chemicals, disinfecting chemicals and dry-cleaning chemicals.
The other chemicals according to their applications are electronic chemicals, electroplating chemicals, environmental chemicals, fabric chemicals, fluxing chemicals, food processing chemicals, laboratory chemicals, laundry chemicals, leather chemicals, metal cleaning chemicals, mining chemicals, odour-control chemicals and photographic chemicals.
The list also includes plastic manufacturing chemicals, printing chemicals, radioactive chemicals, refrigeration chemicals, rust removing & preventing chemicals, sewage treatment chemicals, textile chemicals, waste treatment chemicals, wastewater treatment chemicals, water softening chemicals, water treatment chemicals, wood finishing chemicals and x-ray processing chemicals.
It is indeed imperative for the government to support the industrial chemicals industry through a policy and action plan to be Implemented on priority. The various corrective measures adopted may include creation of conducive environments for investment, rationalisation of tariffs, duty reduction on import of plant machinery and semi-finished goods, extending low-interest loans and incentives for technology transfer in the field.
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