Chemicals Monthly Update – June 2024

The chemical industry has seen increased demand in various segments monthly, thanks to an improved business outlook, especially in end-user industries. However, recent months have brought logistical issues, significantly raising freight costs due to the low availability of containers and diversions caused by the Red Sea crisis, leading to shipment delays and increased product costs. Consequently, chemical prices are expected to rise and remain high in the near term. 

Globally, the chemical industry has also witnessed a recovery in demand, signalling a return to normalcy. The EU27 chemical sector showed production growth in the third quarter, with sequential growth indicating an ongoing recovery. EU27 exports have surged, primarily to the US and UK, with specialty chemicals driving this export increase. Indian companies exporting intermediates and technical products for these specialties have benefited. 

The significant increase in chemical volumes during the first four months of 2024 might be due to short-term restocking rather than stabilised demand. Observing changes in this critical data point over the past few quarters, we turn positive on the chemical recovery in the European region, although it is expected to be gradual. China continues high levels of chemical production but without discussing higher customer demand trends, increasing risks of higher imports, particularly in India and the EU.

Our outlook for Indian chemical company stocks remains cautious in the medium term. Recent quarters have shown mixed performance among chemical companies. We believe the tough times are behind us, and the industry is poised for sequential improvement in performance as the business outlook turns positive. Indian chemical companies are expected to show gradual improvement in H1FY25, with significant recovery anticipated in H2FY25.

We expect various headwinds, such as volatile crude oil prices, higher logistic costs, and demand-supply dynamics, to normalise. Most chemical companies should perform better, driven by demand recovery from various end-user industries and increased utilisation levels in the last two months, indicating early signs of recovery and a positive long-term sector outlook.

Overall, pricing trends are mixed. Chinese prices remain disconnected from Indian prices due to local demand-supply dynamics. Soda ash import prices remain weak, while Acetone, TDI, and mono-ethylene glycol prices have risen. Benzene, Aniline, and Iso Propyl Alcohol (IPA) prices have corrected this month. Phenol prices have recovered recently after a previous correction. R134a prices in the refrigerant category have decreased, while R-32 prices have softened. Acetic acid prices decreased this month, while Toluene prices remained nearly flat month-on-month. Most chemical prices have bottomed out for now. We will closely monitor whether Red Sea supply disruptions increase pricing pressure on chemical companies.

Key beneficiaries in the chemical stocks sector include companies such as Aarti Industries, Archean Ltd., Chemplast Sanmar, Deepak Nitrite, Epigral, Jubilant Ingrevia, Laxmi Organics, and PCBL. From a longer-term perspective, companies higher up in the specialty chemical value chain, such as SRF and Navin Fluorine, stand to benefit. We prefer companies that are higher up the specialty chemicals value chain and will benefit immensely in the long term. Companies delivering value-added products and moving up the value chain will fare better than pure commodity plays in the long run.