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Chemicals demand buoyant; Supply impediments persist

Rising crude oil prices propelled the rates of downstream products during Mar’21 amid encouraging vaccination pace and signs of recovery in economic activity globally. Crude prices touched a two-year high in late Mar’21. Rebounding sectors like Automobile, Construction, Consumer Durables and Home & Personal Care aided demand recovery for chemicals, which is expected to continue for entire H1CY21. Tightness in the global supply chain due to planned/unplanned capacity maintenance, rising freight costs and severe winter storm in the US, boosted prices of most chemicals. In the last three months, prices of key products such as Phenol, Acrylonitrile, Acetic Acid, Aniline, Toluene and Polypropylene soared ~30-100%. Chemical giants have announced immediate price hikes in their end products, citing global raw material and transportation situation as key reasons. PVC prices have touched a four-year high, fueled by bullish demand and supply crunch. Lately, the disruption at the Suez Canal passage (since 23rd March; around 12% of global trade volume is moved through Suez Canal) created buzz for a further price hike in petrochemicals as over 55 ships carrying crude oil, LNG, and chemicals, await to pass through the canal, while some carriers are rerouting through the Cape of Good Hope. Many market participants are carefully observing the situation as any delay could trigger a price hike in the chemical value chain. The Government of India, in response, has chalked out a four-point plan to minimize the impact including prioritization of cargo, freight rates, advisory to ports and rerouting of ships. Container shortage has already been a major issue for the inflated cost of chemicals in the last couple of months. In Q2-Q3FY21, many specialty chemical players’ margins showed resilience due to benign input costs, and this may be marginally visible in Q4, as well. In Q1FY22, we expect margins to taper, given the surge in feedstock prices. For our coverage universe, we expect margins of SRF and NFIL to remain strong in the specialty segment due to stable Fluorspar prices. Higher phenol prices may affect CFIN (in Q4), which could partially be mitigated by operating benefits from the Dahej facility. A sudden rise in Acrylonitrile and Butadiene prices may affect Apcotex margins. In sector EAP, we remain OW on SRF, VO and CFIN.

* SRF & NFIL: Robust demand for hygienic food and pharma packaging should support SRF’s BoPET and BoPP demand, mitigating the impact of rising PET prices. Automotive recovery has been encouraging and should support R-gas volumes in the domestic market. International R-gas prices have marginally increased during the quarter. Fluorspar prices (key RM) were up by 3% QoQ at Rs29.5/kg (China), while healthy demand for agrochemicals may aid growth in specialty chemicals.

* TATACHEM & GHCL: Strong demand on the back of recovery in end-user industries, ongoing normalization in demand-supply economics and rising input prices (Coal prices up ~30% since Sept’20) led to an increase in the soda ash prices after a long time, as prices jumped 19% MoM to Rs1,465 per 50kgs (up 3% qoq). Revival in the auto/construction shall drive demand going ahead.

* Vinati Organics: Toluene prices, a key RM for Iso Butyl Benzene (15% of total sales), fell 5% MoM (up 41% QoQ) to USD710/mt (China). Propylene prices rose 20%/15% MoM/QoQ to USD1,210/MT. Acrylonitrile prices, a key RM for ATBS (2-Acrylamido 2 Methylpropane Sulfonic Acid; 53% of total sales), jumped 24%/100% MoM/QoQ in the SE Asian market, which could aid overall realization.

* BASF: TDI prices rose 8%/6% MoM/QoQ amid tight supply in the global market. BASF Corp (US) recently announced a price hike of USD0.10/lb in TDI, effective from Dec’20. BASF India sources TDI for its captive consumption from its parent company. With most of the chemical product prices elevated, higher proportion of the trading business (~60%) should aid overall performance.

* CFIN: Phenol (key RM for Hydroquinone/Catechol) prices have been rising since Aug’20 and are up 18% QoQ, although down 12% MoM to Rs92/kg (India). CFIN’s margins could be impacted in Q4, partially mitigated by the benefits from the new Dahej facility.

* Apcotex: Acrylonitrile (ACN), Styrene (SN) and Butadiene (BN) together account for 80-90% of the total RM cost of Apcotex. BN/ACN prices increased 62%/67% in Mar’21 due to a surge in demand from SBR/ABS segments amid a supply shortage due to the plant shutdown in the global market, which could impact the margins.

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