Chemical Sector Update - Price stability remains distant By Emkay Global
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Price stability remains distant
Bolstered by the gradual recovery in global economies, crude oil prices surged to a 24-month high in June 2021. Crude oil prices remain supported by upbeat demand outlook as global vaccination rates rise and various countries relax Covid-related restrictions. Tracking elevated crude oil prices, downstream chemical prices also remained firm, aided by continued concern about shipment availability.
Recent spike in Covid-19 cases in South China has stalled port movement as strict containment measures have been imposed in the region. Yantian port, one of the largest container handling ports in China, has been facing congestion since early-June, leading to a jump in container freight costs.
Although price increases in June’21 for most of the chemical products under our scanner were only in single-digits, we believe sustaining logistic issues are going to push the prices northward in the coming month. Some of the chemicals that gained the most in June (MoM) are Butadiene (25%), Ammonia (22%), Benzene (10%) and Phenol (3%), while we saw some normalization in the prices of chemicals such as Acetonitrile, Aniline, VAM, IPA, MEG and Acetone which were down by 3-13% MoM. Demand across the chemical space is healthy and rising with the reopening of economies; however, manufactures are facing challenges in meeting the rising demand in time due to logistics issues.
As we have highlighted earlier, the lateMarch Suez Canal blockage has affected the supply chain and the impact is likely to continue until July-Aug’21, with the newly emerged congestion in South China further worsening it. Container freight costs are still 2-2.5x higher YoY. The uncertainty on chemical prices finding stability remains distant. Due to unprecedented levels of uncertainty, cost across the value chain is expected to rise. As a preventive measure, chemical players are opting for short-term pricing contracts rather than going for longterm ones.
We have seen Q4 margins coming off from Q2 and Q3 highs for most of the companies, and expect margins to further cool off in the next one or two quarters. For our coverage universe, we are confident on SRF’s and NFIL’s margins to remain firm in the specialty chemical business, with lower input ratio of the key raw material Fluorspar, whose prices remain stable. Higher phenol prices may affect CFIN in Q1FY22, which could be mitigated by operating benefits from the Dahej facility. In sector EAP, we remain OW on SRF, VO and CFIN.
* SRF and NFIL: Robust demand for food and pharma packaging continues. This should support SRF’s PFB segment, mitigating the impact of rising feedstock prices. Prices of Fluorspar, a key RM for the specialty chemical business of SRF and Navin, were down by 1% QoQ to Rs29.3/kg (China).
* TATACHEM and GHCL: Strong demand on the back of recovery in end-user industries, ongoing normalization in demand-supply economics and rising input prices (Coal prices have more than doubled since Oct’20) led to a sharp increase in soda ash prices in April. However, June prices corrected from the highs but remained up 19% QoQ at Rs1,315 per 50kgs.
* Vinati Organics: Prices of Toluene, a key RM for Iso Butyl Benzene (15% of total sales), are up 7% QoQ (down 3% MoM) to USD755/mt (China). Propylene prices rose 15% QoQ to USD975/MT (down 13% MoM). Acrylonitrile prices, a key RM for ATBS (2-Acrylamido 2 Methyl propane Sulfonic Acid; 53% of total sales), fell 30% QoQ and 13% MoM in the SE Asian market, which could lead to lower realization.
* BASF: The company is going to benefit from the increase in TDI prices, which are up 10% QoQ as BASF Corp (US) announced a price hike of USD0.10/lb in TDI, effective from Dec’20, followed by force majeure taken by some companies in the US. With most of the chemical product prices still remaining elevated, a higher proportion of the trading business (~60%) should aid overall performance in Q1.
* CFIN: Prices of Phenol, a key RM for Hydroquinone/Catechol, have been rising since Aug’20 and are up 86% YoY in the international market, while domestic prices are up 118%. We believe that the higher price of phenol could be absorbed with the benefits from the new Dahej facility which is running at over 75% utilization level.
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