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Over the last couple of months, prices of most basic chemicals have started declining, led by the fall in crude oil and vegetable oil prices. Moreover, as per several press reports, container freight rates have dropped by ~40% since Aug’22 (click here). Freight rates are likely to come down further due to high inventories (build-up due to Covid-led disruptions) (click here). With basic chemicals prices correcting and freight rates declining, we believe that margins of specialty chemicals companies could improve further over the next couple of quarters. We continue to prefer SRF in large caps and Navin Fluorine in mid-caps.

Correction in benzene, toluene prices a relief for major chemical players: : Benzene prices have corrected ~29% over the last 3 months. Benzene is the key raw material for players such as Deepak Nitrite, Aarti Industries, Atul, etc. During the same period, toluene prices have also corrected by ~23%. Toluene is also a major raw material for Atul, Deepak Nitrite, Aarti Industries, etc. In our view, this is positive for Deepak Nitrite’s advanced intermediates business. For the phenolic business, we had already highlighted in our previous report (click here) that phenol-acetone spreads have been firming up due to correction in benzene propylene prices and firm phenol prices on account of robust demand of Bisphenol-A

Vegetable oil and its derivatives prices have corrected sharply; negative for Fine organics: As per press reports, on account of strong inventory build-up of palm oil in Malaysia (click here), palm oil prices have corrected sharply. Rapeseed oil prices have also corrected significantly over last three months. As a result, vegetable oil derivatives such as erucic acid prices have corrected ~27% over last three months, largely in line with the correction in palm oil prices. Fine organics uses erucic acid, stearic acid, among other vegetable oil derivatives for manufacturing of Erucamide, Stearamide, etc. Hence, there is a high possibility that Fine will have to take the price correction. This is likely to result in some correction in its spreads which have seen a significant jump over last couple of months.

Methanol prices have remained firm; acetic acid prices have declined:As per press reports, on account of strong inventory build-up of palm oil in Malaysia (click here), palm oil prices have corrected sharply. Rapeseed oil prices have also corrected significantly over last three months. As a result, vegetable oil derivatives such as erucic acid prices have corrected ~27% over last three months, largely in line with the correction in palm oil prices. Fine organics uses erucic acid, stearic acid, among other vegetable oil derivatives for manufacturing of Erucamide, Stearamide, etc. Hence, there is a high possibility that Fine will have to take the price correction. This is likely to result in some correction in its spreads which have seen a significant jump over last couple of months.

Methanol prices have remained firm; acetic acid prices have declined: Methanol is produced either through coal or natural gas. On account of gas crisis in Europe, methanol prices have remained firm while its downstream derivative acetic acid prices have corrected 29%/56% over the last 3/12 months. This has resulted in contraction of acetic acid-methanol spreads. In India, GNFC manufactures acetic acid.

Butanol prices have corrected; positive for Clean Science:

: Butanol prices have corrected 24%/46% over last 3 months. Clean Science uses tert-butanol to manufacture BHA from MeHQ. Hence, although the phenol and methanol (raw materials for MeHQ) prices have not corrected meaningfully, correction in butanol prices are likely to result in higher margin for Clean Science’s BHA.

Blanked capacity of containers leading to freight rate declines:

On account of Covid led challenges, there were a lot of capacity additions done by the carriers. Currently, as per industry reports, carriers are focusing on capacity reduction as the level of blanked capacity is higher than what it was in CY19. However, even after the blanked capacity, the underlying capacity has still only reached in-line with CY19 levels. Going ahead, with an average ~25-30% capacity reduction on the transpacific and ~20-25% capacity reduction on Asia-Europe, freight rates on these routes are likely to continue their fall significantly, as per reports. Indian chemicals players’ operating expenses had jumped sharply due to higher freight costs. In some cases, some of the expenses were even charged to the customers. With the freight rates dropping considerably, Indian chemicals players’ operating expenses should see some decline, in our view. Hence, we believe that with the decline in major raw material prices and freight rates, outlook for Indian chemicals players’ seem bright. Although there are concerns on demand slowdown down to inflation, signs of which are still unfound for the Indian chemicals players. We continue to prefer SRF in the large caps and Navin fluorine in the mid-caps.

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