Chemical prices have declined by up to 25 per cent in the past two months due to a sharp fall in the prices of raw materials, including crude oil, higher refined production when overall demand was impacted due to general slowdown globally amid economic uncertainty, and the ongoing trade war between the world's two largest economies -- the United States and China.
Prices of H-acid, an important dye intermediate extracted from naphthalene, have slumped by 25 per cent since July to trade currently at Rs 366 a kg. This acid was quoted at Rs 415 a kg by the end of the June quarter. Similarly, prices of lauryl alcohol, an organic compound produced industrially from palm kernel, have slumped by 23.5 per cent to Rs 83 a kg. R-22 gas prices dipped owing to the fall in chloroform prices.
Polypropylene prices plunged by over 13 per cent to trade at Rs 76 a kg and isobutyl benzene fell by 7 per cent to Rs 129 a kg.
Raw materials, including crude oil and palm kernels, used to produce chemicals have reported a steep decline in their prices over the past two months. Therefore, chemical producing companies have passed on a portion of the raw material price decline to consumer industries such as specialty chemicals (dyes, dye intermediates, food-grade chemicals, etc) and pharmaceuticals. With this decline in raw material prices, specialty chemicals, fertiliser and pharmaceutical companies are likely to generate higher profits in the September quarter.
"We have enjoyed low prices of palm kernel and coconut oils over the past few months. Prices of these vegetable oils have declined due to overproduction of palm kernel in Malaysia and Indonesia. Apart from that, crude oil has been soft, which also helped in the decline in the prices of petrochemicals. In view of the raw material prices, we have passed on our product prices to consumers," said U Shekhar, managing director, Galaxy Surfactants Ltd.
After hitting $64 a barrel, crude oil prices slipped to $57 a barrel towards the end of August, only to recover to trade currently at $63.6 a barrel. The "U" shape curve has benefitted petrochemical companies to quote their products' prices lower.
"The emergence of new fatty alcohol capacity in the oleo chemical industry has boosted supply of chemical raw materials which dragged down prices of overall chemicals in this segment," added Shekhar.
In spite of rising environmental concerns and sharpening cost focus, the sector has sufficient dry powder to sustain this pace, led by burgeoning underlying demand from end-user industries, outsourcing opportunity from the West, and emerging export and import substitution opportunities due to the clampdown on chemical manufacturing in China.
"While these drivers create a conducive environment for the entire chemicals universe, we argue that specialty chemicals players -- owing to strong entry barriers and high growth visibility -- are poised to benefit the most. Moreover, the industry has, in order to capture the promising potential, prudently increased capital expenditure by 60 per cent-plus cumulatively over FY19–21 versus FY16–18, which we believe would pay rich dividends," said Rohan Gupta, an analyst with Edelweiss Securities.