The steep fall in crude oil prices has led to a corresponding decline in the prices of many downstream products in the last few months. The derivative products of crude oil, which serve as raw materials for specialty chemical companies have also seen a month-on-month decline in prices.

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While most chemical prices are down, prices of ethanol and IPA (isopropyl alcohol) have been rising due to demand for sanitizers. Ethanol prices have doubled month-on-month to Rs 70/kg. Ethanol is widely used as fuel blender in petrol; however, domestic producers are now routing them for making hand sanitizers. Prices of IPA, primarily used for manufacturing hand sanitizers, had started rising in late-March. The prices have started tapering off, but are still up 168 percent in three months. Broking firm Emkay says that current ethanol prices are unsustainable in the near term since production has outpaced demand. They also add that sanitizer-related demand across the country has also led to pent-up demand for chlorine (up 1 percent month-on-month) and caustic soda (up 8 percent month-on-month).

This movement in price impacts the bottomlines of specialty chemical companies:

SRF and Navin Flourine

Both SRF and Navin Flourine use flourspar, a major raw material in the chemicals segment, and is used in metallurgical operations, ceramics industry and manufacturing of chemicals. The price of flourspar has fallen 11 percent in a month to Rs30.5/kg which would be positive for the company. Flourspar is used to manufacture hydrofluoric acid which in turn is used as a catalyst in oil refining activities. Given that refining companies are functioning at lower utilizations, this impacts pricing of fluorspar and hydrofluoric acid.

GSFC

The company produces caprolactem, which is used in production of nylon 6 fibres and resins. The main raw material for caprolactem is benzene, a crude derivative. In past few days, caprolactem prices have fallen faster due to lower demand, leading to lower spreads for the company.

Read: Valuation of Indian oil companies: Thoughts after the meltdown in crude prices

Tata Chem and GHCL

The companies are major producers of soda ash, which is used in manufacturing dyes, coloring agents, fertilizers and industrial activities. However, current demand-supply environment continues to dampen soda ash demand in the domestic market. Emkay says, although prices have been flat month-on-month, they are down 5 percent in last three months to Rs 1,160 per 50 kgs. Lower fuel cost could support margins.

Vinati Organics

Isobutyl benzene (15 percent of total sales) is used to manufacture ibuprofen, a pain killer. Toluene and propylene are the key raw material for iso butyl benzene which are extracted from gasoline- a crude derivative. The prices of toluene, increased 17 percent month-on-month to $350/MT, but are down 47 percent over the last three months. Propylene prices have fallen 19 percent over the the last three months to to $645/MT. With IBB sales largely going to China, there could be major revenue concerns as demand from that country is yet to revive. Prices of acrylonitrile, a key raw ma material for ATBS (2-acrylamido 2 methylpropane sulfonic acid) that contributes 53 percent of total sales, have corrected 19 percent month-on-month in South East Asia. Emkay expects margins to remain steady but revenues to be soft.

BASF, GNFC

TDI (tolylene di-isocyanate) is produced in a sequence of steps from naphtha, a material obtained from crude oil. It is an isocyanate used primarily in the manufacturing of flexible foams (mattresses, cushions, etc.) whose production is now lower due to limited demand. The prices of TDI – which accounts for about 5 percent of the total raw material cost – were down 6 percent month-on-month (down 13 percent/31 percent iover the last 3-12 months) due to lower demand. This will impact GNFC negatively as TDI and is a major contributor to the company’s revenues.

Also Read: After crude oil, prices of these commodities may plunge to new lows

Shares of specialty chemical companies have done well in this month as export demand has been strong and analysts expect the fall out of COVID to be lower compared to other sectors. That is because post-COVID, it is widely expected that a lot of demand could shift to India, away from China. Also these companies cater to essential sectors such as pharma, agrochemicals and FMCG.

Deepak Nitrite

Deepak Nitrite is likely to benefit from the increase in prices of isopropyl alcohol as it is among the major producers of IPA in the country with a capacity of 30,000 MTPA annually. It will also benefit from a decline in benzene prices as benzene is a key raw material in the production of phenol and company is the largest producer of phenol in the country.

First Published:May 4, 2020 6:11 AM IST