Chemical Firms Face Demand Woes Though Cost Stress Eases

Some respite, however, is now being provided by China, which has eased longstanding covid curbs. Lower oil prices are another positive, as it helps ease raw material prices and supplies. Even shipping rates and container availability have improved over time. Strong domestic demand for chemicals is another major positive.

However, analysts remain cautious and watchful about the impact of the global slowdown amid lingering recession worries.

Analysts feel that while the pace of rate hikes and inflation are falling, the interest rate hike cycle may continue for some time and inflation is still much higher than the 2% targeted by developed economies such as the US.

Prahalathan Iyer, chief general manager (research and analysis) at the Export-Import Bank of India, said recessionary concerns may lead to caution prevailing for about two quarters more. He, however, kept a positive view of the prospects of the Indian chemical industry.

Trade data across India, China and the US reflect weakness engendered by an economic slowdown. Consequently, export revenues of Indian companies, particularly those exposed to cyclical end-users, are under pressure, said analysts at Kotak Securities Ltd.

India’s exports and imports of organic and inorganic chemicals trended lower from a year ago in December 2022. Exports fell 6.6% from a year ago (although they rose 9.8% sequentially compared with a depressed base), while imports fell 20.4% from a year ago (down 0.5% sequentially) in US dollar terms, as per Kotak.

Even trade data from the US and China, too, reveal softness. US chemical exports were lower by 9.5% from a year ago at $13.4 billion in November, and imports declined 2.5%, while China’s overall exports (across all sectors) fell 9.9% from a year earlier in December and imports fell 7.5%, as per analysts at Kotak.

Among chemicals, demand for discretionary applications such as dyes and pigments, polymers, and automobiles continues to face headwinds, analysts said, though demand for essentials such as agrochemicals is steady. Higher crop prices are supporting agrochemical demand, though high channel inventory could impact sales in the near term.

Although domestic demand for chemicals continues to remain healthy, exports trend needs to be monitored amid demand weakness across the European and Chinese markets, said analysts at Centrum Broking. Analysts, however, do expect companies to benefit from lower chemical prices.

“Most basic chemicals saw a sharp correction in prices in Q3FY23 as crude oil prices moderated 10% sequentially and chemical feedstock prices witnessed a fall of up to 20% sequentially on weak demand. Ocean freight costs declined 40-50% sequentially and are currently back to normalized/ historical levels. Rupee depreciated 3% versus the dollar," analysts at Prabhudas Lilladher said.

Chemical prices generally trended downwards sequentially in Q3, impacted by demand weakness in Europe and China. Domestic companies are expected to benefit only partially due to the spillover of high-cost inventories in Q3, said analysts at Centrum. Nonetheless, they expect some gross margin expansion for the chemical producers, with major benefits likely to accrue in the current quarter.