The Impact of Rising Chemical Prices on Specialty Chemical Stock Investments

The recent surge in the prices of several basic chemicals in China has sparked optimism about a potential rebound in demand. However, analysts caution that this price spike may be short-lived. In recent months, sluggish demand and declining prices of many chemicals have negatively affected the financials and stock performances of specialty chemicals companies.

According to ICIS, a data services provider, prices for 28 out of the 32 chemicals tracked saw an increase in August, with the ICIS China Petrochemical Index rising by about 15% from its June lows. This uptick is attributed to temporary factors, such as seasonal demand, production turnarounds, and restocking due to depleted inventory levels, particularly in anticipation of China’s ‘golden’ season in September and October.

In India, some companies, like Aarti Industries, have hinted at a potential pickup in demand, which may have contributed to the recent increase in stock prices. Stocks of companies such as SRF, Vinati Organics, Aarti Industries, and Deepak Nitrite have risen 4-12% since August, marking a stark contrast to the 5-23% decline in stock prices observed earlier in the year. However, analysts, including those from Kotak Institutional Equities (KIE), warn that this price surge may be overestimated. They caution that the recovery could come from a depressed base and that most earnings projections already account for a bounce-back in demand in the second half of the fiscal year.

KIE also raised concerns about the stretched valuations of many chemical stocks, especially given the weak financial performance in Q1 and the soft guidance for Q2. There are uncertainties about whether China’s stimulus, aimed at revitalizing the construction sector, will be effective in triggering broader demand recovery. Meanwhile, domestic players in India continue to expand capacity despite the weak demand, driven by long-term opportunities arising from the growing China+1 strategy.

Analysts at Anand Rathi note that, while chemical companies are not delaying capital expenditure plans, the ongoing demand slowdown is expected to be temporary. However, this expansion could negatively affect their financials in the near term as seasonal demand peaks fade after October. Furthermore, competition from Chinese players, who have ramped up production after the lifting of COVID restrictions, is anticipated to put pressure on domestic companies. While long-term growth prospects remain solid, near-term challenges suggest that specialty chemicals stocks may be overpriced at present.

Source: https://www.moneycontrol.com/news/business/markets/rising-chemicals-prices-not-a-good-reason-to-buy-specialty-chemicals-stocks-now-analysts-11360431.html