India Chemicals Report December 2022

Fall in basic chemicals prices continues

During Nov’22, prices of several basic chemicals continued their decline following

the correction in crude price. But vegetable oil derivative prices are yet to follow

suit, tracking the correction in vegetable oil prices. In our view, the fall in phenol-

acetone spreads could continue the pain for Deepak’s phenolics business in 3QFY23

if no major uptick is seen in Dec’22. Moreover, we believe Clean’s gross margins

could improve sequentially on account of the notable correction in phenol prices in

Nov’22. 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.

Phenol-acetone spreads decline by ~15% in Nov’22: Benzene prices corrected ~7% in

Nov’22 (refer Exhibit 2). Benzene is the key raw material for players such as Deepak

Nitrite, Aarti Industries, Atul, etc. During the same period, toluene prices corrected by

~9% (refer Exhibit 3). 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. Further, phenol-acetone spreads over benzene propylene fell by 15% in Nov’22

(refer Exhibit 4). Assuming, no material uptrend in phenol spreads in Dec’22, Deepak’s

phenolics business could continue to disappoint in 3QFY23, in our view.

Correction in phenol prices positive for Clean Science: Phenol prices corrected ~10% in

Nov’22. Phenol is a key raw material for Clean Science (~35-40% of its total raw material

purchase). Hence, although the prices of its raw materials such as methanol, butanol, etc.

didn’t change meaningfully in Nov’22, phenol price correction is a positive for Clean

Science (refer Exhibit 5) Thus, if phenol prices drop further from here or are flat in Dec’22,

Clean Science’s gross margin could see considerable improvement sequentially.

Erucic acid (vegetable oil derivative) prices flat post ~15% correction in Sep-Oct’22:

Rapeseed oil prices continued to fall, and corrected by ~14% in Nov’22 (refer Exhibit 6).

However, the price of erucic acid, another vegetable oil derivative, was flat (after ~15%

correction over Sep-Oct’22) (refer Exhibit 7). Fine Organics uses Erucic acid and Stearic
acid, among other vegetable oil derivatives, to manufacture Erucamide, Stearamide, etc.

In case of Fine Organics, the spread did not decline much in 1HFY23. Hence, in our

opinion, there is a high possibility that Fine will have to undertake a price correction in

2HFY23 to pass on this raw material price decline to its customers. This is likely to result in

some correction in Fine’s spreads, which have seen a significant jump over the last couple

of months.

Prices of methanol and acetic acid fall ~3-4% in Nov’22: Methanol is produced either

through coal or natural gas. On account of the gas crisis in Europe, methanol prices didn’t

decline much in Nov’22. Acetic acid prices have also corrected in tandem with methanol

prices. Hence, there was no major change in acetic acid-methanol spreads in Nov’22. In

India, GNFC manufactures acetic acid.

Some logistical challenges might impact the freight rates in the near term; prefer SRF and

Navin fluorine: As per various press reports, revision in IMO (international marine

organization) regulations starting CY23 could result in challenges for shippers. Moreover,

in Europe, shortage of truck drivers is currently hampering the flow of materials. In our

view, these near term challenges could impact the near term freight rates. However, in

our view, near term spike in freight rates (if any) might not be much of worry for Indian

chemicals players given Asia-Europe freight rates have corrected in the range of ~40-50%

over last one year. We continue to believe outlook for Indian chemicals players’ remain

bright. We continue to prefer SRF in the large caps and Navin fluorine in the mid-caps.