Chemical prices in India are on watch and chemical stocks have recently run up on rise in prices of several basic chemicals in China. However, a report by Kotak Institutional Equities said that the firmness in prices appears to be related more to short term and seasonal factors than to a structural improvement in demand-supply, which it added, seems likely to remain challenges for the next few quarters.
According to ICIS in China, prices of 28 of the 32 chemicals that it tracks, ran up in August 2023 with the ICIS China Petrochemical Index up ~15 per cent by month-end as against its June 2023 lows. ICIS attributed the increase to seasonal and temporary factors including several production turnarounds, a seasonal upswing in demand ahead of the ‘Golden’ season in September-October, the Chinese government’s stimulus announcements and restocking by customers off run-down inventory levels. The report also stated that China is expected to continue to add substantial new capacities in the coming quarters even as the seasonal boost to demand fades away post October.
Meanwhile, Indian chemical stocks recently run-up on rising prices of basic chemicals in China, which according to the markets are an indication of recovering demand. Also, commentary by certain companies that demand has picked up on-quarter in 2QFY24 may also have played a role in the run-up in stock prices, the report stated. “For example, Aarti Industries’ management said on August 31 in a media interview that 2QFY24 demand is on average up 10 per cent versus the levels of 1QFY24. Stock prices under our coverage are up anywhere from 4-15 per cent over the past two weeks. However, we note that (1) any recovery is coming off a very depressed base, (2) earnings estimates already factor in a recovery in 2HFY24 and (3) valuations are now even more stretched for most stocks. Besides, the outlook for end demand remains unclear for CY2024 and the supply overhang from China continues to loom,” said Kotak Institutional Equities.
According to the report, customer destocking is expected to fade in the next couple of quarters. It also showed less confidence in a strong recovery in end-demand with uncertain macroeconomic conditions in key regions worldwide. “Additionally, the Chinese oversupply may well persist for a year or two, depressing realizations across much of the industry. Hence, we remain cautious on the sector; we roll forward our Fair Values by a quarter to September 2024,” the report said.