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COVID-19 opens up opportunities for chemicals sector; puts margin pressure on petrochemicals: Icra
May. 11, 2020
The impact of the COVID-19 crisis on petrochemicals and chemicals sector will differ across value chains, with segments like packaging witnessing an uplift, a report said.
In the chemicals sector, the crisis has resulted in several Indian companies getting order inflows from global chemical players to meet the short-term supply disruptions from China, which is a credit positive for these players, rating agency Icra said.
The report further said the lockdowns have adversely affected the demand for chemicals and petrochemicals owing to decline in consumption and shutting down of manufacturing plants, supply chains and distribution networks.
Packaging, especially food packaging, sanitary and medical applications, are seeing an uplift mainly due to stockpiling, an increase in delivery services and the high healthcare-focused activities, it added.
"The sharp decline in crude oil prices has significantly altered the ethylene cost curve. While earlier, natural gas and ethane-based crackers enjoyed a large cost advantage vis-a-vis mixed feed or naphtha-based crackers, the competitiveness of the latter has improved owing to the decline in crude oil and consequently naphtha/LPG prices," Icra Senior Vice President and Group Head, Corporate Ratings, K Ravichandran said.
Accordingly, naphtha/LPG-based crackers are beneficiaries of a lower crude oil price environment, he added.
"As for the Indian petrochemicals industry, which is primarily naphtha-based, it is a key beneficiary as tolling margins of ethylene crackers have improved.
"While prices of various petrochemicals have declined for Indian manufacturers, the decline in prices of feed stocks has been higher, thereby improving the spreads," he added.
Regarding impact on the chemicals industry, Icra said with pesticides getting placed under the essential commodities category, the functioning of the industry has been close to business as usual.
Additionally, since the application of the agrochemicals begins by end-May and continues till September, the product off-take is not expected to be impacted, it added.
While domestic demand is expected to remain stable, exports are expected to witness headwinds owing to challenges related to port handling and international logistics.
Indian agrochemical industry imports a major portion of its raw material requirements from Chinese technical manufacturers.
Nevertheless, with easing of the lockdown in China and the Chinese government offering export rebates to pesticide manufacturers, the production levels in China have reached around 70 per cent of the normal production levels.
For the upcoming kharif season, agrochemical players are not expected to witness any shortage of raw materials.
Icra Vice President and Co-Head, Corporate Ratings, Prashant Vasisht said in the initial phase of the lockdown in India, several specialty chemical players had to shut down their manufacturing plants, barring production of chemicals classified under essential commodities.
"The production, however, is expected to resume soon as the government has relaxed various norms related to the lockdown. Additionally, owing to the over-dependence of global chemical players on Chinese supplies, the disruptions have sent global players scrambling for alternate supply sources.
"As a result, several Indian players have witnessed order inflows from global chemical players to meet the short-term supply disruptions from China, which is a credit positive for these players," he added.
Source: Outlook India
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