Seems like prices are again shooting. just a fwd from friend pasted below
Chemicals-
Our interaction with the dealers and companies have indicated sharp rise across all the dye intermediates in the last ten days. Especially, H acid prices are up 2x to Rs 1,000 per kg, while Gamma acid is up 60% to Rs 560 per kg and Vinyl Sulphone is up 93% to Rs 300 per kg since February 2016. We have been tracking prices of these intermediates for the last couple of years (through continuous dealer interaction) and find it to be very volatile.
What’s the reason for such a reaction?
One of the China’s biggest chemical company “HUBEI CHUYUAN” has been shut down by the regulatory authorities owing to non compliance of effluent treatment. Hubei Chuyuan Group is one of the largest chemicals group company in China and mainly produces dyestuffs, dyestuffs intermediate, fertilizers, pesticides and pharmaceuticals. Since 1990, it has been producing intermediates for Reactive Dyes and established itself as the World’s largest production unit for H-acid, K-acid and Para base. By producing eight main intermediates of Reactive dyes, it is presently controlling about 60% of the global intermediate market for reactive dyes. Therefore sudden shutdown of huge capacities is expected to result in a supply glut thereby driving chemical prices.
Is this normal?
We have been tracking prices of these intermediates for the last couple of years (through continuous dealer interaction) and find it to be very volatile. Post implementation of strict effluent treatment norms by Chinese government from January 2015, chemical companies in China have been witnessing shut down notices owing to non compliance. This has led to volatility with chemical prices witnessing sharp rise for 3-4 months and then settling down at the normal rate once the capacities become operation after taking corrective action by the companies.
In FY15, one of the bigger company in China namely Zhejian Runtu Co. Ltd, witnessed shutdown notice and had to take corrective action. It took almost 3-4 months for the company to come back and make its capacities operational. This resulted into driving up the prices of H acid from Rs 250 per kg to almost Rs 2,000 per kg and stabilised at Rs 400 per kg after the capacities got commissioned.
In FY16, fewer capacities witnessed shutdown (no big names) resulting into again driving up the prices of H acid to Rs 1,000 per kg. Now, again one of the bigger players has witnessed shutdown notice which is driving up the prices.
Incidentally all these shut down notices have taken place just before the peak demand for dyes (February to July) leading to supply glut and panic buying from the users. We have also observed that despite such sharp rise, the impact on the final product (dyeing of textiles) was restricted to 5-6% only. The textile companies did not hesitate and allowed hikes after some negotiations.
Is the trend different from earlier years?
Our interaction with the dealers and companies indicate that the current trend is different as
· The capacities going out of the system are huge and command very high global market share. Therefore, they expect the rally to continue at least till the time the capacities become operational
· Even if one assumes it to be operational in 3-4 months, it would be couple of months before the G-20 SUMMIT which is being held in China (Hangzhou, Zhejiang) from 4th September to 5th September 2016. It has been observed in the past that whenever there is a global event in China, the government authorities swing in action and curtail the manufacturing activities to control pollution so that they have clean air (difficult to have clear skies in China if the manufacturing is in full swing). Thus the Indian players believe that the capacities might take longer time to get operational thereby providing longer window of opportunity to keep price at higher level
· Lastly, the raw materials costs are benign this time owing to falling crude thereby expecting higher profitability for the Indian companies
What to expect now?
We expect prices to remain at elevated level at least till these capacities come back on-stream. Therefore FY17E could yield windfall gains to Indian companies. Some of the companies that have exposure to dye intermediates and dyes stuffs are
Atul Ltd (ATLP IN) – Derives ~21% of its revenues from Colors (dyes and pigments) and is backward integrated to H acid.
Aarti Industries (ARTO IN) - Derives 25-30% of speciality chemicals revenues (~80% of total revenues) from dyes and pigments.
Bodal Chemicals (BODL IN) – Is purely a Dyes intermediate and dyes stuff player.
Shree Pushkar Chemicals & Fertilisers Ltd (PCFL IN) – Has exposure to H Acid and Dyestuffs.
Bhageria Industries (BDGC IN) – Is purely a H acid player (Dyes intermediates).
Shree Hari Chemicals Exports Ltd (SRHC IN) - Is purely a H acid player (Dyes intermediates).
Kiri Industries (KIRI IN) – Dyes intermediate and Dyes stuff player. Could be next the Bodal as it intends to repay debt. The debt has been reduced to Rs 4.1 bn from Rs 8.5 bn last year and plans to further reduce it by Rs 2.5 bn in FY17E.
Aksharchem (India) Ltd (ADCH IN) – Is purely a Vinyl Sulphone player.
We also expect this to have a rub-off effect on other chemical companies as well, especially pigment manufacturing companies.
- I am aware this is unlikely to happen - just thinking aloud)
