This thread is to start a discussion aimed at understanding the chemical sector in India. It is an invitation to other investors, analysts and industry experts to share their knowledge and insights about this industry so that everyone can understand this sector better.
Industry overview and segments. The chemical sector is a broad and diverse field that encompasses many different types of products, processes, and markets. Some of the major segments include industrial chemicals, petrochemicals, specialty chemicals, agricultural chemicals (aka agrochemicals). While the pharmaceutical industry can also be considered as a segment of the chemical industry and shares some of the economic characteristics of agrochemical industry and specialty chemical industry, it is also different and unique in its own way so it might be better to discuss the pharmaceutical industry in a separate thread.
Points of dicussion and goals. Each segment has its own characteristics, opportunities, and challenges that affect the performance and prospects of the companies operating in it. Therefore, it is important to understand the strengths and weaknesses of each segment and how they relate to the overall trends and dynamics of the chemical sector. Via discussion with other stakeholders, we can all hope to learn more about the factors that influence the demand and supply of chemical products, the competitive landscape and market share of different players, the innovation and research activities of various firms, and the regulatory and environmental issues that affect the industry. Our discussion can also try to identify specific companies that have a competitive edge or a unique value proposition in their respective segments. You can compare and contrast their financial performance, growth strategies, product portfolios, customer base, and future outlook. You can also evaluate their risks and opportunities based on their exposure to different markets, regions, and currencies. By doing so, we hope to collectively gain a deeper understanding of the chemical sector in general and the strengths and weaknesses of specific companies in particular. Another point of discussion could be the correlation between demand and supply of various chemical products so as to enable investors to build a more resilient portfolio.
PS: Some threads and posts on this (ValuePickr) forum pertain to the chemical sector and contain some good information and points of discussion. Let me mention them below.
There is a related thread titled “Chemical Sector Analysis” on ValuePickr but its context, focus and aim seems very narrow. In particular, unlike the aforementioned thread, I would strongly discourage discussions pertaining to current stock prices and valuations but hope to have discussions pertaining to understanding the underlying business. Hence starting a new, broader thread here. The aforementioned thread does contain posts with useful and interesting information and I note some of these below.
There seems to be no general thread about the petrochemicals segment of the chemical industry but there are threads on specific petrochemical companies such as the following.
There seems to be no general thread on understanding agrochemicals segment or on industrial chemicals segment but there are threads on some specific agricultural/industrial chemical companies such as the following.
Can we talk about Chlor Alkali industry i can see there is a thread above, but we can start it here from basic starting with- Caustic Soda, Chlorine etc world production, demand, estimate
Let me share my notes on the Chlor Alkali segment of the chemicals industry and hopefully others will add on to it and/or critique my claims/hypothesis.
Production Process. Production of caustic soda (aka sodium hydroxide (NaOH)) from saltwater via electrolysis is a very energy-intensive process. For producing every 80 tonnes of caustic soda, 71 tonnes of chlorine and 2 tonnes of hydrogen are co-produced (2.25 tonnes of 50% caustic soda with each tonne of chlorine). Each tonne of caustic soda requires around 2200 kWh (9000mj/t) of electricity and 1.55 tonnes of salt. Electricity comprises 30%-45% of the cost of making the product.
Uses. The three main products of a Chlor-Alakli plant are Chlorine (Cl_2), Caustic Soda (NaOH) and Hydrogen (H_2). Closely related products are soda ash (Na2CO3) and hydrochloric acis. Sodium Bicarbonate, Potassium hydroxide and Potassium carbonate are sometimes produced in relatively smaller quantities. The main usage of chlorine is to make hard plastics like PVC, water treatment, as a bleaching agent in the production of paper and cloth and in cleaning products, pesticides, polymers, synthetic rubbers, and refrigerants. Caustic soda is used in aluminium production, paper and pulp, food industries, soap & detergent, metal industry, textile, pharmaceutical and rubber industries. Soda ash (Sodium carbonate/bicarbonate) is used mainly in the production of glass and soaps and detergent and various metallurgical processes. Because of the different uses of sodium (caustic soda and/or soda ash) and chlorine (raw chlorine and/or HCl), the prices of the two outputs are independent and these two prices determine the margins/profitability of the chlor-alkali industry.
Some economic characteristics of the industry. Both the major products of the process are commodities and like all commodities their price fluctuates significantly depending on the current equilibrium between demand and supply. Economics of the chlor-alkali industry. Supply side. The primary raw material is electricity so the cost of production is mostly determined by the cost of electricity. Demand side. Individually - caustic soda, soda ash, chlorine are all commodities whose supply levels are all highly correlated but their demands are not. Chlorine (at least in its raw and reactive forms) is a very hazardous substance and cannot be traded internationally. Globally, during the FYe20-FYe22 period, the profitability of the industry was determined chiefly by chlorine and caustic soda/soda ash were considered more as byproducts of the industry. However the consumption of chlorine is less in India and in fact, its disposal was a problem lading to a negative yield on chlorine for the industry at times. This might change significantly as India lessens import of PVC and instead manufactures it domestically. Hence, the challenge and costs associated with disposal of chlorine are expected to gradually subside going forward. From past three years, the realizations of chlorine have turned positive for domestic players and the trend is expected to continue even going forward which should support the ECU realization of the sector. This also seems to imply that there are places/plants in the world where the electrolytic process is carried out mainly for the sake of obtaining chlorine and such manufacturers are happy to dump the caustic soda at very low prices. As of Jan23, India was considering the imposition of anti-dumping duty on caustic soda but although the finding supported this, GoI finally decided not to impose any anti-dumping duty.
Value-addition. Many chlor-alkali factories have forward integration and produce various value-products from the three main outputs of the electrolysis process. The sodium-based value added products include sodium carbonate and sodium bicarbonate. The chlorine-based value added products include dichloromethane (or methyl dichloride), chloroform and carbon tetrachloride. The hydrogen-based value-added product is hydrogen peroxide.
Thus the long-term investment of this segment of the chemical industry crucially depends on two things (among other things):
Increase in chlorine demand/offtake in India. This would crucially depend on whether their announced PVC production facilities in India actually materialize or not. Given that chlorine is relatively cheap in India it might make economic sense for the downstream folks to manufacture their chlorine-based products such as PVC in India itself rather than importing it.
Reducing operational expenses by switching to renewable energy. The industry cost structure is majorly determined by the cost of electricity and so companies which have cash or access to low cost capital and are in locations suitable for solar/wind can potentially reduce their (raw material) costs significantly by running their factories on such cheap renewable energy.
GLOBAL MARKET SIZE AND EXPECTED GROWTH OF CAUSTIC SODA MARKET
Asia Pacific region is expected to dominate the market till 2027. China (38%), India (5%) , Japan(7%) currently has 50% of global market share, volume wise.
North America accounts for 17% share and Europe 28.6%’
China is both the largest producer and consumer of caustic soda with 38MMT of installed capacity.
Important thing to note here is installed capacity is more than the demand, 1 reason can be that average capacity utilization is around 82% in Chlor Alkali industry.
But want to understand the exact reason of this demand/supply mismatch and why companies are increasing more capacity etc…
