Indian chemical industry may get some respite from China

The Indian chemical industry has had a mixed last two years. There have been long term demand drivers but headwinds in the last few quarters have not been too positive. They have faced pressure from rising raw material prices, logistic challenges and supply chain constraints. In addition, fears of recession in the US, UK and EU has resulted in contraction in demand. Now there is some respite from China.

The recent decision by China to substantially withdraw stringent COVID curbs and resume economic activity could be the saving grace. Firstly, China has been a key player in the specialty chemicals value chain. Getting back China in the mainstream would mean less of supply chain constraints. There is also help at hand from lower crude prices, improved container availability and shipping rates as well as hopes of strong domestic demand for chemicals.

A cross section of analysts remain cautious on the impact that the rate cycle could have on these chemical companies. While pace of rate hikes has slackened with inflation, the interest rate cycle is likely to continue for another 75 bps to 100 bps in the US. That is likely to make a lot of chemical companies financially vulnerable. This could get heightened due to concerns that excess hawkishness may slacken demand for chemicals.

The EXIM Bank appears to be positive on chemical companies in India. In December 2022, India’s exports and imports of organic and inorganic chemicals were lower by -6.6% and -20.4% respectively. Even global trade hints at a slowdown in chemicals. However, the real picture is more nuanced. Demand for discretionary applications like dyes, pigments, polymers and automobiles face headwinds; but agrochemicals is steady. Crude prices could hold the key to the chemicals sector in 2023.