ICRA downgrades petrochemical and basic chemical outlook amid global oversupply.
Outlook on specialty chemicals remains stable, with profitability expected to moderate in FY2024, but not trigger an outlook change, it said, adding that the petrochemical and basic chemicals industries are likely to face pressure on operating rates and profitability.
Outlook on specialty chemicals remains stable, with profitability expected to moderate in FY2024, but not trigger an outlook change at this stage, it said, adding that the petrochemical and basic chemicals industries are likely to face pressure on operating rates and profitability.
"The petrochemicals and basic chemicals industries have been facing headwinds on account of weak demand amid a global supply glut, owing to capacity expansions in several chemicals.
"This is likely to exert pressure on the operating rates as well as profitability of the petrochemical and basic chemical players," Icra said in a statement.
As for the specialty chemicals segment, while profitability is expected to moderate in FY2024, the extent is expected to be mild enough to not trigger an outlook change at this stage.
“Tepid global growth and inflationary pressures in major chemical-consuming nations are exerting pressure on the global demand of a host of chemicals and thus, volume growth for these chemicals is expected to slow down in the near term. Moreover, sizable capacity expansions over CY2022 to CY2024, are expected to weigh on the operating rates and would result in a supply overhang, which is likely to keep the spreads and margins under pressure in the next two-three years," Prashant Vasisht, Senior Vice President and Co-Group Head of Corporate Ratings at Icra Ltd said.
The demand for commodity polymers on the global front is anticipated to remain lackluster, owing to the feeble economic growth in Europe and a gradual recovery in China. The ongoing expansion of capacities in China, the United States, and the Middle East will further curtail operating rates and margins. In the case of polypropylene and polyethylene, capacity is set to outpace demand, leading to a supply surplus until CY2025. China is slated to significantly augment its poly-vinyl chloride (PVC) capacity, alongside India, which is expected to result in surplus concerns by CY2026.
However, on the domestic front, India's demand remains robust, particularly in the health, packaging, automotive, consumer durables, and housing sectors, with growth expectations ranging from 5-8% in the near to medium term. Nevertheless, Indian manufacturers are confronted with the challenge of overseas dumping due to lackluster demand in other global markets.
While naphtha prices have cooled down recently, the prices of end-products have also experienced a notable decline, impacting the profitability of manufacturers. Currently, most chemical product spreads are lower than their 5-year averages and are likely to remain under pressure in the near to medium term. The effective implementation of the Government of India's quality control order for select chemicals may provide some respite by supporting prices.
In the basic chemicals sector, profitability has been on a downward spiral, with products such as caustic soda, soda ash, phthalic anhydride (PAN), and maleic anhydride (MAN) experiencing significant drops in realizations and profitability. Caustic soda, in particular, has been adversely affected due to increased capacity and oversupply. The margins for PAN and MAN have also been under pressure due to the influx of imports from overseas producers.
Vasisht emphasized, "Icra anticipates a moderation in profit generation for companies operating in the petrochemical and basic chemical sectors in the near to medium term, resulting in weaker return metrics. This has led Icra to revise its outlook on these industries from Stable to Negative."
While challenges persist for the petrochemical and basic chemical industries, the domestic demand remains a glimmer of hope amidst the global headwinds. The industry will vigilantly monitor these dynamics as it navigates the intricate terrain of the market.
