OTHER GROUP COMPANIES
market

Is “Europe+1” in the making?

In their latest report, analysts at IIFL Securities make an attempt to understand the implications of the looming energy crisis in Europe on Indian chemical industry.

September 20, 2022 11:08 IST | India Infoline News Service
Analysts at IIFL Securities have scanned the landscape of energy-intensive chemicals, key chemistries that are more prevalent in Europe, and highlight impact on Indian Chemical companies. Some of their observations are as mentioned below.

Cost curve inching higher

European chemical players had the advantage of low gas price, which led to setting up of large-scale capacities of bulk chemicals that also helped it in scaling up of specialty chemicals value chain. The entire economics is now under threat with gas prices rising almost 2x-3x in the last one year (rose 10x over long term historical average). Natural gas remains the key source for fuel, steam generation and feedstock; hence resulting into sharp increase in cost of production across all chemicals.

Would it be similar to “China+1”?

Analysts at IIFL Securities believe “Europe+1” theme would not be similar to “China+1” theme, as unlike China - who has been a key competitor and hence the supply disruptions benefited Indian players - Europe, in addition to being a competitor, is also a large export destination (client). Therefore, any slowdown/curtailment in operations is likely to have an impact in the near term. Also, unlike China, demand slowdown in Europe remains a concern. Further, gas availability and pricing would be critical for Indian players to benefit.

Indian players well equipped

Indian players are well equipped with the required technology know-how, infrastructure, talent/workforce, and are now willing to invest more to tap growth opportunities. This further enhances growth visibility for the entire Indian chemicals sector. Indian players could explore setting up capacities in bulk chemicals like Nitric Acid, Acrylic acid, Acrylonitrile, Acetic acid, Cyclohexane, etc., while increasing cost of production in specialty chemicals. This would drive higher outsourcing opportunities for Indian speciality chemicals.

Discretionary demand more vulnerable

The energy crisis is forcing European countries to rationalize usage of Natural gas, which is likely to impact the discretionary industries first and critical industries like pharmaceuticals and agrochemicals later. Therefore, Indian chemical companies supplying to pharma and agrochemicals are likely to face minimal impact. A similar trend was visible during COVID-19 times too.

Analysts at IIFL Securities have analyzed companies having Europe exposure in the following buckets to highlight the ones that are likely to get benefited/ disrupted.
  1. Energy-intensive chemicals
Natural gas is predominantly used in Methane reformer that produces Methanol and Ammonia. Ammonia is the most important intermediate chemical compound, used as basis for almost all products.
 
  1. Large capacities in Europe
The advantage of cheap natural gas costs has helped Europe to set up some large capacities of basic chemicals.
 
  1. Leading chemical companies in Europe
Europe is home to some of the large global chemical companies. Among the leading chemical companies in Europe are BASF, Evonik, Lanxess, Solvay, Lonza, Linde and Bayer. Analysts at IIFL Securities have highlighted managements’ recent commentary on the Europe situation, and their take on them in this report.
 
  1. Chemicals trade between Europe and India
India exported ~Rs619 billion to Europe while imports stood at Rs391 billion in FY22. Bulk chemical exports were low while organic chemicals exports were high. Imported products comprise of carbonates, aluminium oxides, formulated of pharmaceutical, biotech and nutrition markets.
 
  1. Company specific exposure
The report highlights specific exposure of some of the chemical companies to Europe in terms of exports and imports.

Key risk to Europe+1 theme
Normalization of geo-political situation resulting into resumption of gas supply at cheaper rates.

Invest wise with Expert advice

FEATURED ARTICLE

BLOGS

Open Demat Account

Invest wise with Expert advice

By continuing, I accept the Terms & Conditions and agree to receive updates on Whatsapp