Why chemical stocks are rising

Market


Few months ago, chemical stocks were in a downtrend. This was due to the fall in global chemical prices and doubts over the rich valuation of chemical companies.

However, in the last of couple of days, the near-term outlook of the sector has changed drastically.

Beaten-down chemical stocks have been breaking records on the markets recently, continuing their bull run.

Here is the list of Indian chemical stocks that have been on a tear and have seen a massive rise.

Chemical stocks.

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Chemical stocks.

Now let us see what spurred this rally.

#1 Depreciating rupee

The Indian rupee, over the last few days has hit new lows and breached the psychological level of 80 per dollar.

This weakness against the US dollar has been rattling the markets and the wider economy.

However, it has made chemical stocks attractive from a medium-term perspective as they tend to benefit from higher exports.

A falling rupee makes exports cheaper and competitive in the international market.

#2 Surge in Demand

The demand for chemicals from end-user industries such as food processing, personal care, and home care is also driving the rally.

Demand from global companies has increased due to the China plus one strategy of companies to avoid investing only in China and diversify their businesses into other countries.

Industrial lockdowns during China’s zero covid policy and shutdowns due to environmental concerns led to severe supply chain issues.

This resulted in an increase in demand for chemicals as clients of Chinese companies shifted their businesses to India.

The industry is also further benefiting from the government’s Atmanirbhar Bharat Abhiyan to reduce the dependence on imports for chemicals and make India more self-reliant.

For this, the Ministry of Chemicals and Fertilizers has formed a seven-member joint task force. This task force will identify the production of critical chemicals and reduce bottlenecks in ease of doing business. This will include policy measures and regulatory clearances in India.

The production Linked Incentives scheme for manufacturing of Advance Cell Chemistry Battery has also added to the demand for chemicals.

Besides, a cut in Russian gas supplies has resulted in a sharp jump in electricity costs in Europe. This has impacted the production of energy-intensive chemicals like ammonia, methanol, melamine, etc.

It is due to this that some of the demand is shifting from Europe to India.

Bottom Line

The improved outlook in demand for chemicals has increased the requirement for capital expenditure in the chemical industry.

To support this, the government has allowed 100% Foreign Direct Investment (FDI) in the chemical sector.

However, to meet this demand and remain profitable, chemical companies will have to reduce dependence on external sourcing of raw materials.

They must also undertake initiatives and measures to revitalise and overcome challenges associated with the industry’s logistics and supply chain network.

Apart from this, companies will have to cut down emissions, in its decarbonisation efforts to make the sector more sustainable.

All this will help the companies to expand their capacity and make them sustainable over the long term.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

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