Chemical Companies May See Muted Growth Amid Pricing Pressure
Investors are closely tracking the chemical sector as it faces a challenging environment. The near-term projection indicates that chemical companies may encounter muted growth, largely due to ongoing pricing pressures. Despite some positive volume recoveries in select segments, the upcoming September quarter hints at a mixed performance across the industry.
Impact of Pricing Pressure on Profitability
Specialty and fluorine-based companies are likely to outperform their peers, buoyed by improved margins. However, producers of commodities and agrochemicals are expected to feel significant strain. Forecasts reveal a modest year-on-year sales growth of about 5%, a 4% increase in EBITDA, and a slight net profit rise of around 1%. Unfortunately, this growth is overshadowed by weak spreads and significant pricing pressures, as evidenced by declines in product prices like benzene and toluene, which have plummeted compared to last year.
According to Motilal Oswal Financial Services, the organic compound segment witnessed substantial price drops in September, with butadiene crashing by 31% and benzene falling by 19% year-on-year. These shifts highlight the ongoing struggle against global demand fluctuations. As Brent crude prices fell from $80 to $69 per barrel in just one year, concerns over profitability intensify. While initial sales may have been boosted by front-loaded orders in anticipation of potential tariffs, a decline in order volume is expected to impact many companies’ results, as noted by Kotak Securities.
On a more favorable note, refrigerant gas manufacturers such as SRF and Gujarat Fluorochemicals are projected to thrive, driven by strong pricing for R-32 refrigerant gas and robust demand in the specialty chemical sectors. Elara Capital suggests that fluorine-based industries could see an impressive EBITDA growth ranging from 13% to 86%, primarily due to strong margins.
The agrochemical sector remains unpredictable, as excessive rainfall has negatively impacted crop yields. Axis Securities and Elara indicate that disrupted seasons could result in decreased consumption of herbicides and insecticides. Conversely, fertilizer producers are likely to experience steady growth, thanks to consistent demand.
As we move forward, investors are encouraged to remain vigilant about upcoming project launches, pricing trends, and crucial US tariff decisions that will undoubtedly influence the future of chemical companies in this climate of pricing pressure.