Chemical stocks have been in focus on the back of shutdowns in China following a power outage and this is impacting bulk chemical players positively.
CNBC-TV18’s Sonal Bhutra focuses on bulk chemicals and how they differ from specialty chemicals.
Kotak Securities said while it is positive development for bulk chemicals, downstream players which depends on China could see some margin pressure. The outage in China is impacting production, with around 25 percent of output being affected. This has led to a sharp spike in prices of bulk chemicals.
What is the difference between bulk chemicals and specialty chemicals?
The chemical value chain starts with the feedstock, which is the raw material for making base chemicals. Feedstock basically is oil, gas, coal etc. Basic or bulk chemicals are then used to make intermediate chemicals, which after further processing are converted to speciality chemicals which is ultimately used by the consumer.
B&K Securities recently spoke about how investors have so far ignored companies with exposure to bulk chemicals, and only focussed on speciality chemicals in the last 5-6 years. This is because of cyclical nature bulk chemicals earnings -- that have lower visibility due to the China factor -- which has led to the large disparity in valuations of these two segments.
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Bulk chemicals are raw materials needed to produce speciality chemicals, while speciality chemicals are either a single chemical or a mixture designed for a specific application.
Bulk chemicals are produced in huge quantities but are low in value. Hence, these companies have low margins. Speciality chemicals have low volumes, but they have specialisation, which is why speciality chemical companies have higher margins.
Bulk chemicals can be divided into organic chemicals like methanol acetic acid; and inorganic chemicals like caustic soda, chlorine and soda ash.
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Speciality chemicals can be divided into numerous segments, like water chemicals, construction chemicals, personal care, rubber chemicals, among others.
Gujarat Alkalies, Meghmani Organics and DCW are some of the bulk chemical companies while Aarti Industries, Navin Fluorine, SRF are among those who manufacture speciality chemicals. Specialty companies that are backward integrated can cushion themselves from spikes in bulk chemical prices, which we are seeing right now.
In contrast to base or commodity or bulk chemicals, speciality chemicals are recognised for what they do and not what they are. It seems for now, bulk chemicals will be in focus because of the changes in the global macro picture. Whether this sustains or not is something we will be tracking.