Specialty chemicals are used in different industries, in the form of additives, to add value to finished products, such as agrochemicals, paints and coatings, personal care products, construction chemicals, textile chemicals, polymer additives, and water treatment chemicals. Specialty chemical manufacturers need to make high investments in research and development in order to add special features to a basic chemical and unlike basic chemicals, the market value of a specialty chemical is decided on the basis of its quality and utility, rather than composition.

The sales volume of specialty chemical manufacturers in India has increased in recent years, owing to the closure of chemical plants in China as a result of rising environmental concerns. Also, The Make in India initiative of the Indian government has led to the entry of new firms in the specialty chemical market, thus contributing to its growth in recent years.

The recent steep fall in crude oil prices has led to a corresponding decline in the prices of many downstream products in the last few months. The derivative products of crude oil, which serve as raw materials for specialty chemical companies have also seen a month-on-month decline in prices.

The major growth drivers for the industry are an increase in the production of specialty chemicals that can be attributed to its rising demand in end-use industries such as textile, real estate, food processing, personal care, home care, automobiles, and consumer durables, among others. The chemical industry in China has been experiencing a downturn since the past few years due to slow economic growth, stringency in environmental norms, and the rising cost of labour and as a result of declining chemical production in China, India took the opportunity to increase its share in global chemical exports at low labour cost and export their products to the United States and the European Union thus capturing the major foreign markets.

While the weak crude oil indicates about a global economic slowdown, it favours Indian industries being a net importer of crude and derivatives. While the sharp correction in crude prices within one quarter could impact financials temporarily due to inventory markdown, lower input prices led by weak crude should be beneficial for Indian specialty chemicals in the medium term. However, commodity chemical players could see a repricing of products for crude prices and could impact their financials. With this, the leading specialty chemical manufacturers with integrated manufacturing and customized supplies are most likely to be the key beneficiaries of crude price correction.

The impact of the ongoing coronavirus pandemic on the specialty chemical industry is likely to be only in the near term as many companies have selectively started partial manufacturing operations. Considering the critical role played by the chemical industry in the essential goods value chain, the industry is expected to gradually scale up their operations. Thus the powering trend of de-risking of input procurement from China by global chemical leaders and correction in crude prices offers great export as well as a domestic sales opportunity for the Indian specialty chemical industry benefitting stocks like Aarti Industries, SRF, GSFC, BASF, and Vinati Organics.

For Aarti Industries; improvement in product mix and correction in input prices with respect to crude will lead to healthy margins while for SRF the fall in the prices of Flourspar by 11% is positive for the company as it is a major raw material in the chemicals segment, and is used in metallurgical operations, ceramics industry and manufacturing of chemicals. Flourspar is used to manufacture hydrofluoric acid which in turn is used as a catalyst in oil refining activities.

For GSFC; the fall in prices of caprolactem is positive as the main raw material for caprolactem is benzene, which is a crude derivative. For BASF; the prices of tolylene di-isocyanate (TDI) which account for about 5% to raw material cost was down by 6% on the month-on-month basis is positive for the company as TDI is produced in a sequence of steps from naphtha, a material obtained from crude oil while for Vinati Organics; the fall in prices of toluene by 47% in last three months is quite good. Isobutyl benzene which accounts for 15% of total sales is used to manufacture ibuprofen, a pain killer. Toluene is a key raw material for isobutyl benzene which is extracted from gasoline- a crude derivative.

With shares of specialty chemical companies performing well in the last month because of the fall in crude oil prices and an increase in export demand, COVID-19 is likely to have a limited impact on the sector.