Cloudy outlook for Indian chemical firms as cheap Chinese imports flood market

. The specialty chemicals market represents 22 per cent of India's overall chemicals and petrochemicals market and is valued at $32 billion

Indian speciality chemical makers  may face a bumpy ride in the second half of the year after reporting dismal second-quarter results  as heightened competition from Chinese companies left little room for the domestic players to raise prices, squeezing margins and leaving them with a bleak outlook for the rest of the financial year.

Major domestic players such as  Balaji Amines, Aarti Industries and Alkyl Amines reported a 20-50 percent decline in quarterly profit from the year-ago period. Input expenditure, especially on alcohol, rose, alongside overcapacity in the industry. However, these companies were unable to pass on their higher costs to the consumers.

“In Q2, we faced an unprecedented phase of challenges in the speciality chemical industry, primarily due to a rapid change in input costs, which resulted in lower landed costs of imported competitor products impacting Balaji Amines' ability to charge a fair price for our products,"  Managing Director Ram Reddy said in a press release.

Speciality chemicals are organic chemicals that are used in a wide range of everyday consumer and industrial products. The market represents 22 per cent of India's overall chemicals and petrochemicals market and is valued at $32 billion, according to a KPMG report from last year. The industry caters to sectors such as  food, automobile, real estate, clothing and cosmetics, among others.

Chinese imports spell trouble

Chinese factories are dealing with overcapacity and lack of customers at home, pushing them to intensify exports to wiggle their way out of trouble. However, the situation is unsettling competitors whose profitability is under threat.

Commenting on the increased competition, Rajendra Gogri, chairman and managing director at Aarti Industries, said that per kg margins had almost bottomed out as compared to the first quarter. He flagged increased Chinese competition in the last few quarters.

Meanwhile, Alkyl Amines confirmed in its analyst call that the company is preparing to petition for anti-dumping duty against Chinese players for excessive exports of Acetonitrile or ACN. Acetonitrile is used to make pharmaceuticals, perfumes, rubber products, pesticides, acrylic nail removers and batteries. It is also used to extract fatty acids from animal and vegetable oils.

"We are in the process of putting the papers together to apply for anti-dumping (duty) and the whole process takes about six months, " said Alkyl Amines Executive Director Kirat Patel. He added, "We hope to maintain capacity utilisation of 60 percent to 65 percent. But … if these prices become more aggressive and (if) these kind of prices persist, we could have some impact."

Last week, Alkyl Amines reported a second-quarter net profit of Rs 27.24 crore, down 48 percent from a year earlier, while Balaji Amines' profit for the quarter ended September plunged 46 percent to Rs 32.69 crore.

Street nervous about outlook 

Brokerage Motilal Oswal trimmed its estimates for Alkyl after the Q2 results, flagging risks related to pricing power. "We predict ~11% revenue CAGR over FY23-FY25 for AACL, accompanied by 11% EPS CAGR during the same period. Potential risk to our outlook includes increased competition, which will limit the pricing power of AACL as competitors influence market prices," the brokerage said in a note on November 9.

Commenting on the quarterly results for Deepak Nitrite,  brokerage Prabhudas Lilladher flagged pressured margins for phenolics. The brokerage forecasts EPS (earnings per share) would decline to Rs 61 in FY24.

Ongoing investigation into Chinese chemical imports 

Local producers are tackling these issues by filing applications with the Directorate General of Trade Remedies (DGTR). Last month, the DGTR  launched multiple anti-dumping duty investigations into certain chemical imports from China due to an uptick in dumping, according to media reports.