Chemical stocks advanced 4 percent on October 11 on the backdrop of an increase in prices globally over the Israel-Hamas war, which is likely to benefit select companies in the sector. With Israel being the world's largest producer of elemental bromide, the war is likely to raise bromine prices.
Shares of Tata Chemicals, SRF, GHCL, Aarti Industries Ltd, Atul and Vinyl Chemicals Ltd gained in the range of 1-4 percent.
Impact of rising bromine prices
Domestic brokerage firm JM Financial in its report stated that the ongoing situation in Israel creates a certain amount of uncertainty regarding the production, export and sales of bromine from the Dead Sea, which is one of the world's largest salt pans and accounts for around 50-55 percent of the world's bromine capacity.
Since Israel supplies roughly 30 percent of the world's bromine, exports could be negatively impacted, which would cause prices to climb from the current $3.5/kg.
“We believe that any increase in bromine prices bodes well for Archean given it produces bromine from Rann of Kutch and is also set to introduce certain bromine derivatives in 2HFY23. Our sensitivity indicates that every $0.4/kg movement in bromine price results in an 8 percent increase in our target price," JM Financial said in its report.
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Cost of raw ingredients rise
Analysts also noted that in October, prices of benzene, an essential raw ingredient for companies like Deepak Nitrite, Aarti Industries and Atul have risen around 20 percent. In the same period, the cost of toluene, another important raw ingredient, has gone up by about 6 percent as well.
Further, phenol spreads were down around 12 percent in October but have risen sharply by 38 percent in the last three months owing to a gradual increase in phenol/acetone realisations. Analysts believe that Deepak’s phenolics business could show positive surprises from 2QFY24 onwards as phenol spreads are likely to have troughed, in their view.
Meanwhile, Ethylene oxide prices have been relatively flat this month, which bodes well for Aether Industries, which has a lot of products on ethylene oxide chemistry. On the agrochemicals front, the International Grain Council (IGC’s) robust grain production outlook, strong global grain consumption expectations in MY23/24 and firm grain and oilseed price index indicate a positive environment for innovative agrochemicals.
However, the pressure on generic agrochemicals from excess supply by China might continue, although it would be slightly blunted vis-à-vis the last quarter.
Also Read: Middle East tensions heighten market uncertainty: AMP chief economist
Top sectoral picks
JM Financial prefers SRF, Deepak Nitrite and Archean Chemical stocks in the segment. The brokerage has a buy call on all three stocks with target price of Rs 2,230, Rs 2,066 and Rs 628, respectively. It also maintains a 'buy' rating on UPL, PU Industries, Deepak Nitrite, Clean Science, Navin Fluorine and Aether Industries.
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