Author : Siddhartha Bhaiya & Nishith Shah
The ongoing Russia-Ukraine war has sent the global supply chain awry, leading to runaway increase in gas and energy prices across Europe. With Russia squeezing gas supplies, electricity prices in Germany alone have increased 8x in the last 12 months (Exhibit 1).
Exhibit 1
The situation could get worse as Russia threatens to completely shut-off the tap on gas exports to Europe. This could have ramifications across global manufacturing but more so for chemicals. Germany has a big Chemical complex (of 200 plants) which was built around the cheap and plentiful Russian oil and gas and was used for both generating power and as feedstock for products. Another concern is that if these plants are not shutdown in a calibrated manner, then it could lead to a potential mishap. Once shut, restarting these plants could be a long-drawn affair and thus could take out many chemical companies from the business.
Exhibit 2
Post Covid, the global chemical market which was earlier dependent on China was under duress as Chinese lock-down led to a significant impact on production for many industries. Global companies were looking at alternative countries (China +1) for securing their raw material supplies and we have seen the chemical industry doing well in India over the last 18 months.
Prices of many chemicals which had increased significantly post the pandemic have sky-rocketed post the Russia-Ukraine war (Exhibit 2 & 3).
We believe that the Indian chemical industry is structurally well poised led by
– Strong domestic and international demand
– Lean manufacturing structure in India
– China plus one strategy
– Export opportunities
– Problems in Europe
While there are strong tailwinds for the Indian chemical industry, risks to demand remain in the face of any global recession. Keeping true to our philosophy of investing with a margin of safety, we have a couple of specialty chemical companies in our portfolio that are trading at sub 10 PE multiple. There are pockets where stocks are reasonably priced and offer a decent margin of safety but a lot of stocks in the sector are also priced to perfection and we would steer away from them.
