Crude Oil Impact on Chemical Industry

The crude oil prices have made new highs and are sustaining above 100$/ barrel levels. Due to global tensions and supply disruption challenges, the natural resource is expected to continue the uptrend.

The uptrend in crude oil prices will have a direct impact on the petrochemical derivatives and downstream products of crude oil, thus impacting the margins in the chemical sector. The aromatic compounds such as benzene, toluene, xylene etc are direct petrochemical derivatives, thus higher dependency of the chemical companies on the petrochemical value chain will result in margin erosion. To understand the impact of prices, we have to understand the KSM for the chemical company and how much dependency it has on crude oil.

Aarti industries ltd uses benzene and toluene as their key starting materials to manufacture the forward integrated products. For example, PNCB is used by pharmaceutical companies to manufacture Para amino phenol which is an API for paracetamol. So the incremental prices will be absorbed by the PNCB manufacturers and might be passed on with a lag in quarter.

The vinati organics ltd have their value chain starting from acrylonitrile, toluene and propylene, all belonging to the petrochemical family. The acrylonitrile is used to manufacture the key export product for vinati i,e ATBS. With the increase in crude prices and freight cost, margins for the products might be volatile. If we look at the raw material cost as a percentage of revenue, the contribution has increased from the range of 40-45% to 50-55% mark in the period of one year and doesn’t seem to be correcting in the near future.

Valiant organics ltd have benzene and phenols as KSM thus as discussed above the margins will take the hit. Valiant is one of the Intermediate manufacturer for paracetamol drugs. Valiant is manufacturing PAP from PNCB route and it’s procured from aarti industries. Key raw material for chloro benzene is also phenol

 Deepak nitrite ltd is largely dependent on the petrochemical derivative as it uses toluene, benzene, xylene, E-hexanol and other derivatives as KSM. The margins could be sustainable only if they pass on the prices. The diversified value chain will drive the revenues however margins sustainability is expected to be low.

The Clean science and technology ltd and Camlin fine science ltd, both have similar value chains. The products manufactured are the same with the KSM being phenol, however the process is different. CSTL uses anisole route whereas CFS uses hydroquinone route. The CFS stands at a competitive disadvantage as margins in anisole route seems to be higher. With increase in prices and competitive disadvantage, camlin is expected to  have more hit in profitability compared to clean sciences.

Fairchem Organics is dependent on the vegetable, soybean and palm oil as KSM, but it is been observed that as the crude oil prices rises, the rule of elasticity comes in and consumers shift from petrochemicals to oleochemicals thus driving the prices of vegetable and pam oils. This rise in prices may impact the margins of the company.

Fine Organics Raw material is palm oil. Palm oil also follows the similar trend of crude, so it is expected that margins of fine organics may get impacted

The halogen chemistry of fluorine is not related to crude derivatives as the KSM is hydrogen fluoride (HF) which is derived from fluorspar. The company follows the elemental products strategy where the KSM is fluorine but the other reactants are functional groups such as phenols and alcohols which are derivatives of crude. Thus the margins for companies like Navin fluorine international ltd, SRF and Gujarat fluorochemicals  will be impacted but not on the steep curve. 

The amines belong to the functional group of carbon and hydrogen chains. The organic chemistry will be affected by crude prices as ammonia is reacted with alkyl halides to manufacture amines. Alkyl amines ltd and Balaji amines ltd will experience contraction in margins if the incremental prices are not passed on successfully.

The Paushak ltd uses Chlorine and carbon monoxide as KSM to manufacture phosgene, however the other reactants used are petrochemical derivatives which will impact the cost of production for a few products. The monopolistic competition might help in retaining the margins.

The Neogen chemicals ltd have the value chain based on bromine. The bromine is derived from brine which is not a crude derivative, but functional groups of alcohols compounds will impact the profitability due to crude prices. Neogen chemicals have a competitive advantage over Chinese bromine manufacturers because of low availability of brine in china. Besides, the increase of revenue contribution from CSM business gives visibility for sustainable margins.