Diversified Product Portfolio To Reduce Covid-19 Slowdown Impact On Chemical Players: ICRA
With most basic chemical and petrochemical players having a diverse range of end-user industries, the impact of Covid-19 slowdown is likely to be moderated, ratings agency ICRA said in a report.
While the industry may face near-term headwinds, the medium to long-term credit outlook remains stable for the industry, ICRA said.
"Credit profiles of most of our rated basic chemical and petrochemical players are expected to remain resilient in 2020-21, supported by the diversification of products in their portfolio, wide applications of these chemicals and manageable leveraging levels," ICRA Ratings Vice President and Co-Head Corporate Ratings Ankit Patel said.
"Despite the pronounced decline in revenues and margins in FY21, the credit profile of most incumbents is supported by their large size, strong balance sheets, healthy liquidity and strong financial flexibility," he added.
The global chemical industry has been dealt a series of blows from closures related to Covid-19 pandemic, demand destruction and logistical challenges, the report said.
The severity varies as consuming sectors such as automotive and construction have been majorly impacted, while food packaging, pharma, sanitary and medical applications are witnessing a demand surge, primarily due to stockpiling, increase in delivery services, and high healthcare-focused activities.
Due to the weak demand scenario, the global industrial production is likely to ebb in 2020, before it witnesses a rise in 2021, ICRA added.
For some basic chemicals like caustic soda, soda ash, methanol, among others, ICRA expects that volumes are likely to be impacted by 300-500 basis points following the weak demand scenario.
"Margins will be impacted by a decline in capacity utilisation levels resulting in lower absorption of fixed costs and an increase in overheads such as freight costs this fiscal...," ICRA Ratings Senior Vice President and Group Head Corporate Ratings, K Ravichandran said.
However, softer crude price and various cost rationalization exercises carried out by companies should provide some offset, Ravichandran added.
Meanwhile, in case of petrochemicals, demand has been impacted adversely across most products.
However, decline in crude oil prices have strengthened the economics of naphtha-based crackers owing to the significant flattening of the ethylene cash cost curve, ICRA said.
While synthetic fibre segment players grapple with muted demand from the discretionary textile segment, flexible packaging players find themselves in a sweet spot due to sharp surge in demand owing to increased usage of packaged products and e-commerce, the report added.
The synthetic rubber segment has been dealt a double whammy of auto sector slowdown and lower replacement demand due to travel restrictions impacting tyre demand, it said.
"For FY21, the demand for most petrochemical products is expected to be impacted between 10-20%, albeit less dire than what was expected earlier. Additionally, margins across most products have been impacted as global supply chains have been disrupted," ICRA Ratings Vice President and Co-Head Corporate Ratings Prashant Vasisht added.
ICRA expects petrochemical producers to report a 200-300 bps decline in operating margins, he added.