China’s Energy Crisis Could Benefit Indian Chemical and Steel Players

China's worsening energy situation has impacted not only its commercial and industrial segments and forced factories to cut production but it is also threatening to impact the growth of the country's vast economy and place increased strain on global supply chains. With Chinese players grappling with the energy issues, Indian Ratings and Research (Ind-Ra) opines that companies in India, particularly those operating in the chemicals and steel sectors, would benefit in the domestic as well as international markets.

Globally, the increased coal prices, high logistics costs and logistical challenges have led to a rise in raw materials costs across sectors. However, the order books of Indian manufacturers would witness growth on account of lower supply by Chinese counterparts.

Moreover, the increase in raw material prices has led to a rise in the prices of the exported goods, and the resultant adverse impact on the terms of trade (export price to the input price) is one of the reasons for dollar strengthening against the rupee. The weakened rupee coupled with China's production crunch will give a boost to Indian exports. However, the increased coal prices have pushed up manufacturing costs globally, and the agency believes producers across sectors will pass the increased costs to the end-user industries, thereby leading to inflationary pressures, which could eventually trickle into the Indian economy as well.

Impact on Indian Chemical Sector

The Indian chemical sector, which had been sourcing raw material from China, had already been grappling with higher import costs of intermediates/key raw materials due to the high cost of logistics. With the increased cost of energy in China, the overall cost of these raw materials will increase for Chinese companies. This would lead to a double whammy for Indian manufacturers, as they would have to source it at high prices either from China or from Indian counterparts.

The prices of organic chemicals in India may rise over the near term, leading to short-term inflationary pressure in the industry. However, the agency believes China's energy crisis and resultant likelihood of shutting down of Chinese companies or intermittent curbs on manufacturing would prove advantageous to Indian companies, as the demand for their products is bound to rise in both domestic and international markets. Furthermore, the agency opines that the domestic end-user industries for chemicals, such as dyes and pigments, pharmaceuticals, agrochemicals and others, will pass on the overall increase in costs to consumers, thereby maintaining their profitability.