What are Chemical Stocks?
Chemical stocks are collections of shares belonging to the companies involved in the production of chemicals along with their distribution and sale simultaneously.
The sector produces and distributes chemicals used as both raw materials and finished products for companies dealing in pharmaceuticals, automotive construction, textiles, and agriculture.
Chemical stocks have performed unexpectedly well even during the worst economic scenarios reported from 2016 to 2019. The global economy witnessed stagnant growth in the second half of 2016, which continued through 2019, which, according to the International Monetary Fund (IMF), recorded the weakest pace of global growth since the financial crisis of 2008.
The chemical industry, even during that period, managed to maintain a CAGR of 17%. This showed that even if the chemical sector decides to cut down on production during difficult times, it would still be able to balance the economy as it plays an inevitable role in making the essentials available to various industries across the globe.
Why Should You Invest in Chemical Stocks?
You should invest in chemical stocks for four reasons that include increasing demand, portfolio diversification, innovative approach, and government support.
Increasing Demand - The sector never faces challenges so far as the demand is concerned. As both a basic commodity and specialty chemicals, the products serve the raw material requirements of various industries, including pharmaceuticals, agriculture, consumer goods, fuels, and others.
Portfolio Diversification - If you are an investor looking to improve your growth trajectory, this sector, with immense resilience, offers a safe haven for investment while also giving you an opportunity to diversify your portfolio efficiently.
Innovative Approach - Companies invest in research and development and implement innovative measures to boost growth and progress over time. As the chemical sector reflects a competitive growth, it hardly fails, and hence investors can rely on it when investing in its stocks.
Government support - Given the vital role that the chemical industry plays as a raw material or finished goods provider, the government makes sure to support it through various schemes, including Make in India. The authorities keep the chemicals deregulated except for some of the hazardous categories.
The above pointers ensure the reliability that the chemical companies offer to the investors, thereby boosting their confidence whenever they plan to invest in chemical stocks.
The Indian chemical industry is projected to have a CAGR of 11-12% by 2027, and it is expected to reach a market worth $1 trillion by 2040, which makes investing in these stocks totally worth it.
What is the Future of Chemical Stocks?
The future of the chemical stocks is bright and promising with a sharp growth lined up in the coming years. The industry produces more than 80,000 chemical products, starting from bulk basic ones to specialty chemicals, petrochemicals, fertilisers, agrochemicals, and polymers to name a few.
India acquires third position in Asia and sixth position across the globe so far as the production of chemicals in a wide range is concerned, contributing 7% to the GDP.
The cyclical nature of the chemical stock market might be concerning, but the resilience it has shown in difficult times acts as a ray of hope for investors even in economic downturns that may arise.
The support from the government in the form of various schemes, including Make in India, appears to be the best backing for the chemical-related companies.
What Factors Affect Chemical Stock Prices?
The five factors that affect chemical stock prices are market conditions, supply chain, technological advancements, company financials, and raw materials.
Market conditions- The market undergoes fluctuations from time to time due to factors like geopolitical matters, regulatory changes, company performance, etc. This might cause a heavy decline in the chemical stock prices.
Investors must keep a watch on these factors and analyze the market for price fluctuations before investing in chemical stocks. In 2020, during the COVID-19 pandemic, the stock prices of the chemical companies witnessed an unexpected rise in the business as there were no significant competitors available to serve the unprecedented growth in the demand for chemicals.
Though the prices were surging, it created an imbalance in the market because of high demand and limited supply of the products. The major setback was the unavailability of the chemicals from the Chinese producers, who have been the biggest competitors of Indian chemical companies.
The demand-supply disruption came under control only when the Chinese chemical producers reentered the market, stabilizing the supply.
Supply chain - An efficient supply chain network ensures smooth transactions for investors. When this network is not robust and gets impacted by even the minutest disturbances due to regulatory changes, extra costs, and other geopolitical tensions, the entire investment suffers, affecting the share prices.
Technological advancements - Chemical companies regularly update and upgrade their systems. To achieve desired results, they conduct research and development and deploy innovative measures to improve and boost production procedures.
The costs involved in ensuring these efficiencies also impose a significant effect on the stock prices of the chemical companies.
Company financials - Investors are important stakeholders of a company, and they must go through the company financials to check the fundamentals of the company to understand how their stocks would perform further.
Take note of the revenue, expenses, debt, surplus, earnings per share, and other ratios. The financial health of the companies also affects their stock prices, which investors must know about before investing in their stocks.
Raw materials - For the production of chemicals, companies require raw materials like crude oil, natural gas, etc. When there is an increase in the prices of the goods to be utilized in the production process, the cost of the chemicals gets affected, thereby affecting the company’s profitability and its stock prices simultaneously.
Besides the above-mentioned factors, market sentiments, government policies, declaration of dividends, and business cycles also affect chemical stock prices to a great extent.
What are the Advantages of Investing in Chemical Stocks?
The five advantages of investing in chemical stocks include the opportunity to diversify, consistency in demand, exposure to the global market, support from the government, and distribution of dividends to shareholders.
Diversification opportunity - Investors get an opportunity to diversify their portfolio instead of keeping it concentrated. Chemical companies serve the requirements of various industries, and hence investment opportunities are many.
Demand consistency - The chemical companies never run out of demand. From the pharmaceutical sector to the automotive industry, chemicals help in the production of multiple items and finished products. The demand for chemical products, therefore, is not a challenge.
Global exposure - From companies operating nationwide to those running worldwide, Indian chemical companies provide their products to them, irrespective of the boundaries.
Investors can easily benefit from global market access, reaping more and more returns on their investments.
Government support - The government provides complete support to the chemical companies. It reduces the basic customers' duty on various products besides aiding initiatives under the Make in India scheme.
There is another program called Production-Linked Incentive (PLI) that boosts domestic manufacturing, ensuring economic growth for India.
Dividend distribution - Most players in the chemical sector consider distributing dividends to shareholders, who trust them with the investments. The dividend amount acts as a regular income stream for them.
In the Union Budget 2023-24, the Department of Chemicals and Petrochemicals received $20.93 million to acknowledge and encourage the ways in which the government supports the chemical sector and thereby drive the industry growth and development through various schemes.
What are the Risks of Investing in Chemical Stocks?
The three major risks of investing in chemical stocks are the market’s cyclical nature, regulatory and environmental compliance, and competition.
Cyclical nature- Though chemical products are always in demand, be it as finished products or raw materials, the demand may vary significantly. This tends to affect the revenue of the companies, thereby affecting the stock valuation.
Regulatory and environmental compliance - Stricter environmental and safety rules may lead to paying penalties and operational inefficiencies. Investors might come across instances where compliance costs affect the stock valuation significantly.
Competition - The exposure to global competition is a big risk as the involvement of an international chemical provider might make the Indian counterparts look less worthy if they do not meet the demands or the expectations of the client companies.
Investors are likely to see considerable fluctuation in the market in the event of a loss of trust in Indian chemicals and their quality and scale.
India faces fierce competition with China when it comes to providing chemicals to industries across the globe.
As China faced some strict regulatory and environmental challenges, causing an economic downturn in the latter half of 2024, many nations relied on a China +1 formula, which gave India an opportunity to approach international players and supply them the chemicals, especially specialty chemicals.
This has led to the growth of the specialty chemical sector of India, attracting international manufacturers to a great extent.
When Chemical Stock Prices Go Up?
Chemical stock prices go up in two scenarios - one is when the demand for chemicals increases, and another is when there is a shortage of supply of the chemicals in the market.
In the first half of January 2025, the soda ash prices witnessed a huge upward movement, boosting the chemical and fertilizer stock prices to 10%. It majorly pushed the chemical stock prices as soda ash is one of the vital raw materials in industries that manufacture or produce glass, detergents, etc.
This indicates how the change in the cost of raw materials for chemicals also influences the chemical stock prices.
When Chemical Stock Prices Go Down?
Chemical stock prices go down either when the demand for the chemicals is low, or there is a disruption in the supply chain. If the former is the reason, it leads to the cutting back on production, affecting the inventory level.
This negative effect on the inventory level leads to an imbalance between demand and supply. In August 2024, the chemical sector stocks saw a steep correction when the stock prices fell beyond 5% in a day.
The reasons cited for the continuous drop in the prices were EBITDA withdrawal, potential cost escalation, and changes in the near-term demand.
