The reason behind Deepak Nitrite’s rally

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In three days, the market price of the Indian specialty chemical major, Deepak Nitrite has rallied nearly 21% from 2382.45 (on October 1st) to 2886.80 (on October 6th). What’s the reason? The Q2 results of this company are yet to come. Then what made the stock price to soar after a couple of days of correction? The one and only cause is the continuing power crisis in China. This has been resulting the partial or total shut down of several chemical plants in that country.

As per reports, nearly 25% of chemical production has been hit by this energy crisis in China. China is one of the largest suppliers of both raw materials and intermediate goods for chemical industry. As a result, prices of many chemical compounds have risen significantly. This means, globally raw materials for chemical industry are now becoming more expensive. This will impact our chemical industry too. But this is one side of the story.

On the other hand, Indian chemical sector is seeing an opportunity of growth and demand for its products. Especially for companies, which are not much dependent on China for their inputs are more buoyant. For example, Deepak Nitrite, Aarti Industries, and other specialty chemical manufacturers have seen their market capitalization on a rise.

This is not the first instance when Indian chemical companies have seen an opportunity. Recently, China started restricting the production capacity of chemicals plants due to environmental concerns. Then companies like Deepak Nitrite, Vinati Organics, etc. have grabbed the opportunity. And after the outbreak of the pandemic, several industries have seen shift from China to India and other countries. Chemical industry is also one of them. These are one of the reasons for the rise of Deepak Nitrite as a dominant player in this sector. Particularly in the manufacturing of phenol and acetone, it became the largest player in India. And it is the leading producer of sodium nitrite in the world.

However, according to some experts, the power shortage in China will have a negative impact on those companies of the supply chain which distribute and deliver products to the final consumers like other entities, government etc. This will last for some time. Because these entities are mostly dependent on the raw materials and intermediate products supplied by China. The rising chemical prices is also another reason. On the flip side, the manufacturers of base chemicals and bulk commodities will get benefit.

But these benefits will reap only if Indian power plants are able to fulfill the rising demand. Because we already know that our power plants are also facing the problem of coal shortage.

Therefore, this crisis will create the opportunities on one side and will pose threats on the other side for the Indian chemical entities.

Raghuveer Jandhyala

Editor, Tax Concept. I have written on market, finance, management, and technology.

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