ESG (Environmental, Social, and Corporate Governance) and healthcare are two investment themes which are vastly in vogue nowadays. The popularity of these themes is likely to accelerate in the future since go green and stay clean is the mantra for the post COVID-19 era.
As a result, in the era of hyper-specialization even some commodity businesses are flourishing. For instance, plans for EV adoption and the thrust on improving the share of renewables in the energy pie have stoked a new bull market in metals. Of course, other factors have also been favourable for the present bull-run in metals such as steel and copper.
Similar is the case with bulk chemical manufacturers. Take an example of Hydrogen Peroxide (H2O2). Strong demand, environment-friendly nature and import substitution paint a rosy picture for H2O2 manufacturers.
H2O2 is not only an environment-friendly industrial chemical but it also finds applications that promote hygiene and keep the environment clean.
Besides being known for its antimicrobial properties, Hydrogen Peroxide is widely used as an oxidizing and bleaching agent. Industries such as pulp and paper, refineries, textiles and laundry, electronics and healthcare, to name a few, are the primary consumers of H2O2.
Global demand for H2O2 was 4.5 million MT in 2020. It is expected to grow to 5.7 million MT by 2027. India accounts for 5% of the global market for hydrogen peroxide. Until recently, the domestic production fulfilled 2/3rd of the domestic demand while imports made up the rest.
Back in 2017, India imposed an anti-dumping duty on Hydrogen Peroxide originating in or exported from Bangladesh, Taiwan, Korea RP, Indonesia, Pakistan and Thailand. Following this, realizations of Indian manufacturers improved. The duties on these imports in India will be in effect until June 2022.
(Source: Bloomberg)
National Peroxide, Gujarat Alkalies and Chemicals, Indian Peroxide and Hindustan Organic Chemicals are some of the major H2O2 manufacturers in India.
Improving price realizations encouraged Indian manufacturers to ramp up capacities in the past few years, which created some excesses and a supply glut. However, capacity additions provided a big boost to India’s import substitution and atmanirbhar initiative. With India announcing new textile parks and planning to accelerate the development of a full-scale research-driven biotechnology industry, the demand for H2O2 is likely to increase.
Moreover, some sizable and sustainable opportunities are also likely to open up in the post pandemic era.
India’s e-commerce evolution has advanced by several years during the on-going pandemic. Consequently, the paper, paperboard packaging and container market is expected to witness a strong growth momentum going forward. The paper industry uses H2O2 for bleaching cellulose, wood pulp and de-ink the paper in recycling.
Disinfectants and sanitization market has seen a huge growth during the pandemic times and most of it looks durable in nature. Since H2O2 is used in water and sewage and effluent treatment plants, it is likely to gain importance in future as businesses and governments are becoming more concerned with environmental issues.
Historically, Indian manufacturers have been at a disadvantage chiefly because of two reasons—one, lack of economies of scale, two, relatively inefficient natural gas pricing and market dynamics.
Natural gas market in India is maturing with time though. Not only have gas companies shown flexibility in modifying the terms of the long term contracts to accommodate the view of their customers, but a major ramp up in gas production globally has dragged the prices. In the foreseeable future, gas prices are likely to remain stable. India is also cutting back its import reliance for natural gas.
National Peroxide is the industry leader and owns 44% of India’s total installed production capacity. In FY20, the company enhanced its capacity from 95,000 MTPA to 1,50,000 MTPA.Enhanced capacities are expected to help the company attain economies of scale and utilize fixed costs better, thereby becoming more cost-efficient. The company has a long-term gas supply contract with GAIL.
Investors and fund managers alike often avoid commoditized businesses because predicting the upswings and downfalls in a commodity cycle is extremely difficult. Moreover, valuations at the beginning of a cycle make them unattractive.
That said, in the case of H2O2, volumes may pick up eventually, should underlying industries make progress on the expected lines.
In the quest for niche, we shouldn’t forget about dull and boring businesses which look ridiculously straight forward. Here’s a million dollar question—how much money should one allocate to pure commodity companies? That’s where the concept of asset allocation comes into play.
You may also like to read: Is biotech the new high-tech?
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