Soft demand can mitigate the benefit of new capacities for Tata Chemicals2 min read . Updated: 09 Jan 2020, 12:12 AM IST
- Prices of soda ash have been soft due to abundant supply. Low raw material costs can help mitigate the impact
- Investments in product diversification and expansion within these segments are now set to bear fruit
The story of Tata Chemicals Ltd, ever since the elevation of N. Chandrasekaran as Tata Sons chairman, has been of business restructuring. It divested the consumer products business to a group firm, raised its stake in the US soda ash business, and focused on two segments, basic chemistry and specialty chemicals.
Investments in product diversification and expansion within these segments are now set to bear fruit. The company’s silica and nutrition solution plants are set to begin commercial production, for instance. Further, Tata Chemicals plans to step up focus on sodium bicarbonate, a product related to its existing soda ash business.
New central government rules to reduce emissions at thermal power plants are projected to drive demand for sodium bicarbonate. “Tata Chemicals has already started supplying commercial-grade bicarb to Tata Power and NTPC. With the increasing opportunity therein, Tata Chemicals is expanding bicarb capacity at its Mithapur plant by 40%, which is likely to come on stream by September 2021," analysts at Motilal Oswal Financial Services Ltd said in a note after a recent analysts’ meet.
While all of this is good, a recent analysis by SBICAP Securities Ltd showed that the thermal power sector is lagging in installation of pollution-control equipment by a wide margin, despite the government’s push. Weak balance sheets and the fear of a rise in electricity costs due to investments are seen as major hurdles. So, while Tata Chemicals may find customers for its existing bicarb capacity, a rapid rise in demand is not certain.
Similarly, prices of soda ash, a large business segment for Tata Chemicals, have been soft due to abundant supply. “Prices of soda ash remain lower in December and are at $17.4/50kg (Mumbai spot) due to the oversupply situation prevailing in India," Emkay Global Financial Services Ltd said in a note. Tata Chemicals is responsible for the increase in capacity. The silver lining here is that low raw material costs can mitigate the impact of soft soda ash prices.
Even so, demand is a crucial variable. Soda ash sales volumes fell in the September quarter in India. Besides, large overseas producers announced fresh capacity additions, which can weigh on prices.
The management attributed the reduction in sales volumes in the September quarter to inventory adjustments. Also, the new overseas capacities are expected to take time to come on stream. In the meantime, Tata Chemicals expects demand to catch-up, bringing balance to the market. While that will be the best possible outcome, investors tracking the restructuring story would do well to keep a track on demand dynamics as well.