Where is the chemical industry going?

Business Economics, Oct, 1999 by T. Kevin Swift

Specialty chemical prices tend to be set by "value-and-use," not by cost, and historically higher margins were not impacted as much by cyclical demand pressures. The value added to the customer raises "switching costs." offsetting customer bargaining power. Critical mass in end markets is also important.

Specialty chemicals have a higher value added, because they cannot easily be duplicated by other producers [TABULAR DATA FOR TABLE 2 OMITTED] or are shielded from competition by patents. As a result, high barriers to entry, can exist because of technology requirements. Capital needs are less important and more flexible than with basic chemicals but can still be relatively high. Although dedicated and continuous operations are also typical in specialties, a large number of plants also exist that are general-purpose synthesis operations (with equipment for specific unit operations, such as distillation, crystallization, filtration, etc.) or formulating plants. By definition, most specialties are niche business, and beyond a certain size, scale does not matter. On the other hand. strong technical servicing, marketing, and distribution competencies are a must, as close customer relationships and servicing are paramount. Innovative chemistry and applications technologies are growth drivers for most companies.

Consolidation and globalization are occurring, although acquisitions tend to be smaller than in basic chemicals. Alliances to provide scale and scope are becoming important. On the other hand, specialty company margins are under pressure as demand has slowed and as "supply chain management" practices by large customers have eroded value and use. In addition, overcapacity has become a problem in some segments. As a result, many of the factors behind the attractiveness of specialties have eroded. Some segments face environmental pressures such as "green" products and processes. Companies generally employ focus or product differentiation strategies, and some are seeking to evolve branding strategies.

Life Sciences

A $100 billion business in the United States, life-science products are differentiated chemical and biological substances that interact with the biological processes of human, animals, plant and other life forms to induce specific outcomes. Included are pharmaceuticals, biological products, diagnostic substances, animal health, vitamins, nutritional, and crop protection products. The latter is a $13.5 billion business and includes pesticides and other products for crop protection, plant disease management, and industrial and commercial pest management. [TABULAR DATA FOR TABLE 3 OMITTED] Pharmaceuticals and other health-related products represent an $86.5 billion business. Life sciences also include biotechnology, a $14 billion technology platform that cuts across the two main businesses with applications in pharmaceuticals, diagnostics, crop seeds, traits and value-added grains, among others.

Life sciences is the most dynamic of the three main businesses. Many life-science markets exist and include hospitals, physicians and other health care providers, testing laboratories, pharmacies, and other retailers, as well as agriculture, forestry and some service sectors.