The science and materials of chemistry make the lives of people throughout the world healthier, safer, and more sustainable and more productive. Our food, safe water supply, clothing, shelter, health care, computer technology, clean energy sources, transportation and every other facet of modern life, all depend upon the business of chemistry.
More than $700 billion of chemistry products flow through the US economy each year. The products of chemistry are present in some form in nearly every facet of the global economy. In fact, over 96 percent of all manufactured goods are directly touched by chemistry. Industries consume products made by other industries that have large chemical inputs, for instance, plastics, rubber, synthetic textiles, and components using these materials.
Companies in this industry transform organic and inorganic raw materials by a chemical process and formulate products. Major companies include Dow, DuPont, Pfizer, BASF, Formosa Plastics, Roche, SABIC, and Sinopec Group.
The global chemical manufacturing industry remains at about $5 trillion annually. China, the US, Ireland, Germany, and Belgium produce the most chemicals and also are among the largest importers of chemicals.
The business of chemistry supports nearly 25% of jobs globally. In the US, most production of basic chemicals is concentrated along the Gulf Coast, where petroleum and natural gas feedstocks are available in refineries. Texas and Louisiana produce a majority of all primary petrochemicals. Production of other products, such as plastics, pharmaceuticals, and fertilizers is more widely dispersed among the states.
Chemical producers are subject to numerous laws addressing business and trade, and the highly regulated nature of the chemical industry can make compliance management exceptionally burdensome. Companies entering foreign markets must assess a number of factors that can significantly impact the operating environment within a given country. Emission standards, as well as laws regulating the management and disposal of hazardous waste, are typically extensive. Other major concerns include intellectual property protections and regulations addressing chemical security.
The production of chemicals are classified into Commodity Chemicals and Specialty Chemicals…
Commodity chemicals are those chemicals that are produced in large volumes. Such chemicals include inorganic chemicals, bulk petrochemicals, organic chemical intermediates, plastic resins, synthetic rubber, man-made fibers, dyes and pigments, printing inks, etc. Commodity chemicals. These chemicals are produced mainly by large companies, often as byproducts of petroleum refining. Margins on commodity chemicals are usually low because the chemicals are so widely produced. Commodity chemicals are used to produce more complicated chemicals which are known as specialty chemicals.
Specialty chemicals are low-volume, high-value compounds sold on the basis of what they do, not what they are. Also known as performance chemicals, some examples include paint, adhesives, electronic chemicals, water management chemicals, oilfield chemicals, flavors & fragrances, rubber processing additives, paper additives, industrial cleaners, and fine chemicals. Agricultural chemicals include fertilizers and crop protection chemicals, i.e., pesticides. Consumer products include soap, detergents, bleaches, laundry aids, toothpaste and other oral hygiene products, shampoos and other hair care products, skin care products, cosmetics, deodorants and other body care products, and perfume and cologne, among others. Margins are generally higher on these products.
Chemical manufacturers are leaning towards going zero waste, resulting in less energy and resources consumption. The critical nodes of the sustainable ecosystem include chemical production, applications, raw materials, and end-users. The recycling of plastics is expected to reach a 20% year-over-year growth through 2030.
Let’s look at the Competitive Landscape…
The overall health of the global economy drives the demand for chemical industry since chemicals are used to make a wide variety of industrial and consumer products. The profitability of individual companies is closely tied to efficient operations. Big companies have economies of scale in purchasing and production. Small companies can compete effectively by producing specialty products, of which there are a large number.
Many specialty chemicals are protected by patents, either for the product itself or the manufacturing process, and have no direct competition. Indirect competition comes from products with similar properties. Patents are especially important to many smaller manufacturers, which may license their product or technology to larger companies for manufacture and sale.
Because they often have a high value-to-weight ratio, many chemicals are traded internationally, and many manufacturers have production plants overseas. The largest sources of US chemical imports are Ireland, Canada, and Germany. The biggest export markets for US chemicals are Canada and Mexico.
The cost of chemical production facilities is extremely high. Companies require considerable capital for manufacturing equipment, safety systems, and raw materials. Consolidation among chemical companies has resulted in a highly concentrated industry dominated by large producers who operate and market globally.
The Companies to Watch include:
BASF – This is the largest chemical company in the world, with products in every major chemical segment.
DuPont was spun off after the demerger of DowDuPont and now specializes in markets including everything from animal nutrition to water solutions.
Bayer may be best known for its pharmaceuticals, but the company is also a leading agricultural chemical maker and broadened its agrochemical offerings with its 2018 acquisition of Monsanto.
Prices for commodity chemicals depend largely on raw material and energy prices. Prices for specialty chemicals are additionally dependent on demand in end-use markets.
The business of chemistry has consistently been one of the largest U.S. private-sector investors in new plants and equipment, as new products and processes resulting from R&D are brought into reality. Profit margins, operating profits and capacity utilization rates are drivers for Plant and Equipment investment.
Specialty chemicals are generally more profitable than commodity chemicals. Because of this, many companies decide to develop specialty products. Because chemical plants run most efficiently at high capacity, companies generally produce large volumes of product even in the absence of sales, and therefore carry large inventories of finished product. To avoid production interruptions, they may also have large inventories of raw materials.
Most companies have large capital investments in production facilities and have heavy spending for maintenance as well as Research and Development. The industry is capital-intensive: average annual revenue per employee in the US is about $1,000,000.
The US industry’s working capital turnover ratio averages about 20%. Sales of some products can be seasonal, resulting in uneven inventories and accounts receivable. For the industry overall, accounts receivable average about 60 days’ sales. Risks associated with seasonality are particularly acute in the agricultural chemical industry, where companies commonly build inventories during periods of low demand. Manufacturers of chemicals with seasonal demand may incur substantial inventory carrying costs. Inventories in the US chemical manufacturing sector typically turn about five times per year.
Chemical manufacturers are subject to a large variety of local, state, and federal government regulations concerning worker safety and air, water, and ground pollution. Because of poor past practices, many older chemical plants have ground contamination from a variety of toxic products and may have liability for Superfund site cleanup.
Our take at Cibunet is that while companies in the Chemicals and Science industry focus on high profits for their shareholders, the core nature of this industry puts it somewhat at variance with global sustainability goals. This challenge presents a great opportunity for new entrants in the industry to come up with solutions that can be adopted by existing companies.
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