Specialty profitability

Prices. The price of commodity chemicals is based on cost of production, capital needs for expansion, and the ratio of supply to demand. Profit margins can drop under changing conditions, and unit price tends to be low. Specialty chemical prices vary widely. They are based on the value of a product or system to the customer. Profit margins can usuaHy be maintained, and unit price is higher than for commodity chemicals. 

Contrary to the commodity chemical business, the key to win in the specialty products market does not lie in squeezing out profits by means of economies of scale or process optimization. Rather, it lies in the ability for fast new product launches in order to capture the largest market share as soon as possible. Since superior product quality and performance is what really differentiates one specialty product from another, the product properties need to be adjusted as required by business needs. For example, the ability to manipulate functional chemicals in detergent products such as enzymes and zeolites, as well as backbone chemicals like surfactants, is often the key to success for both the detergent manufacturers and chemical suppliers [3], This trend has created an urgent need for an efficient and effective product and process development for these products. 

Currently, specialty chemical players too are benefiting from better industry conditions, significant cost improvement efforts by many players, and a very cautious stance on investments and acquisitions over the last few years. However, we predict that the pre-1997 glory days will never return. Rapid commoditization of parts of the portfolio and relentless price pressure will continue to endanger business models. For some players, a rigorous focus on cost will be the path to success, others - and these businesses will still earn a substantial premium on industry average profitability - will develop true customer solutions. 

The specialty chemicals business needs to face facts the drop in profitability that characterized the 1990s has not abated in the new millennium. Competition has intensified, capital productivity has fallen, and the specialties niches are shrinking with ongoing commoditization. This does not have to be the end of the road, but specialty companies have to take a long hard look at themselves and decide whether they are prepared to fight back, and how they can best equip themselves to do so. 

Source McKinsey proprietary chemicals long-term performance database (CLTPD) Fig. 8.5 Profitability of specialty chemical players. 

The industrial gases industry routinely manages to earn attractive return rates. From 1992 to 2004, the average annual return on invested capital (ROIC) before tax was 13.6 percent. The industry s profitability was thus between that of specialty chemicals (17.8%) and commodities (12%), but more stable. In 2004, industrial gases almost came out on top of specialties, due to the latter s declining profitability in the second half of the 90s (Fig. 11.2).3) Air, its main raw material, is free , and its products are probably the purest commodities from a chemical point of view. In any case, the industrial gases industry has managed to deliver better and less volatile returns than the commodity chemicals sector. 

The industry routinely earns attractive returns, with profitability rates between those of specialty chemicals and commodities. 

Last but not least, top-line and bottom-line results are exceeding expectations, and the extra profits UCB Pharma is making compensate for the profits lost due to the divestment of Surface Specialties. 

In the United States, Du Pont and PPG had a long-established reputation in industrial and consumer paints. W. R. Grace since buying Dewey Almy, and Rohm Haas because of its age-old tradition in acrylics, drew substantial profits from their specialties. This was also true of American Cyanamid (additives for plastics, cosmetics) and of Monsanto (products for rubber, special polymers). Since its withdrawal from the tire business, BF Goodrich, aside from its PVC lines, is concentrating now on specialties. 

To increase their specialty sectors as fast as possible, the leaders of large companies found it more expedient to do so through acquisitions. The prices paid for the most interesting purchases can be considered high because, very often, they amounted to fifteen to twenty times the profits. But the financial sacrifices made by the buyers seemed worthwhile, for they gained a foothold in the market without the long preliminary work that would otherwise have been needed. 

Wacker, in which Hoechst had been a partner from the start, also managed to retain its independence, although it was still active in some commodity-type products (acetic acid, vinyl monomers and polymers, and silicon carbide), it chose to emphasize lines that showed greater profitability, such as silicones, hyper pure silicon for semiconductors, and specialty and fine chemicals. In France the well-run starch and derivatives producer Roquette Freres, after a short flirtation with Rhone-Poulenc, was able to recover its autonomy. 

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