Strong demand will raise prices
By Christopher Reilly -- Purchasing, 11/4/1999
Buyers of specialty and fine chemicals will see continued low prices for some products and firming prices for others. On the whole, continued strong demand fueled by what seems to be an ever-expanding U.S. economy will apply upward pressure on prices for specialty and fine chemicals next year. In addition, raw materials costs are rising, which is further support for rising specialty/fine chemical prices."In general, supply this year has not been much of a problem in many of the major market segments for specialty chemicals. Markets will continue to be supplied, and I haven't seen significant shortages," says Phil Calderoni, director of Menlo Park, Calif.-based SRI Consulting's specialty chemicals update.
Calderoni notes that buyers can expect to see a good deal of new products from specialty and fine chemical suppliers. "Current profit margins in the U.S. are between 8% and 10% for the specialty chemicals producers' business overall. Also, research and development as a percentage of sales is generally running around 2.5% to 3%, which is up slightly from last year's levels," says Calderoni. "Areas that show promise for new product innovation are in pharmaceuticals and plastics additives, particularly for metallocene catalysts. Other than those areas," Calderoni says, "the increase in R&D as a percentage of sales is largely due to development of product reformulations and technical services."
Another factor has had a hand in the economic picture for specialty chemicals. Low prices and low producer margins have led companies to consolidate. In some ways, this has brought about changes in chemical procurement, as the supplier base is smaller than just a couple of years ago.
The big picture
How have the markets for specialty chemicals fared in 1999 and what's in store for 2000? "It's a mixed bag," says SRI's Calderoni. "Specialty chemicals cover such a diverse range of industry segments; however, we have seen overall growth in the specialty chemicals market this year, and will see more, at about 3.4%/yr to 2002," he says.
"The specialty chemicals markets continue to be affected by low export levels," Calderoni says. "But at the same time, some domestic market segments have been doing well, which accounts for the growth."
Pricing for these specialty chemicals is dependent on the specific application. Calderoni says, "Some markets, with newer technologies and higher-value applications, will probably see price increases. But many other areas will not, at least in the near term."
For these market segments, Calderoni says low inflation levels will likely hold down pricing. "There doesn't seem to be much inflation in the U.S. right now, and we're still close to the bottom of the price cycle," he says. "Many specialty chemical producers are trying to hold marketshare by keeping their prices down."
"We see the specialty chemicals market continuing to grow in 2000," says Eric Vogelsberg, project manager at Kline & Company, a chemical market analysis firm located in Little Falls, N.J. "However," he says, "There are a couple of factors that are changing the market situation.
"Many overseas markets pose a challenge to U.S. specialty chemicals producers," says Vogelsberg. "A lot of the stable market segments in the U.S. for specialty chemicals have become mature. For instance, in the domestic automotive industry, the use of adhesives has gone just about as far as it's going to go," he says. "Producers are looking globally for growth."
Cost reduction is another factor. "Specialty chemical manufacturers are increasingly scrutinizing their manufacturing costs," Vogelsberg says. He explains that his firm provides business-analysis services to chemical manufacturers, and has seen a sizeable jump in the number of specialty chemical companies requesting benchmarking and cost-analysis. "If you look at the industry as a whole, it is starting to take on characteristics of a commodities business," he says.
Demand growth
According to data from SRI consulting, some specialty chemicals are showing significant growth, well above the 3.4%/yr overall growth-rate estimate for specialty chemicals.
The markets growing the fastest through the year 2000 (see table) include imaging chemicals (8.1%/yr) and electronics chemicals (7%/yr). Both types of chemicals are used extensively in the electronics and semiconductor markets. "In general, demand for specialty chemicals used in applications that rely on the development of new technologies are doing better than those used in more industrial-based applications," Calderoni says. "Those chemical areas not on the technology bandwagon aren't doing quite as well."
Another type of specialty chemical slated for above-average growth is synthetic lubricants (6.3%/yr), which, according to Calderoni, is "due in part to the continued strength of the U.S. automotive market and the U.S. economy."
The use of flavors and fragrances is also growing. SRI predicts annual growth of these chemicals at 5.5% through 2002.
Demand for some specialty chemicals is expected to grow at below-average rates. Rubber processing chemicals are predicted for the least growth at 1%/yr. Also, oil-field chemicals and lube oil additives are predicted for minimal growth (1.3% and 1.1% annual growth to 2002, respectively), which is due largely to rising oil feedstocks, according to Calderoni.
Demand for chemicals used in pesticides is also slated for low annual growth (1.3% to 2002). Calderoni attributes this to the use of newer biotechnology-based and genetically engineered crops that require less application of pesticides. "Newer, more potent chemistries are being used to replace phosphates, which require more product utilization and also have environmental toxicity concerns," he says.
Here are some outlooks of individual market segments, including trends affecting buyers of specialty chemicals:
Electronics chemicals
While analysts point to future demand growth in electronics and semiconductor specialty chemicals, most agree that price increases will continue on a gradual basis. "Prices are increasing," says David H. Darden, Eastman Chemical's business market manager of electronic chemicals. "But this is predominantly driven by raw material costs."
Darden says that demand for specialty chemicals used in the electronics and semiconductor industries is dictated by the strength of the market and the purity of the products. "In general, the purity of product is increasing, and the market is showing signs of improvement. However, the market is not very strong at this point, so demand has shown slow improvement in 1999 over a very weak 1998," he says.
While SRI Consulting predicts 7.1%/yr growth for electronics chemicals, the semiconductor industry itself is projected to grow at a faster rate. "Projections for annual growth are in the 13% to 15% range for 2000," according to semiconductor industry analyst, Robert Castellano, Ph.D., with New Tripoli, Pa.-based The Information Network. "The semiconductor industry has more or less recovered from the downturn a couple of years ago, and since July of last year, I have seen demand growth," he says.
There has also been some concern on the part of semiconductor manufacturers at the beginning of 1999 regarding dram prices. According to Robert Castellano, "dram prices peaked in January 1999, but then dropped off sharply. Now, dram prices are picking up again," he says.
Mark McCleary, business development manager for electronics at Praxair, Inc. Danbury Conn., says he has seen a significant production ramp-up both for chemicals and gases in the past six months, which he attributes to increasing demand for chemicals used in electronics and semiconductor production.
"I think it's safe to say that the industry has run through its head room, in terms of capacity. We're also seeing the construction phase of new plants come back. Construction of new plants has decidedly picked up," he says. "Next year, the industry has to see more capacity ramp-ups in some of the specialty gases, or we could see some tightening of supply," McCleary says.
McCleary says he has seen growth in demand for a number of chemicals in 1999, including nitrogen trifluoride and tungsten hexafluoride--"Three gases whose increases are directly proportionate to up-ticks in silicon chip production," he says.
Eastman's Darden points out another industry trend, "Many major companies are increasingly demanding 'one-stop shopping' for their electronics chemicals, which has led to companies partnering and forming joint ventures to provide a wide range of products and materials management services to customers," Darden says.
An example of such a partnership exists between Merck KGaA Electronic Chemicals of Darmstadt, Germany, and Praxair, Inc. The companies have formed a global alliance to provide process gases and chemicals, related equipment, and site services to the worldwide semiconductor industry. "The agreement combines the respective sales, product lines, and organization of each global company to create a one-source materials supplier and interface for customers," Praxair's McCleary explains.
"For the most part, it's the gas company choosing the chemical company to supply product," McCleary says. "The gas manufacturer taps into the chemical company's supply to offer the entire spectrum of necessary products and services to the semiconductor manufacturer. They choose the chemicals, distribute them into the fabrication plant, and handle waste removal," he says.
Among the benefits of this system are single management and a reduction in manpower. "Where 25-30 people were needed before, there are only 17 or so workers needed now, and they take care of all aspects of materials management necessary for operations at the Fab," McCleary says.
Plastics additives
"The plastics business is a pretty intimate part of the domestic economy," says Jay Davis, marketing manager, polymer additives at CIBA Specialty Chemicals in Tarrytown, N.Y. "As the economy continues nearly unabated, the plastics industry continues to do well," he says. "This year, we have seen some strength in plastics with price increases for polyethylene and polypropylene that seem to be holding in the marketplace," Davis says. "This has allowed producers to gain a more viable position in the marketplace.
"Some polymer additive prices have also stabilized, particularly in the area of the base polymer additive lines, such as antioxidants, light stabilizers, and process stabilizers for the plastics matrix," says Davis.
"I don't expect the market environment in 2000 to be significantly different from now, except that price stability may be a little more prominent," Davis says.
According to Lou Kattas, a plastics analyst with Townsend Tarnell, Inc. in Little Falls, N.J., "PVC and polyolefins account for the lion's share of consumption of plastics additives," he says. "In the case of vinyl, "Additives used in rigid grades are growing faster than those used in flexible grades," Kattas says.
"Also, polypropylene consumes more antioxidants than polyethylene, because it is run at higher temperatures. And in general, polypropylene consumption is growing faster than polyethylene, so we expect it to have more of an impact on antioxidant consumption," Kattas says.
Another factor affecting the plastics additives market segment is the much-heralded growth of metallocene single-site catalyzed polyolefins. "These materials tend to be more amorphous--especially when used in low-density and linear low-density polyethylene--and they're stickier, which requires more anti-block and slip agents in film grades," according to Kattas. "Also, they tend to provide very clean reactions and narrow mole-weight distributions as a result."
But Kattas warns that the changes metallocene use poses in plastics additives applications are still unclear. "There hasn't been a whole lot of metallocene on the market yet, so the benefits of using these materials have not been fully scoped out," he says.
Pharmaceutical intermediates
Demand is still strong for pharmaceutical intermediates, and prices are holding fairly steady for the most part. In addition, supply seems to be in line with demand in this $1.5 billion market, say analysts. Outsourcing is still a key trend that will continue.
"We're seeing continued growth in the pharmaceutical sector," says Michael Altman, director of marketing at NSC Technologies, in Mt. Prospect, Ill., which was recently acquired by Great Lakes Chemical Corp., Indianapolis, Ind. "Demand in the U.S. pharmaceutical market is growing between 6% to 8%, and I don't think the dynamics of the marketplace have changed much in the past year. I don't foresee much in terms of wholesale price increases in the near term due to inflation," Altman says.
Pharmaceutical companies continue to re-evaluate and restructure their businesses to focus on what they do best, which in many cases involves research and development of new products. Manufacturing steps continue to be outsourced.
Altman says that continued outsourcing and companies' strategies toward a more global focus are the most visible trends, which, he says, "Provide many robust opportunities. These trends will continue in the coming year," he says.
Altman also mentions competition as a prime factor affecting this market in 2000. "We're working in a highly competitive environment, and the number of firms entering pharmaceuticals and fine chemicals is increasing," Altman adds, pointing to the added thrust of competition from overseas pharmaceutical manufacturers. "Foreign pharmaceutical intermediate producers--especially those in China and India--are becoming formidable low-cost competitors when it comes to supplying the more basic intermediates," Altman says.
"The quality of materials used to be a big issue when dealing with overseas suppliers," Altman continues. "Quality is still an issue you have to deal with on a case-by-case basis, but, in general, many firms in India and Korea have progressed quite well and are manufacturing quality intermediates."
In supply news, Eastman Chemical recently completed a restructuring of its fine chemicals plant at Yuen Long Industrial Estate in Hong Kong, China, to meet current Good Manufacturing Practices (cGMP) standards to produce pharmaceutical intermediates.
Eastman also has cGMP restructuring under way at two plants in Batesville, Ark., which are expected to be on line in 2000, according to a company spokesperson.
Cosmetics chemicals
A recent study by Cleveland, Ohio-based market analysis firm, The Freedonia Group, forecasts demand for chemicals in cosmetics and toiletries to increase by more than 5% annually to $6.3 billion by the year 2003.
The study states that fragrances and flavors will continue to be the largest functional category of cosmetic and toiletry chemicals, making up about a third of total market value. Demand for these chemicals will grow by more than 6% annually to almost $1.6 billion by 2003, outpacing other personal care raw chemical groups due to increased use of essential oils and botanical extracts. The report adds that widespread consumer preference for natural ingredients and the benefits of aromatherapy are driving fragrance-and-flavor demand.
In this segment, the fastest demand growth will be for specialty additives (about 9% annually to $1.3 billion in 2003), used in plant acids, enzymes, polymers, proteins, vitamins, and botanical extracts, according to Freedonia.
"One key trend emerging in this segment," says Kline & Co. analyst, Gillian Morris, "Is less distinction between distribution channels for mass-market products and the prestige products, which generally cost more." She explains that this is largely due to consumers' perceptions of the products. "Consumers who buy mass-marketed products are expecting more and more from them," she says.
Consolidation
Across the specialty chemicals spectrum, there has been a rash of mergers and acquisitions as producers and customers alike align their businesses based on synergies in future business and to scramble for market position.
Among the largest of these is the proposed acquisition by Dow Chemical, Midland, Mich., of Union Carbide, Danbury, Conn., which, when completed, will form the second largest chemical company in the world, and a formidable presence in the specialty chemicals industry.
Rohm & Haas, Philadelphia, Pa., a major supplier of impact modifiers to the vinyl business, has acquired Morton International, a producer of salt and specialty chemicals. Morton is a major supplier of heat stabilizers to the vinyl industry, as well as a supplier of biocides.
In September, Witco Corp., Stamford, Conn., merged with Crompton & Knowles to form CK Witco Corp., a $3.3 billion/yr producer of specialty chemicals.
CK Witco Corp. has also concluded the sale of its Oleochemicals and Derivatives business to Goldschmidt AG and SKW Trostberg AG, both based in Germany, according to a Witco press release. Assets changing ownership include production sites in Janesville, Wis., and Mapleton, Illinois, and three European sites--Flimby, the United Kingdom; Granollers, Spain; and Steinau, Germany.
This summer, Eastman Chemical announced plans to acquire the ethylene methyl acrylate and ethylene butyl acrylate product lines of Chevron Chemical Company LLC, according to an Eastman spokesperson.
In May, Great Lakes Chemical Corp., Indianapolis, Ind. acquired NSC Technologies from Monsanto for $125 million.
NSC develops, manufactures, and sells chiral pharmaceutical intermediates and select bulk actives to pharmaceutical companies. Great Lakes also acquired FMC Corporation's Process Additives Division (PAD) in mid-August for $162 million. PAD is a producer of phosphate ester flame retardants, flame retardant fluids, and lubricant additives, as well as a leading supplier of specialty water treatment chemicals used in industrial applications and desalination.
Recent specialty chemical consolidations
Dow Chemical acquired Union Carbide (subject to FTC approval)
Rohm & Hass acquired Morton International
Witco merged with Crompton & Knowles
Great Lakes Chemical acquired NSC Technologies
Great Lakes Chemical acquired FMC Corp.'s Process Additives Division
SOURCE: PURCHASING
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