Surging demand is having a variety of impacts on specialty chemicals prices, depending on the maturity of downstream markets for the respective chemicals.

For many well-established specialty chemical sectors, increased demand is pushing up selling prices, sometimes at double-digit rates. But for some developmental specialties, high demand brings prices down as chemicals move from laboratory to commercial volumes.

Increased demand for most speciality chemicals has given suppliers price leverage. According to the Bureau of Labor Statistics, prices of inorganic pigments for paints and coatings, excluding titanium dioxide and iron oxide, shot up by nearly 32% between May 2006 and May 2007. Meanwhile, volume growth in this sector has been "nominal" over the past year, says paint and coatings analyst Phil Phillips, president of Chemark Consulting in Southern Pines, N.C.

Phillips attributes the surge in inorganic pigments prices to their increased demand from markets looking to differentiate their products. For example, in the automotive market metallic flake pigments give the latest models eye-catching special effects such as subtle exterior tints that change color with the angle or lighting and consumer electronics sold in a wide array of colors and tints.

Another factor boosting specialty chemicals prices is consolidation within the supply market, a trend that has continued for the past decade. The latest example of this was the news in July that Huntsman Corp. had tentatively accepted a $6.5 billion takeover bid by Hexion Specialty Chemicals, and its parent company Apollo Management. (It's too soon to know if the reduced competition in these companies' overlapping areas will result in higher prices, say market experts).

Buyers of specialty chemicals not only have to contend with higher tags, but also shorter notices of price hikes. Jim Rhodes, vice president of corporate purchasing at Fiber Glass Systems, a San Antonio, Texas-based producer of reinforced piping, says that just a few years ago, his specialty chemical suppliers normally gave him a 90-day notice of price increases. Now the notice of price increases is typically 30 days, he says, and in some cases as short as three weeks.

Some specialty chemical suppliers have found ways to bend the contract rules that stipulate at least one month's notice prior to a price increase. For example, Rhodes says one supplier alerts him to a price increase scheduled to go into effect on a certain date, but holds off putting through the increase, sometimes for months, until it sees what its competitors will do. If the competitors eventually weigh in with similar-size hikes, says Rhodes, then the supplier can implement its new rate structure immediately, without any additional warning, "since they've already given us the requisite notice."

But not all specialty chemicals prices are on the rise—some are actually going down. The most consistent pattern of downward movement in specialties exists in newly emerging fields such as bioconversion of cellulose into ethanol, or in nanotechnology.

When a technology is still in the laboratory or pilot plant, prices of the key chemical ingredients are likely to be "relatively high," says Roger Shamel, president of Consulting Resources Corp., a Lexington, Mass. firm that follows trends in specialty chemicals. As the technology advances into the commercial sphere, producers of the required ingredients "move down the learning curve," finding ways to make their production more efficient, benefiting from economies of scale.

Meanwhile, says Shamel, competition emerges as other chemical suppliers become aware of the opportunities in the field and look for ways to churn out the required ingredients as cheaply as possible. As a result, prices of these chemicals gradually fall.

For example, cellulase enzymes, which are used to convert cellulosic materials into ethanol, were so expensive that they could not be used in any industrial processes. But bioconversion of cellulose is now edging closer to the marketplace, though it hasn't gone commercial, and prices of the required cellulase enzymes are falling. Those prices "are still to high" to make cellulose conversion a self-sustaining industry, notes Brian Duff, a process engineer with consultancy BBI International in Denver. But he expects that this stumbling block will be overcome as mass production of the enzymes by rival producers lowers tags further.

Similarly, notes Shamel, some of the chemicals used in developmental nanotechnology applications are still priced at a premium. He cites as a case in point advanced pigments for auto coatings that would allow drivers to switch the color of their vehicles from, say, red to black at the flick of a switch. These pigments are exceptionally pricey and likely to remain so for a long time to come, Shamel notes. But even some of the most innovative specialties eventually reach commodity pricing status, he adds. Nonetheless, he says that development can take "decades," allowing those in the specialties business to make "some pretty good returns" along the way.