The Specialty Chemical Cycle
Everything Old Is New Again
Hey There
Welcome back to the specialty chemicals edition of the newsletter. I get a bit self referential here, but please don’t hold it against me. I link often to Craig B. over at C&EN who is often on point with his reporting. Definitely give him a follow.
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I like to think of specialty chemicals sometimes as a race to see who can create category creating products first. In Formula 1 the fastest teams are at the front of the pack and in the specially chemicals race it’s all about what company is leading with their margins. Legacy specialty chemicals are largely commoditized and it’s all about who can launch that new chemical product that changes the industry.
Evonik is attempting to do this with biosurfactants. Eastman is attempting to do this with sustainable materials. DuPont is buying their way into chemicals and materials used in electronics. Meanwhile companies like Huntsman who have been reliant on their legacy businesses have been under pressure from activist investors to change how they do business. All of the specialty chemical companies get compared to each other and those that slip in profitability or revenue can be judged harshly by their investors.
The problem with having an existing business is that you need to maintain that business and keep it competitive while also spending money on trying to develop that next product. The R&D team cannot just swing for the fences every time they step in the lab because they need to make sure the current customers are happy. Who else is gonna figure out how to rework the 4 bad batches of product that got made on second shift? Maintaining legacy business makes sense because that business pays for literally everything and how long should you wait for the R&D team to deliver the new shiny thing that will bring in all the money?
There is no easy answer on how much time is enough time to create something completely new. Evonik spent 10+ years working on optimizing their biosurfactant business before making a big bet on a plant in 2022. I often see 5 years as the furthest time horizon for innovation, but a lot can happen in two years such as a takeover by activist investors and being bought by a much bigger company. The chemical industry is for lack of a better word volatile and a five or ten year time horizon on product development seems like a luxury when sometimes CEOs can’t even last a few years in their positions.
This volatility actually doesn’t always do well for the employees and many often decide to leave before anyone can ask them to leave. This may be a form of unregretted attrition that is welcomed by shareholders in the form of free cost reduction, but if not controlled well it can hobble companies that were heavily reliant on humans driving their business and technical service processes. If a product development team sees a 70-80% turnover of the entire team it should be an indicator that something is fundamentally wrong. As Elon said “if you don’t make stuff, there is no stuff,” and I would add that if you don’t make new stuff all you have is the old stuff.
I think of the modern chemical industry as having started in the 1930s with DuPont and ICI starting off making a lot of new stuff in the form of polymers. Herman Staudinger didn't win a Nobel Prize for his research on macromolecules until 1953, which means that back in the 1930s making macromolecules was cutting edge research. Polymers, plastics, the companies that made them were really exciting back in the 1960s.
Right now, this same exchange happens, but instead of the word “plastics” I’m sure it’s something like, machine learning, but everyone is wearing athleisure clothing and drinking Kombucha.
Eventually, all of the competition catches up and everyone builds a chemical plant capable of copying the stuff that chemical companies made twenty years prior. This is actually the beautiful benefit of the current patent system. After 20 years from the filing date your patent is no longer valid (if it got granted) and now that intellectual property belongs to the public. This is how Mark Cuban can do his pharma company Cost Plus Drugs. Having a huge amount of production capacity and a knowledgeable workforce with engineers trying to make things more efficient means lower costs for everyone, or a race to the bottom.
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We can think of specialty chemicals as existing on a 30-40 year cycle. Adhesive and tire tackifiers were a nice specialty for Eastman, but with a lot of competition and low cost competitors from China it might be a better business for someone else. Just a few months after all these divestments Eastman then drops the mic in France with their billion dollar investment into circular plastics. After 40+ years a specialty chemicals business is really just commoditized chemicals, but not necessarily commodity chemicals. One company’s commoditized business is another’s specialty. Rinse and repeat.
Every few years a wave of start-ups appear and try to flip the table over. We are witnessing the attempted flipping of the table right now.