Image courtesy of Lanxess

There have always been at least three things to consider in making a complex formulation: what the customer wants, what the regulator demands, and what market forces allow. Each of these is becoming increasingly more complicated, tugging at the very nature of the business. The chemical industry is a B2B platform, sitting at the basis of virtually all value chains, but it is starting to get much closer to the end-consumer: performance chemical and ingredient suppliers are now routinely co-designing with their customers end-products in a trend that has been described “chemistry as a service.” 

Furthermore, stricter health and environmental regulations challenge the essence of the chemical industry, pushing for a redefinition of what chemicals are – a fossil fuel-derived sector providing fossil fuel-derived puzzle-pieces to make everything around us. New chemistry crosses over with biology, as hydrocarbon feedstocks are replaced with greener ones. Biochemistry is born. 

Lastly, the industry is doing some of the hardest market calculations it has done in years – possibly ever – as demand, supply, and everything that links the two in the convoluted global value chain has not followed any “normal” pattern since the start of the pandemic.
To avoid making this article overly complicated too, we will break down these three considerations.

The market: Focused portfolios better positioned at the end of destocking cycle 

Unprecedented events led to an unprecedented destocking cycle that particularly impacted the specialty chemicals sector, a sector typically more involved in the production of durable goods as opposed to plastics or other chemicals used on an everyday basis (like packaging) and therefore absorbed more rapidly. Miscalculations were unavoidable. From Covid-era supply disruptions and stock-outs in 2020-2021, the industry slipped quickly into a period of overstimulated, fast demand, and record profits, warranting over-confident buying and over-stocking in 2022. But, with the Russo-Ukrainian war driving up energy prices, inflation and interest rates in a spiraling way, manufacturers started reviewing their working capital and reducing their borrowing. By the end of 2022, demand had declined, chemical prices declined too, and everyone from chemical producers to their distributors and end-manufacturers was left with very high inventory-to-sales ratios in the midst of a severely weakened demand and against the ticking clock of their products’ shelf lives. 

Since then, one of the longest destocking exercises in the sector’s history began. Fidelity International wrote that the destocking following the global financial crisis in 2007 only lasted about nine months. This time, it has taken over a year. Over this long waiting period, demand was severed since manufacturers were relying on existing inventories without making more purchase orders. As a result, profits, let alone premiums, became incredibly difficult, just as did planning and performance projections. Some of the largest specialty chemical players reported massive drops in sales, BASF closing 2023 with -21.1% year-on-year in total sales; Evonik, with -17%. 

After hitting rock bottom, most of the stock has been now digested in the markets, not without leaving the industry scarred. Raj Kaushik, director for Japanese specialty composites supplier, FRP Services, told GBR that end-customers are now holding less stock than they used to, buying patterns shifting from a quarterly basis to more frequent, local purchases as a result of uncertainty and currency fluctuations. 

Prices for specialty chemicals, including surfactants, remain relatively high, due to ongoing raw material shortages, explained Johnson Lai, vice president for Singapore-based toll manufacturer Chemical Specialties Limited (CSL): “It is a curious contradiction to see the price of raw materials for specialty chemicals escalating due to throughput cutdowns at a time when commodity basket prices are trending low. There are occasions that we know of when some specialty chemicals customers have faced a situation where they could not make their products because of a lack of securing sufficient feedstocks.”

Lai gathers from discussions with others in the industry that inventory should rebalance by the second half of this year, with some markets, like glycols, still dealing with large surpluses in China. 

Demand is expected to kick back stronger in emerging markets, especially in India, but also in China, despite China’s lower-than-expected and rather delayed bounce-back. Southeast Asia is also expected to deliver growth, with the automotive, electronics, construction, transportation, agriculture, and consumer markets fuelling the uptake of chemicals from specialty polymers to water treatment, food additives, flavor and fragrance ingredients, as well as surfactants, electronic chemicals, and oil field chemicals. According to S&P Global, the most in-demand chemicals are electronic chemicals, specialty polymers, cleaning chemicals, surfactants, and flavors and fragrances. 

André Nothomb, executive VP and head of government & public affairs for APAC at Syensqo, the specialty spin-off from Solvay, gave a general overview of the state of key verticals across its diversified portfolio: “For the automotive sector, the EV market is on the rise, although 2023 sales were tempered off by the removal of government subsidies as it is expected that consumers are prepared to make EV purchases without additional incentives. Aerospace, on the other hand, is having a big turnaround moment, after suffering terribly during the pandemic. The agro sector is going through a low cycle, with disruptions emanating from Ukraine putting pressure on global markets, but food production is always poised to grow long-term. Finally, the personal care and home care markets are a big focus, especially for bio-based solutions produced through nature replicating processes such as fermentation with unedible agriculture wastes and other by-products.”

The market size for the global specialty industry is expected to rise to $914.4 billion in 2030, up from $616.2 billion in 2022, according to S&P figures. The chemical industry will always be there, so demand is typically seen in a broader sense of long-term projections. Smart and timely positioning with current trends is also key for quicker gains. According to a BCG report looking at total shareholder returns (TSR) for the period 2018-2022, the capital markets have generally punished multispecialty businesses (chemical conglomerates with multiple unrelated businesses), favoring instead leaders in focused, high-growth segments, especially in life sciences, high-performance materials and chemicals related to green energy and the environment. Better TSRs were also seen in large-cap companies and in emerging geographies.

Recent M&A activity certainly reflects these trends with segment consolidation emerging as the main motivator for mergers and acquisitions, according to BCG. In the past few years, there have been multiple large-scale spin-offs and “split-ups” of large conglomerates along the broad distinction of specialties and commodities. There is a need in the market for the higher-margin, lower-volume businesses to be treated separately and independently from the volume-driven commodities. The most recent such split was completed at Solvay, with the original brand-name retaining the 40% essentials business, and the remaining 60% of revenue of the business was spun off as an independent public company, Syensqo. Syensqo covers specialty polymers, composites, surfactants, and others, serving the automotive, consumer goods, aerospace, food, and electronics sectors.

Similar historic splits include the DuPont and Dow US$150 billion mega-merger in 2015, only to be later split into three more focused companies (Dow, DuPont, and Corteva). More recently, specialty chemicals company Nouryon separated its essential base chemicals business, rebranded to Nobian. Leading distributor Brenntag also made the decision to bifurcate into two companeis, Brenntag Essentials and Brenntag Specialties. Besides these broad reshuffles, we also see a trend to narrow in on specific growth areas through both strategic asset acquisitions and mergers of entire companies. In the first category, Lanxess acquired the microbial control business of International Flavors and Fragrances (IFF) in 2022, consolidating its Material Protection Business, while divesting its polyurethane (PU) business. 

The specialty chemicals industry is becoming more specialized, with mergers giving way to absolute leaders in their fields. The DSM and Firmenich $20.7 billion merger resulted in dsm-firmenich, a “category of one” company in the nutrition, health, and beauty ingredients space. To reinforce its focus, dsm-firmenich carved out its animal nutrition business and acquired Adare Biome, a postbiotics company, which allows it to develop its (human) gut health portfolio. At the same time, DSM Engineering Materials unit and Lanxess’ High Performance Materials combined to form new entity Envalior, now the world’s largest engineering materials player. Other new, more specialist companies include Arlanxeo, a synthetic rubber leader, formed through the merger of Lanxess and Saudi Aramco, who later bought all shares, or Avient, following the acquisition of Clariant Masterbatches by PolyOne. In parallel, the distribution space is following suit, with vigorous M&A from players like Azelis (50 acquisitions in the specialty chemicals and food ingredients since 2016), IMCD (40 acquisitions), and Brenntag (30), many in APAC, consolidating in the most in-demand sectors.

Traditionally, specialty chemicals used to seek vertical integration back to intermediates and raw materials, but this is less popular today, the industry preferring to avoid the cyclicity associated with commodities and also the bigger burden of oil and gas exposure and higher emissions resulting from large-volume production. In fact, petrochemical companies, many of which are state-based and many from Southeast Asia and the Middle East, are now eagerly entering the specialties space (think Sabic’s investment in Clariant, Thailand state-owned PTT acquisition of Allnex, or Malaysia’s Petronas buy-out of Swedish specialty company Perstrop, as well as ADNOC’s bidding in Covestro). So the M&A landscape for performance materials is also shifting towards nicher markets, where companies can reap the maximum rewards of consolidation. 

Destocking pressures had decelerated M&A activity, not just because of less available cash, but also because it was difficult for buyers to know what they were buying – the cash flows and EBITDA performances of potential targets had been distorted by inventory imbalances and low sales. As these pressures ease and companies fall back into balanced inventory-sales ratios, it is possible to see more carve-outs, acquisitions, and mergers, driven by the need to build sharper yet more consolidated portfolios in high-growth segments and territories.

Regulators: The phase-out of toxic and “forever” chemicals brings forth new chemistries 

Bayer’s US$63 billion acquisition of Monsanto in 2018 was the company’s largest acquisition. In retrospect, it was also probably its worst and generally considered one of the worst deals in history. Not long following the acquisition, Bayer lost multiple lawsuits against Monsanto’s Roundup, a herbicide, which contained carcinogenic chemicals, namely polychlorinated biphenyls (PCBs). The use of PCBs has been restricted by many countries since the 1970s. The trials and multi-billion settlements helped bring back into question the regulation of potentially harmful chemicals. The current focus is on limiting the use of per- and polyfluoroalkyl substances (PFAs), which have been loosely regulated. New studies showed PFAs are accumulating in the environment, impacting human health. 

About 10,000 chemicals are listed in the EU’s latest ban of harmful chemicals, including PFAs and other so-called “forever chemicals” because they do not break down fully in the environment, leading to prolonged toxicity. Expected to be implemented by 2026, it would take the chemical world by storm. Under previous regulations, such as the  establishment of Registration, Evaluation, Authorisation and Restriction of Chemicals (known worldwide as REACH) in 2007, or the US Toxic Substances Control Act active since 1976, certain chemicals have been marked out for their potentially harmful effects on health and the environment, but these typically included a phase-out of these chemicals, with the specification “where possible.” Today, we see a stricter emphasis on cutting out PFAs, bisphenols, flame retardants, and phthalates, and, more than that, a regulatory preference for natural substitutes in new formulations. 

Throughout his past academic and industry roles, Amit Kumar Khan, now a co-founder and CEO of Singapore- based start-up Greenitio, was faced with a situation that is becoming more commonplace: "Multiple regulatory bodies such as the US Food and Drug Administration (FDA) often recommended replacing petrochemical molecules in formulations with safer, yet natural origin alternatives. I explored multiple natural alternatives earlier but failed to find existing bio-alternatives with equivalent performance to petrochemicals. I identified a clear market gap: there are many first-generation natural alternatives are there in the market but they fail to meet performance and cost expectation. This issue was not isolated to one industry I worked at or the pharma industry; other global regulatory bodies gave similar feedback, and pharma, cosmetics, and home care product makers struggled to find natural alternatives for petrochemical ingredients," he told us.

The EU ban on PFAs generated over 5,600 comments and requests for change from industry representatives and other specialists, according to German consultancy 5-HT Chemistry & Health. That exemplifies the laborious task of replacing old chemistries with new ones. The most impacted sectors are electronics, cosmetics, and medical devices. For MacDermid Enthone Industrial Solutions, a leader in surface finishing applications across the automotive, electronics, household, medical, and aerospace industries, innovative and sustainable technologies are a priority for both its decorative and functional portfolios. For instance, the company has introduced to the market a chrome-free etch technology for plating on plastics and trivalent chrome plating solutions. It takes time, however, for new solutions to be adopted by the market, and sometimes, alternatives are not yet available. 

“The chemical industry carries an unfortunate load from the past and continues to be subjected to scrutiny, sometimes necessary, other times undeserved. (…) What fewer people understand is the crucial role that the chemical industry has in helping multiple industries decarbonize, through innovative solutions, for which chemicals, including PFAs, provide indispensable functional properties,” said André Nothomb, executive VP, head of government & public affairs APAC and Singapore country director for Syensqo. 

The specialty chemicals sector has a huge task ahead to reinvent chemistries or to prove the negatives are outweighed by the positives of using certain controversial substances. 

Consumers: sustainability, functionality, desirability…and affordability

The enemy of differentiation - a core principle by which the specialty chemicals industry exists - is commoditization. Molecules that once were innovative soon become mainstream when the offer grows too large. Those chemicals that fall in the middle of the spectrum between a basic molecule and a specialty one, such as surfactants, synthetic rubbers, or certain fuel additives, have lower entry barriers and invite production en-masse. To stave off commoditization, the specialty chemicals industry has gradually become more entrenched in the end-to-end value chain, working closer with both raw material suppliers and manufacturing customers in the design of the right chemistry for the right product, something that has become known as chemistry as a service. 

“Customers in materials engineering are looking for more than a supplier – they seek a development partner. Getting it right on the first try is critical, so we walk with them from concept and design to implementation, taking into account the boundary conditions and functional requirements of end products, be these automotive, electronics and electrical, consumer goods, industrial, medical, or food packaging,” said Milan Vignjevic, APAC regional commercial director at Envalior, a leading engineering materials company. 

The intensification of the co-design and co-development trend between specialty chemicals companies and manufacturers is an embodiment not only of regulations, with SsBD (safe and sustainable by design) requirements impacting the pre-market approach, but also of consumer trends at the other end of the value chain. Consumers are asking for more from their products. “End consumers like you, me, and anyone else reading this article, are at the center of everything we do at IFF, so we spend a lot of time and resources understanding consumers,” explained Ramon Brentan, VP for scent, Greater Asia at IFF. 

The main consumer megatrend that IFF, along with other specialty formulators, identifies is sustainability (in the forms of wellness, eco-consciousness, and transparency). But sustainability cannot come at the cost of functionality. “(Consumers) want the same things: high-quality products that are good for them, that they can take delight in, and that are also sustainable – but only if affordable,” Jun Saplad, regional president for APAC at dsm-firmenich, told GBR. 

A PwC survey found APAC consumers, including Southeast Asians, are more eco-conscious compared to the global average, possibly due to the age profile of this population, with a large share of millennials, whom PwC also separately identified to be the top market for eco-friendly products. “Holistic well-being,” or “looking at beauty from inside to outside with a comprehensive and integrated approach,”  as Ramon Brentan defined it, is also more prevalent, particularly in the food and care markets.

Transparency is another sub-focus of sustainability. In 2019, the Michelle Pfeifer perfume line set a precedent in the fragrance industry by disclosing all ingredients on the bottle. Brandowners are now expected to disclose the ingredient lists on packaging, which consumers read more diligently, in search for more bio-based origins, another trend in itself. Sustainable packaging, both as a more eco-friendly choice and as a way to communicate sustainable content, is also more sought-after.

These consumer trends bring a third dimension for specialty chemicals innovation, beyond regulations and financial performance. Consumers are the final jury in the manufacturing court, influencing the guidelines by which a performance molecule stands out from the rest. Specialty chemicals and ingredient makers are reacting by offering products that meet multiple consumer requirements in a single package. For instance, a dsm-firmenich algae-based Omega 3 is more sustainable than its standard fish oil origin, offers twice the potency, and it has a fun and convenient delivery form, as a gummy, rather than a typical gel capsule. Sophisticated science, including chemosensory science to decode the emotions that taste and smell elicit, using MRI-backed data to test reactions to specific stimuli, and AI to generate new formulations, become necessary tools in the R&D lab. 

In the largest global sustainability survey called “Who Cares? Who Does?” released in 2023 by Kantar, a marketing insights company, it was found that consumer spending for FMCG categories will double from US$500 billion per year currently to US$1 trillion by 2027. However, other analysts point to the “intention-action” gap, or what people say versus what they do. Harvard Business Review said about 65% of respondents in a recent survey said they want to buy more purpose-driven brands and advocate sustainability, but only 26% do so. 

In the performance materials space, which supplies predominantly into durable markets like automotive, electronics, or aerospace, sustainable-by-design innovations fall more on improved functionality leading to lower emissions, as well as replacing fossil fuel raw materials with bio-based or recycled ones. For example, Envalior offers a repurposed grade made from abandoned recycled fishing nets, promising carbon reductions of up to 82% in end products like the Samsung Galaxy S22, Schneider Electric’s Merten recycled ocean material product range, and the Ford Bronco. Syensqo’s lightweight composite materials allow airplanes to save fuel by up to 20%. Here, whether the greener solution flies or not depends more on the OEM and the price tag it wants to pay for sustainability. Generally, consumers are more concerned with products that directly impact their health and wellbeing, rather than the impact of their purchases on the environment, PwC found. 

In a perpetually more complex world of chemistry, sustainability provides a common thread between regulations, consumers, and market forces. This will make sustainability-driven innovations the principal arena for differentiation in the competitive specialty chemicals industry.