By John Richardson
CHEMICALS analysts love to talk with great enthusiasm about the specialty end of this business because margins per tonne can be a great deal higher than in boring old plain vanilla commodities. Specialties is an exciting story to spin to investors, as it contains “buzz” phrases such as “value addition” and “innovation”.
But we know that this hasn’t always worked out successfully for chemicals companies that have made the leap downstream. In fact, without wanting to name names, for some it turned out to be a very bad mistake.
Equally, though, it is possible to point to instances of great success, where diversification into specialties has worked, especially for companies with no hydrocarbons feedstock advantage who also operate mainly in mature markets.
What if, however, the rules of the game have entirely changed? What if in a deflationary, post-economic Supercycle world, chemicals companies need to be even more careful about the constant hype surrounding specialties? Do these new rules require an entirely different approach to commodities versus specialties?
Yes. Here are seven reasons why:
- State-owned chemicals companies, especially the Chinese state-owned companies, are going to play a very big role in future mergers and acquisitions.
- China in particular is searching for solutions and not necessarily for profits. It needs the higher-value chemicals expertise to solve its environmental crisis. It simply must achieve a major clean-up of its food, water and air, otherwise its economic reform programme will fail.
- Affordability, affordability and affordability are also three major priorities in China, now that the temporary 2008-2013 wealth effect is over. Average Chinese income levels mean that specialty chemicals that go say into flat-screen TVs or smartphones have to be very competitively priced.
- Equally, affordability will apply to the main focus of China’s future export trade, via its New Silk Road or One Belt, One Road initiative.
- In China, the specialty business might therefore be more of a volume than a margins game. Thus, of course, today’s specialties could become tomorrow’s commodities.
- As for the rest of the developing world, stories about the rise its middle classes have been hugely overblown. So here again, affordability will really matter.
- The future in the developed world will also be about keeping costs down because of ageing populations.
Sure, some chemicals solutions – those that are truly unique – will continue to add fantastic value.Let’s imagine that you make specialty chemicals that go into air-purifier systems that make these systems so unbeatably efficient that cost is not the issue, even in a country such as China.
Unless you can become and remain truly unique, however, the seven challenges listed above threaten you with this scenario:
- You shut down a 200,000 tonne/year styrene plant down to make only 20,000 tonnes a year of a specialty chemical.
- But you end up with speciality margins that are only slightly better, or perhaps even worse, than if you had stuck with styrene.
- And, of course, a small margin on 200,000 tonnes is better than a small margin on 20,000 tonnes that might not even cover your investment cost.