Specialty commoditization

Commoditized specialty chemicals contain commodities as active ingredients and are interchangeable. Thus, ethylene glycol 99% is a commodity. If it is diluted with water, enhanced with a colorant, and sold as superantifreeze in a retail shop, it becomes a commoditized specialty. 

Chemical products can be roughly segmented into basic chemicals, polymers, specialty and performance products, industrial gases, and agrochemicals. However, for practical purposes they are usually classified as commodities and specialties , the latter having higher value added and distinctive key success factors that allow for some additional differentiation between competing products. Albeit this distinction is commonplace in the industry, it should be kept in mind that chemical commodities are not nearly as commoditized as true commodities such... 

In the late 1990s, when investors noticed the combination of declining growth and declining capital productivity, many lost faith in the segment. While fears of repercussions from the Asian crisis proved unfounded, other structural factors such as Asian competition and the commoditization of many former specialty products took effect in their stead. 

Currently, specialty chemical players too are benefiting from better industry conditions, significant cost improvement efforts by many players, and a very cautious stance on investments and acquisitions over the last few years. However, we predict that the pre-1997 glory days will never return. Rapid commoditization of parts of the portfolio and relentless price pressure will continue to endanger business models. For some players, a rigorous focus on cost will be the path to success, others - and these businesses will still earn a substantial premium on industry average profitability - will develop true customer solutions. 

The specialty chemicals business needs to face facts the drop in profitability that characterized the 1990s has not abated in the new millennium. Competition has intensified, capital productivity has fallen, and the specialties niches are shrinking with ongoing commoditization. This does not have to be the end of the road, but specialty companies have to take a long hard look at themselves and decide whether they are prepared to fight back, and how they can best equip themselves to do so. 

Then, however, the market started to change. With the arrival of the new millennium, the specialty chemical business did not look so special anymore. Volume growth in many segments slowed as markets matured. Prices and margins came under more pressure due to increased commoditization and lower innovation rates. While prices declined, costs went up (Fig. 8.3). In Germany, for example, factor costs for chemical production increased by 2.9 percent p.a. over the last 15 years, while at the same time product prices declined by 0.4percent p.a. Though these numbers include commodities, the trend holds true for specialty products as well. 

Innovation is needed to steer the market back into specialty territory customers will only grant a company specialty margins if they perceive differentiation. Innovation is also the best strategy to raise the barrier against low-cost market entrants. Or, as one CEO put it bluntly Commoditization only happens when you let if . 

First, the process of building new activities along the value chain will bring the chemical industry even further toward the end customer as companies reach out to new groups of customers further downstream. At the same time, we will see an even further increase in the commoditization of specialties because customers will grow more sophisticated, and producers will not be bringing anything new to the table. 

The Commoditization of Specialty Chemicals - What Happens Next. ... 

Drive to low-cost operations. The inevitable drive toward commoditization of large-volume work-horse surfactants will require manufacturers to relentlessly drive cost out of their systems and increasingly shift the burden associated with sales, general operations and administration (SG A), and research and development (R D) onto higher-value, smaller-volume specialty products. 

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