Specialty Chemicals
Solid vectors of growth
Whereas bulk chemicals directly feel the sting of higher feedstock and energy prices, performance chemicals are in a better position not only to pass on costs, but cash in solid margins, and this is because specialist formulations have a well-established place in different end-markets. The harder these molecules are to replace, the less exposed they are to price-driven competition.
"If it comes to a situation when a product crosses the limit of affordability for customers or if an ingredient has structurally poor availability, IMCD’s expertise is chiefly crucial because we have the toolbox to propose alternative solutions by reformulating a product to make it more affordable,” said Emmanuel Colette, business group director for APAC (Food and Nutrition) at IMCD, a specialty chemicals distributor.
Bigger headaches have been brought on by the shortages in raw material supply combined with the continuous bottlenecks in logistics, which have derailed orders and led to long waiting lists for some products. The global chip shortage continues to affect electronics and car production, in turn slowing down electronic chemicals as well as specialty plastics and high-performance fuels that go into the automotive sector. “Supply chain and logistic challenges have given us no break in the last two years, and there are little signs of change,” said Vimala Arumugam, managing director and head of Malaysia-Singapore at BASF, the world’s largest producer of specialty chemicals.
BASF, like most of the industry, had a fantastic 2021, closing the year with €78.6 billion in sales, 33% higher compared to the previous year. In Singapore, Arumugam said BASF registered a growth of 20% in sales, which amounted to €312 million for the year. In Q1 of this year, BASF had revenue of €23.1bn, 19% higher compared to the same time last year. Even though the growth trend continues, Arumugam cautions for the second part of the year: “The first quarters of 2022 announce sustained growth, echoing the global sentiment. However, we are closely following geopolitical events whose impact may not be felt yet but could be later on,” she said.
If we look at the performance of the main chemical players in Singapore (and globally), many have registered more than 20% growth in FY21 (Evonik, 23%; Arkema, 25%; Lanxess 23%), which was either maintained or exceeded in the first quarter of FY22 (BASF, 19% growth compared to Q1 of FY21; Evonik 22%; Arkema, 30%; Lanxess, 43%). Specialty chemical companies did not just manage to sustain the momentum built in 2021, but also accelerated growth, helped by higher chemical prices and robust demand. Reflecting the performance of their principals, distributors of specialty chemicals and ingredients recorded similarly high growth and profitability. Azelis completed the third-largest IPO on Euronext Brussels in 2021, as well as growing its revenue by 27.2%. Brenntag, the world’s largest distributor of chemicals, generated a gross profit 19.6% higher than the previous year, with an EBITDA of 29.5%. Between specialty chemicals and commodities, the specialties business stood out: “Brenntag Specialties grew substantially faster than Brenntag Essentials. In 2021, we reported an operating gross profit 25% higher compared to last year and an EBITDA of 34.3%,” said Henri Nejade, COO at Brenntag Specialities, commenting on the excellent results.
Even though half-year results might tell a more accurate story about the sector’s resilience in 2022, most analysts forecast uninterrupted growth for this decade. By 2029, the global specialty chemicals market is expected to reach a value of US$827 billion, growing at 4.1% CAGR, compared to basic chemicals which are projected to a value of US$650 billion by 2030 (a year later). In Singapore, the EDB identifies four key growth sub-segments that promise the most opportunities: nutrition and agrifood; hygiene and health; smart materials and mobility; and sustainability. “These interests are a reflection of Singapore’s competitive advantages – stability, predictability, innovative spirit and operational excellence. We will leverage these qualities and capabilities to ensure that our Energy & Chemicals sector is competitive, future-ready from a climate perspective, and ready to ride on the Asia growth story,” said Ow Kai Onn, VP and head of chemicals and materials at the Economic Development Board (EDB).
It is in these four sectors earmarked by Kai Onn that investments have been ripe, both in terms of M&A, which shows more momentary, opportunistic trends, and in terms of capacity building and preparing for the long-term future. With nutrition becoming a powerful sector that drifts away from the traditional chemical space, this will be treated separately in the next article (see article titled Nutrition). For the remaining of this article, we will look at the care markets (pharma, personal care, and home care), sustainable products, and e-mobility.
Active M&A in the care markets
The “care” markets (home care, personal care, industrial care, and pharma) have been the most attractive for acquisitions. Already a leader in the market as the producer behind the popular Schwarzkopf brand, Henkel solidified its position in the professional hair market after acquiring the APAC Shiseido hair business. With China, India, Japan, South Korea and Southeast Asian countries at its doorstep, Singapore is spoilt with opportunities in the beauty sector. The same big markets also guarantee strong growth in the pharma and health sectors. Globally, 80% of Brenntag’s M&A investments go to life sciences. Similarly, Azelis also prioritized personal care, food, and specialty agri/horti in its 15 acquisitions completed since 2017, which have secured the Belgian distributor a presence in 12 APAC markets. Most recently, Azelis acquired a majority stake in Thai personal care distributor Catalite. Competitor IMCD completed five acquisitions in the past year, expanding its presence in Indonesia (in pharma), in Australia and New Zealand (home care and water treatment), but most importantly, in China, with three acquisitions in 2021, and a new one in 2022.
Global specialty chemicals player Lanxess created a new business unit, “Flavors and Fragrances”, to incorporate its newly acquired portfolio from Emerald Kalama Chemical with its heritage product basket from its Advanced Industrial Intermediates (AII) business unit. Lanxess completed other acquisitions in the consumer segment, buying two French companies (biocide specialist INTACE and animal health and biosecurity specialist Theseo). Within the Material Protection Products unit (MPP), Lanxess acquired the microbial control business of IFF (International Flavors and Fragrances Inc), a leading supplier of antimicrobial ingredients. Vinod Agnihotri, managing director for ASEAN and head of MPP in APAC at Lanxess, commented: “The company is pursuing a portfolio restructuring to stretch further away from unpredictable cyclical segments to more stable ones by creating a more robust consumer protection segment.”
Promising stability and robust fundamentals, the care markets have also lured distributors that have been more traditionally engaged with commodities further downstream. Surfactants provide this opportunity given their versatile applicability in soaps, detergents, lubricants, inks, adhesives, and fabric softeners, among others. With a footprint across all major APAC markets (China, Korea, India, Japan, and Southeast Asia), German distributor Helm is expanding its basic chemicals and derivatives portfolio of methanol, ethylene glycols, acetyls, and others, into the surfactants space. Daniel Loh, president at Helm Asia, looks at five key target sectors: automotive, electronics, construction, care, and bio-based materials – which he calls “an emerging but powerful growing segment.”
Defining sustainable products
Multinational American conglomerate 3M made a public commitment that all new products coming out of its pipeline will embed a “sustainability value commitment,” which means each product must demonstrate attributes like recyclability, reusability, waste reductions, water or energy savings, responsible sourcing, or the use of renewable materials, clarified Kevin McGuigan, VP at 3M Southeast Asia. 3M is not alone, as more companies are either innovating for sustainability, or are reviewing and reclassifying their portfolios to identify and qualify “greener” products, which can be found in every type of chemical, from surfactants to specialty polymers, construction chemicals (including paints and coatings and performance chemicals added to cements, concrete, etc.), electronic chemicals, water treatment chemicals, lubricants, paper and textile chemicals, and finally, agrochemicals and food additives, which constitute one of the largest market segments under the specialty chemicals umbrella.
The incentives to create more sustainable specialty chemicals are straightforward: The consumer demands it. GBR spoke to Stepan Company, a specialty chemicals producer operating a biodiesel and fractionated coconut methyl ester plant on Jurong Island that supplies surfactants to different markets.
“We note a diversified demand base for different products, such as more carbon-efficient cars, fresher and safer foods, more energy-efficient building materials, and, across all products, a higher sustainability value. While much of this demand is globally relevant, I believe it is much stronger in Asia given the region’s rapid industrialization and young demographic, factors that drive a very dynamic consumer sector.”
Allen Yu, VP Asia Pacific, LyondellBasell
For the past few years, Stepan has been investing in the technology and production capabilities to produce bio-surfactants made from vegetable feedstocks. In 2020, it bought NatSurFact, a technology platform that uses rhamnolipids to make bio-surfactants, and in 2021, it acquired a fermentation plant with a capacity of 20,000 t/y of biosurfactants in Louisiana. Asked about what is motivating these investments, David Ho, the general manager for APAC Surfactants business unit unhesitatingly pointed to consumer trends: “Within the consumer market, which covers home care and personal care, but also industrial institutions, we see a strong preference for everything natural and minimalist. People seek formulations that are biodegradable, plant-based, and gentle to the skin and to the environment. Out of concern for the environment, consumers are asking for waterless formulations, going back in time to when powder detergent and solid soaps were the norm. Biodegradability is another big trend, especially when it comes to hair conditioners or moisturizers.”
Rather than looking at sustainability as another differentiating, added-value feature, specialty chemical producers have seen a much larger opportunity (and perhaps becoming a necessity) to re-brand many of their portfolio contents using this sustainability filter. Stepan dedicates 80% of its R&D budget to sustainable products and practices, using a bio-index to measure the carbon footprint of each product. BASF has branded sustainable products as “Accelerators,” and set a target to achieve €22 million in sales from Accelerator products by 2025. Vimala Arumugam, managing director and head of the Malaysia-Singapore area at BASF, said: “While pushing innovation in more sustainable products, we do not hesitate to phase out products with proven sustainability concerns.”
BASF has already assessed 57,000 solutions to identify 16,000 Accelerator solutions, using a “Sustainable Solutions Steering method.” Similar sorting undertakings are also taking place among distributors. Nick Powell, SVP of global ingredients & specialties and president for EMEA and APAC at Univar Solutions, said: “The demand for more sustainable ingredients and products has accelerated so much so that we recently appointed a global vice president for sustainable and natural products to drive our strategy across different verticals. We are reviewing our entire portfolio of specialty ingredients, classifying them as natural and sustainable after referencing them against various technical criteria, and then condensing them into an offering that will help further enable our customer and suppliers’ relevant product initiatives and goals.”
Being classified as “sustainable” is already an important flex for corporates, and popular certifications like EcoVadis are helping the industry to both assess where they stand in their sustainability journey and showcase the badge of their positive developments. Azelis has earned the coveted platinum EcoVadis certification, while IMCD won the gold certificate, with both companies climbing to the top percentile of assessed companies. The specialty chemical market will also require third-party audits and certifications to validate sustainable products against an external standard, or else the green label may be too loosely applied, and eventually lose credibility. “Green products have a decisive role in a company’s market share, but it is important to ensure these green labels are a mark of real, tangible actions, and not a mere greenwashing exercise,” said Andreas Hauser, the CEO of TÜV SÜD Digital Service in Singapore.
Inspection, testing and certification service provider TÜV SÜD expanded its offer to test the chemical and biological composition of products to understand their sustainability value; yet these services are still selectively applied, and the industry needs an international benchmark to define itself by. This is how the Green Compass, an initiative by TÜV SÜD, together with A*STAR and JTC, appeared. Although this started in Singapore, Hauser hopes it can take off internationally, much like a similar industry benchmark called SIRI (Smart Industry Readiness Index), which was also launched by the German certification company and other partners in Singapore, before gaining international recognition.
A special subcategory of sustainable products is bio-based products. These point to a radical change in the specialty chemicals industry, which is changing its fossil fuel roots for organic feedstocks, sharing the same upstream with the food industry. With this switch, the criteria for sustainability go beyond the carbon footprint of the product (which is necessarily lower compared to fossil fuels-derived alternatives), to considerations like the conditions for cultivating the (feedstock) crops and the transportation distances from the harvesting field to manufacturing units.
Image courtesy of Univar.
THREE CASE STUDIES FOR BIO-BASED SPECIALTY PRODUCTS
1. Arkema will use castor oil at its soon-to-be-open polyamide-11 plant in Singapore:
When Arkema doubles its capacity for bio-based polyamide 11 after the inauguration of its new plant in Singapore, it will require more feedstocks and greater vigilance around the sustainability of its provenance. Danny Foong, general manager at Arkema Southeast Asia said castor bean, the raw material for its product, is almost an intrinsically sustainable feedstock: “Compared to other plants, like palm oil or soya, castor grows in very marginal environments near deserts, which means its plantation does not require deforestation, nor does it compete for land with feed crops. Moreover, once the oil is extracted from the seed, the cake can be used as fertilizer in the castor field.”
With 80% of all castor oil coming from the Indian state of Gujarat, Arkema, BASF, Jayant Agro-Organics, and NGO Solidaridad launched the first sustainable castor program to support Gujarati small farm holders in applying the best practices in terms of resource management, the use of fertilizers, but also making a sound profit. 13,000 ha of castor farming has been certified by the Sustainable Castor Association with the “Success” standard (Sustainable Castor Caring for Environmental & Social Standards) in the last six years since the project began.
2. Braskem uses the Brazilian sugar cane for its bio-based polymers within the I’m Green portfolio
“Braskem’s technology for ethanol dehydration is not solely restricted to producing polyethylene (PE). While bio-ethylene is our primary product, we can extract other components like green propylene. Our advantage is that we can add new steps along our current production chain and make further bolt-on investments at sustainable costs. As part of our I’m Green portfolio, we have already launched ethylene derivatives like the Green Wax, the world’s first renewably sourced polyethylene wax with the same properties as a fossil fuel wax. We have also launched the bio-based ethylene vinyl acetate (EVA), an elastomer polymer with a rubber-like feel for which we found a market gap in sectors like the footwear industry.” Roger Marchioni, Asia Director, Chemicals and Polymers, Braskem
3. Croda uses certified palm oil from Malaysia and Indonesia for its predominantly bio-based portfolio
“The short distance to the source of the feedstock, but also the fact that our raw materials are RSPO certified, greatly improves our sustainability footprint. Croda started offering palm oil-based products about 20 years ago, beginning with specialty esters, then ethylene oxides, compounds traditionally made from a petrochemical base. Today, we are very proud of the high rate of 60% plus bio-based products, which gives us a clear competitive advantage against our peers in the market with synthetic or chemical products. But we still recognize the need to introduce new products and we have announced a new range of biopolymers and biosurfactants with improved properties – for instance, used in formulations used in laundry softener.” Chan Chian Yeow, Site Director Croda Singapore
CONCLUDING THOUGHT
“The circular economy is a significant vector of growth, a type of growth that is sustainable in itself and looks at the future rather than a niche that may disappear tomorrow. My message for the industry is innovation should look at long-term returns while balancing the need for short-term gains.”
Gulferaz Ali, VP and Managing Director, Eastman Asia Pacific (APAC)