This month’s column examines the business of specialty chemicals, which are omnipresent in our daily routines. Specialty chemicals deliver significant values to the end product and command a premium price. Innovation and product differentiation are the hallmarks of specialty chemicals. These are being threatened by waves of commoditisation.
Specialty chemicals are omnipresent in our daily lives. They make the toothpaste foam and lend a pleasing fragrance to the chore of dishwashing. They help us groom ourselves and keep our homes and workplaces spick and span. They enhance the appeal of the food and beverages we consume. Smartphones that rule our lives would be unthinkable without them. The global market for specialty chemicals was valued at $630 billion in 2019.
Performance Chemicals
Specialty chemicals are often used to impart specific attributes, like flavour, fragrance, texture, lustre, or colour to the end product. They may also be used to modify the physical properties like porosity, surface tension, or structural stability of the end product. Specialty chemicals are used to alter the performance and perception of the end product. They are almost always directly present in the end product used by consumers. Though they form a miniscule constituent of the end product, the specialty chemicals add significant value and often contribute to the brand-building of consumer products. Specialty chemicals have even enabled products to foray into new applications and markets. They are thus able to command a premium price.
Processes
The processes in the specialty chemicals industry usually employ complex chemistries involving hazardous reactions like hydrogenation, nitration, halogenations, etc. Batch processing is the norm in the industry. The manufacturing operations are often challenging with multistep reactions. The purities required are often exceptionally high. More often than
not, these processes are developed in-house after considerable investments in R&D. The chemistries and recipes are zealously guarded. The precursors and raw materials for manufacturing are usually very expensive. As many of these chemicals end up in consumer products, such as fabrics, food, and beverages, cosmetics, electronic goods, etc., the quality requirements are very stringent and unforgiving of even trace impurities.
Innovation
The specialty chemicals industry is knowledge-driven and lays great emphasis on innovation and R&D. Product offerings are often customised to meet the requirements of individual customers. Unlike commodity chemicals, specialty chemicals from various suppliers are not interchangeable with one another. These chemicals are used in such small quantities in the final product that their cost is not of much concern to the endusers. Switching to a low priced competitor could be ruinous as it would sabotage the quality of the final product. Businesses take great pride in their chemistry and molecules, which are closely guarded and cherished like family heirlooms. The specialty chemicals businesses thrive on their reputation of supplying innovative, differentiated products and providing responsive customer service. They are thus able to carve out niches for themselves in a widely fragmented industry. The market for specialty chemicals is consumer-driven.
Bundling Services
Sometimes specialty chemicals are so unique and customised that the supplies come bundled with services. A very good example of this can be found in cooling water treatment. Suppliers of cooling water treatment chemicals are also awarded O&M contracts with personnel stationed at the customer’s site to monitor the performance on a daily basis. Similar examples of handholding can be seen in applications of construction and industrial cleaning, where formulation and dosages are situation-specific.
Fragmented Industry
The specialty chemicals industry is deeply fragmented with more than 350 segments. These include polymer additives, construction chemicals, water treatment chemicals, colourants, surfactants, textile chemicals, flavours and fragrances, cosmetics and personal
care products, etc. Specialty chemicals can be grouped either by functions or by markets. A good example of the functional classification is provided by the popularly known CASE segment made up of coatings, adhesives, sealants, and elastomers. The market classification would be construction, electronics, automotive, oil field, etc. Four end-user industries – Construction, Electronics, Food and Beverage and Personal care and Hygiene – account for a lion’s share of the global consumption of the specialty chemicals.
Construction
Many economists believe that the post-pandemic recovery would be fuelled by a construction boom. A suite of chemicals is employed by the construction industry. These include concrete curing compounds, mould releasing agents, floor hardeners, surface retarders, water repellents, waterproofing compounds, adhesives, rebar coatings, epoxy grouts, and protective and decorating coatings. Chemical admixtures are the smallest constituents of the concrete mix, but provide significant benefits by enhancing the compressive strength, durability and surface finish. Salts of lignosulphonic acids and hydroxycarboxylic acids are used as retarders in hot climates to slow down hydration of cement and lengthening the setting time. In colder climes, calcium formate and calcium chloride are used to accelerate cement hardening and reduce the setting time. Adhesives find myriad applications in construction for tile fixing, panel fixing, floor covering, etc. Adhesives based on polyurethane, acrylics, and silicones are commonly used.
Food and Beverage
Chemicals are used as additives in foods and beverages to improve their safety, freshness, flavour, texture, and appearance. The main types of additives are – thickeners and stabilisers, emulsifiers, colourants, sweeteners, enzymes, and preservatives. Additives ensure processed foods stay safe and fresh on their long journey from factories to homes. Thickeners and stabilisers, referred to as food hydrocolloids, are added to imbue food with stability, structure, and mouthfeel that customer’s desire. They are commonly used in bakery and confectionery, dairy products, and frozen desserts. Many of these are derived from natural sources like proteins and starches, but they are also produced synthetically at
lower costs.
Electronics
The electronics industry depends upon a broad spectrum of specialty chemicals to manufacture various components. Electronic Chemicals, as they are called, are used in the fabrication of semiconductors, integrated circuits, and printed circuit boards, and photovoltaic cells. Electronic Specialty Gases are used in various fabrication processes like film deposition, film etching, substrate doping, and chamber cleaning. These include various silanes, halocarbons, arsine, diborane, phosphine, germane, and various oxides of nitrogen.
Care and Hygiene
This segment of specialty chemicals addresses our physical and psychological well-being. Consisting of products for personal and home care and for home and workplace cleaning, this segment has come into the forefront following the COVID19 pandemic. Surfactants, pigments, fragrances, and solvents are some of the major chemicals that go into formulation of the care and hygiene products.
Commoditisation
The specialty chemicals industry has been fighting strong headwinds of commoditisation and consolidation for several years. Commoditisation will remove product differentiation, the USP of the specialty chemicals business. The increased standardisation and competition will depress margins, which in turn will hurt investments in innovation. The specialty chemicals industry needs to innovate continuously to keep pace with the rapidly changing demands of the new economic order that is bound to shape the postpandemic world. This will also help it stave off commoditisation.
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