Commodity Chemicals Get a Bad Rap
The terms "specialty chemicals" and "commodity chemicals" have
been used extensively in the chemical industry for many years.
As indicated in the definitions above, these terms can be used
in a variety of ways, sometimes seriously and sometimes in jest.
One way these terms are used quite frequently, and in our view,
improperly, is to imply that specialty chemical businesses are
more attractive than commodity chemical businesses.
While there certainly are many cases where this type of characterization
is on the mark, there are also many other situations where this
is not accurate.
In the article that follows, we will explore this subject in
more detail.
Commodity Chemicals
Get a Bad Rap
Definitions
The initial definitions used come close to generally accepted
meanings, i.e. specialty chemicals are products sold for their
performance characteristics and which are low in cost in relation
to the total cost of the customer’s product, while commodity
chemicals are products sold based on their chemical specifications
and which are high in cost in relation to the total cost of
the customer’s product. It is also generally accepted that commodity
chemicals are basic and intermediate feedstocks produced at
the front end of the chemical chain, such as olefins and aromatics,
whereas specialties are produced much further downstream. These
definitions however, have nothing to do with the relative attractiveness
of a business.
Synonyms
Commodity chemicals have also been called basic chemicals, process
chemicals and industrial chemicals, to name a few terms used
with synonymous meanings. Specialty chemicals are also referred
to in synonymous terms, such as performance chemicals. Again,
regardless of the label, profitability and attractiveness are
normally not a defining characteristic of either type of business.
Is there something in between commodity chemicals and specialty
chemicals? A recent article on Clariant described how they have
set up a semi-specialty chemicals business unit, which it seems
is a term used to connote product lines which are not deemed
to be true specialties. This illustrates the fact that as you
go from one end of the chemical chain to the other, there are
not hard and fast definitions.
Which is more attractive?
Some of the less-than-serious definitions on page one relate
to the fact that the term "specialty chemicals" is often used
to connote a strong business, while "commodities" is almost
a 4-letter word in some circles. It is here where these terms
are misused.
For example, when measured by operating income as a percentage
of sales averaged over 5 years, Value Line’s specialty chemicals
group significantly underperformed the "basic" or commodity
chemicals group (see below).
And when measured by return on total capital employed over the
same 5 year period, commodity chemicals again posted significantly
better results (see below).
Today however, many chemical companies shun the commodities
label (Nova is a notable exception). While some of this is aimed
at feeding perceptions on Wall Street and otherwise trying to
improve valuations, there is no basis to assume that one type
of chemical business is more or less attractive than the other,
based on these labels alone.
Questions:
Is Solutia a commodity chemicals company or a specialty
chemicals company?
Solutia is classified as a commodity chemical company
by Value line but is classified as a specialty chemical company
in the Dow Jones industry groupings.
What about Hercules - commodity chemicals or specialty
chemicals?
Hercules is a specialty chemical company according
to Value Line but a commodity chemical company in the Dow
Jones groupings.
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