Consolidation and Commoditization of Chemicals and Technology

Consolidation and Commoditization of Chemicals

I am a Polymer Chemist by day and I work in the specialty chemicals industry as a product development chemist. You verify these claims with a visit to my LinkedIn page. While I am relatively new to the chemicals industry and by no means an expert — I can read.

I have noticed some global shifts of not just chemical companies, but also technology in general. The chemicals industry will be my first example and it is going through an intense period of mergers and acquisitions. Some of the biggest companies in the world are shuffling around their business, divesting risk, and making bets on the next 30 years.

Here are a few examples:

1. Dow and DuPont are merging, DuPont spun of the risky Chemours — a purposeful spinoff due PFOA liability suits.
2. Bayer spun off Covestro and is trying to buy Monsanto
3. ChemChina is buying Syngenta
4. Cytec spun off Allnex and Cytec was acquired by Solvay
5. BASF bought Chemetall, Part of Henkel, and wanted Monsanto
6. Praxair bought Linde AG
7. Airgas gets acquired by Air Liquide
8. Evonik bought part of Air Products

Enough listing, you get the picture. A nice visual of how the chemicals business is becoming commoditized can be visualized in this excellent figure form McKinsey and Company.

Figure from McKinsey and Company Article

My industry — thermoset resins — is becoming a commodity. Other materials such as batteries will become commoditized next. This is evident with Elon Musk turning on the Gigafactory — the world’s largest battery factory with a projected capacity to equal to the world’s current battery manufacturing output.

Over the next 30 years I think the world will see a few things occur.

1. Significant investment into the BRIC countries will result in a race for market share of commodities and soon to be commodity materials
2. Development of quantitative structure property relationship models that are applied to industry resulting in prediction of materials properties of formulations and new chemicals
3. Internet of Things, digitization of chemical manufacturing, advanced manufacturing, and automation of technical service jobs in recent commoditized markets.
4. Derivative effects in other industries such as electronics, computers, automotive, and energy generation

For instance if epoxy resin prices continue to decline wind turbine costs will come down and this will further depress energy prices. With depressed energy prices operation of fossil fuel plants will become more expensive. If battery technology is prevalent for large scale storage then grids will be less reliant on fossil fuels. If less fossil fuels are being consumed for energy then they can be turned into chemicals. Prices for raw feedstock will drop and specialty and high performance materials will get cheaper. Lower prices in materials will depress prices of derivative products. I don’t think we will see a death spiral here, but it will probably happen faster than we think.

Commoditization of Technology

My last point on derivative effects is already being experienced. The price of computing power has fallen like a rock and has experienced and something of an inverse trend to Moore’s law exhibited by the following figure from The Hamilton Project.

If the typical worker in 1982 wanted to purchase something with computing power of an iPad2, it would have cost more than the 360 years worth of wages.

Figure from The Hamilton Project

The price of computing power has dropped due to advances in manufacturing and the ability to fit more transistors on a chip. The materials required in the manufacturing of computing parts such as the polymers of motherboards and photo-resists are becoming commoditized (see first half of article).

Smartphone markets in the developed world are becoming saturated with what they can do in terms of computing power and market share. We may be at the peak of the current app boom especially with Snapchat’s IPO being overvalued despite the loss in market share of Snap’s users to Instagram stories. The ability of people to create, market, and sell their applications is easier than ever and the competition in this space is becoming tougher with less return on venture capital investment.

While there might be a shortage of software engineers and programmers to automate the manufacturing of boring stuff (chemical processes, supply chains, etc) there is no shortage of people wanting to become the next AirBnb, Uber, or Snapchat.

With an oversupply of available technology for available software to share and edit my photos the industry may be facing what has already happened and is currently happening in the chemical industry. Google is a great example for what happened with Alphabet and the spin-off of risk such as Google-X. This can be visualized below.

Figure from the Irish Times

This new structure for Alphabet allows for a few things to occur.

1. Risk generated by Calico, Google X, Sidewalk Labs, Google Ventures, Google Capital, Nest, and Fiber will not effect Google as strongly before and those arms can be closed or chopped and sold if they perform below expectations
2. Alphabet can acquire other companies and perhaps work on the same model that Koch industries has been operating (there is a difference between public and private).
3. Allows for vertical integration of systems such as if people have Google Fiber they can better consume products from Google. If people have Nest data can be generated to understand energy consumption in homes, which can in turn influence incubation of the right start-up at Google X to solve a problem we don’t know exists yet.

Koch industries has a similar model, but it’s private and gets a lot more bad press than Alphabet. It can be visualized in the picture below.

Figure from Creately

Koch Industries has vertical integration that is unparalleled when you think about it all of the sectors they operate in, but outside the scope of this current post.

As technology becomes more commoditized and expands into the developing world I would expect one of two things to happen.

1. Possible bust in the start-up bubble we saw in early 2000s with the dot com bust
2. Merger and Acquisitions of companies such as Alphabet buying Snapchat (once Snap Inc undergoes a correction) Spotify, Uber, or Lyft. Facebook has already done this with WhatsApp, Instagram, Oculus Rift, etc.

I think the 2nd option is the most probable and I think it is already occurring. It will be interesting to see if governments can stand up to these giants as having monopolies in the future. The last 30 years gave us the rise of technology and globalization. The next 30 years should be really interesting.

Thank you for reading.

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