Moving into Specialty Chemicals

Performance chemicals offer higher margins, but the entry barrier is also steep.  

After nearly five years of planning, evaluation, and construction, last fall the US$200 million factory of the Kraton Formosa Polymers Corp. (KFPC) started operations at the Mailiao complex of the Formosa Plastics Group (FPG).

A joint venture between Taiwan’s FPG and U.S. specialty rubber and plastics maker Kraton Corp., KFPC was established to bring together FPG’s infrastructure and manufacturing capacity with Kraton’s high technology. The new plant is producing HSBC (hydrogenated styrenic block copolymer), a high-performance synthetic rubber additive produced from styrene and butadiene, two derivatives of naphtha.

As HSBC-infused materials are considered “purified,” HSBC products can receive U.S. Food and Drug Administration and Department of Agriculture approval for use in medical tubing and instruments, food packaging, and an array of other products. As a result, this high-value petrochemical commands prices two to three times that of regular rubber. Mike Wong, president of KFPC, estimates that the new plant will produce 30,000 tons of HSBC annually for some US$150 million in revenue.

The Industrial Development Bureau (IDB) under the Ministry of Economic Affairs forecasts that the new plant will drive some NT$15 billion (US$497 million) in downstream industrial development.

The Kraton-FPG tie up is the latest step in what the Taiwan government envisions as an upgrading of the domestic chemical industry into producing high-value “specialty chemicals.” Environmental concerns, trade barriers, and the eroding competitiveness of Taiwan’s petrochemical sector have all taken the shine off the industry, but the multidimensional specialty-chemicals sector still offers great opportunities. According to the Taiwan Chemical Industry Association (TCIA), Taiwan’s chemical output contains only 3-10% added value, much lower than the 20% or higher attained in developed countries.

Specialty chemicals, also called performance chemicals, generally don’t constitute the bulk of the material in an end product, but instead are usually added in small quantities to affect changes in the properties or performance of a product. Mike Wong says that additives such as HSBC may impact the “feel” of a product and how the material behaves – for example, putting the bounce in a rubber ball or making a diver’s fins more flexible.

As rising standards of living and economic growth generate demand for higher-quality consumer goods around the world, especially in Asia, demand is increasing for the use of specialty chemicals across a range of industries, including electronics, textiles, food, automobiles, optoelectronics, medical devices, construction, energy, and a host of others. Allied Market Research estimates that the global industry will reach a production value of US$233.5 billion by 2020.

Government assistance

Since 2011, Taiwan has set its sights on getting a larger slice of this market by investing some US$20 million annually into a variety of chemical R&D programs and projects.

The IDB’s High-Value Petrochemical Industry Promotion Office (PIPO) and the Department of Industrial Technology (DoIT), also under MOEA, aim at consolidating research capabilities across government, industry, and public-private research institutes to research, develop, and commercialize technological advances.

Liu Chih-chung, manager of the Materials and Chemical Industry Research Division for the Industrial Economics and Knowledge Center (IEK) at Taiwan’s premier research organization, the Industrial Technology Research Institute (ITRI), says that the government supports chemicals research in two primary ways. The first is a top-down approach in which government bodies assign specific research projects to various institutes, including ITRI as well as the Taiwan Textile Research Institute (TTRI) and the National Chung-Shan Institute of Science and Technology (NCSIST), the research arm of the military.

The second is a bottom-up approach in which private companies can apply for research grants and space in research labs under a variety of programs, such as DoIT’s A+ projects. Again, ITRI, TTRI, and others will likely be tapped for lab space and expertise.

As the chemical industry, like pharmaceuticals, involves significant research outlays and lengthy development times, much of the effort Taiwan has put into upgrading its chemical sector has yet to bear fruit. Yet many of the programs look promising. For example, NCSIST’s Chemical Systems Research Division is working with the industry to promote development of C5 derivatives – chemicals that are produced in small amounts in naphtha crackers and have a range of applications as both commodity and specialty chemicals. In a special report on C5 derivatives, international data analytics firm IHS notes that they can be applied to everything from autos, adhesives and electronics to personal-care products such as fragrance chemicals and even nutraceuticals like vitamins.

Since 2014, NCSIST has teamed up with private industry to develop the C5 series of derivatives into higher-value-added chemical products applied to the elastomers in medical and consumer products.

Local commodity petrochemical manufacturer USI Corp., a leading producer of polyethylene, is another entrant into specialty chemicals. Several years ago USI was interested in getting into the manufacture of CBC (cyclic block copolymer) advanced plastics, which are valued for their thermal stability, UV durability, high transparency, and purity.

USI lacked a pilot plant to perform test production, but it successfully applied to the government for technical support and funding, ultimately demonstrating its capability to produce CBC plastic. USI will begin production of the material under license from Dow Chemical Co. beginning this year.

“Although big American or European companies have the capacity for a pilot plant, Taiwan’s SMEs cannot bear the financial burden,” says IEK’s Liu. “This is where the government can provide assistance both technically and financially.”

Specialty chemicals not only provide higher margins but a high degree of product differentiation and customization, which tends to discourage customers from changing suppliers. That customer stickiness, in turn, provides some cushion against fluctuations in raw material prices. Rising costs can often be passed on to customers, as opposed to the commodity-chemical market in which cost is the paramount consideration.

Specialty chemicals also have high barriers to entry for would-be competitors – an advantage for incumbents, but a major hurdle for aspirants in Taiwan.

Ed Shober, senior vice president for specialty electronics chemicals supplier Versum Materials, a recent spinoff from Air Products, cautions that “the table stakes are high” for those looking to bet on specialty chemicals. “To put in a new lab requires a lot of investment,” he says. “You’re spending US$20-30-40 million on equipment and tools.” More importantly, “it requires a real hone-in on customer service, a high level of technology and R&D, and the experience of people who understand the needs of industry. You just don’t get into this market easily.”

Shober notes that even some of the world’s largest chemical manufacturers have failed in attempts to break into specialty chemicals markets because they lacked the technology and attention to customer service needed for the industry. Versum spends some 15% of its revenue on R&D.

Versum has two manufacturing facilities in Taiwan producing specialty chemicals primarily for the semiconductor industry: one to manufacture specialty gases called precursors, and a second, a joint venture with San Fu Chemical Co., to produce slurries. Al Chuang, senior director for Versum’s Advanced Materials branch, says that the chemicals are produced in Taiwan in part because they are highly sensitive and can easily be damaged during shipping, but more importantly to ensure consistent quality.

For KFPC, the FPG-Kraton joint venture, the object is to achieve synergies. FPG gains access to highly specialized chemical markets, while Kraton is able to leverage FPG’s infrastructure, resources, and experience in the Asian market, where Kraton wants to expand. “For Kraton to come into Asia on its own and start from scratch, it would take a little longer and would be a little more challenging,” says Mike Wong. “Having a partner like FPG provides a lot of support.”

With Taiwan’s commodity chemical makers seeing little prospect for development, tie-ups with well-established specialty chemical companies might offer the best way forward.

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