General, News

In the Future, Will a Dow or a DuPont Need to Own a Plant Anyway

Even in the conservative chemical industry, fashions come and go. Offshoring supply chains in the current turbulent world is a bit passé, but outsourcing manufacturing seems on point as the Dows, DuPonts and Syngentas seek to become more asset-light by relying on third parties to produce anything from intermediates to more complex active ingredients.

Welcome to the world of the CMO (and CDMO), or Contract (Development and) Manufacturing Organisations, where chemistry-minded chefs diligently follow a customer recipe, and even add a bit of magic sauce here and there to develop the formula. One thing, if you have a job for them, you may need to join the queue as business is brisk right now.

“People conflate outsourcing with off-shoring but outsourcing is a trend that is accelerating. Offshoring is over, caput,” Ben Rosenzweig, executive Chairman of Ascent Industries, which manufactures defoamers, surfactants, lubricants and other ingredients. “Everyone wants their supply chain to be domestic or near shore. They don’t want to do it, but they want to see it and know where it is. We provide a lot of supply-chain security to those who traditionally looked at the lowest-cost providers and who, post Covid, saw their supply-chain completely snarled and half of their raw ingredients stuck in a container across the Pacific somewhere.”

The dangers of putting all one’s eggs in the same basket has only periodically played on the minds of the chemical industry’s titans. Perhaps now is one of those times. Huge integrated chemical complexes sprung up producing everything under one roof. Some of them continue to thrive (the US, Middle East), others in energy disadvantaged areas like Europe are being spliced and diced or undergoing a bit of “open heart surgery” as BASF CEO Martin Brudermueller put it recently.

Where companies want to be more asset light, contract manufacturers step into the breach. It’s telling that while parts of the chemical industry complain of destocking and slower factory run-rates, there are CDMOs short on capacity and having to be selective on the jobs they take.

Novozymes A/S is just one company that has suffered this year.

The demand for its probiotics used in supplements is there, the Danish company has the product and solutions ready, but capacity constraints at the custom manufacturers has been holding things up, CEO Ester Baiget said in an interview with chemicalESG.

Valerie Diele-Braun, CEO of CABB Group, which makes a variety of fine chemicals and active ingredients found in herbicides and drugs to food and personal-care products, said she is seeing a clear outsourcing trend among customers investing in in-house capabilities, such as R&D, marketing, digitization, and working with reliable partners in areas where they can’t differentiate.

Outsourcing in its crudest form got going in the 1980s. Faced with increased government scrutiny into exactly what the chemical industry was manufacturing and how, companies started to ditch the more challenged parts of their portfolio. The simplest way was to sell sites to the plant managers who had been running them for years. They provided a bit of financing in return for a supply agreement, spawning a generation of single-site players dotted all over the place.

“They whipped out a lot of those manufacturing sites,” Rosenzweig said.

The issue now is that a lot of the managers-turned-owners are now in their 80s: they’ve given some shares to employees and their kids don’t want anything to do with pop’s surfactants business. Ascent sees an opportunity to roll up the market, a chance to broaden its portfolio of products that it can make for others, plus build an own-label business on the side. The more plants the better as it eases supply-chain risks for a company like DuPont. If a hurricane takes one out, a CMO of any scale has another elsewhere to ensure supply continues.

“We’ve seen a bunch of those chemical plants and we think we can be a home for some of them from an acquisition point of view,” Rosenzweig said in an interview with chemicalESG.

Couldn’t the Dows or DuPonts in the future just ditch manufacturing altogether and become innovation houses, their sole purpose to dream up new molecules, formulations and materials, while a third party runs their production in the background. The pharmaceuticals industry is further down the road on this, relying more heavily on CMOs and CDMOs, which provide additional services in the actual development of the product.

And what does the rise of the CMO mean for a company like BASF, where operating sprawling, integrated manufacturing sites — known internally as Verbunds — is a quasi-religion taken to dizzying heights in terms of efficiency. Even BASF, earlier this year, had to announce the planned closure of several major plants (including caprolactam, ammonia and TDI) at its flagship Ludwigshafen Verbund due to high production costs.

One asset-light contender snapping at BASF’s market share in UV absorbers and plastic additives is Suqian UniteChem.

The Chinese company is taking a very different approach. Rather than build a plant in Europe, it will manufacturer products in China, where it’s backward integrated into raw materials, and use warehousing capacity to compete with BASF. While some Chinese players have previously dipped in and out of the European market opportunistically when margins are high, UniteChem says it will be a permanent fixture, even when shipping costs spiral, thanks to its stockpiles of product. Like that, it hopes to overcome customer fears around offshoring as automotive OEM production runs can be 4-5 years. The model is working in Europe and UniteChem is doing a copy and paste job in the US now, adding warehouses there.

“Building a chemical factory in Europe is not the most fashionable thing now,” Jan Kreibaum, UniteChem’s global head of strategy, said in an interview. “To get approved by these key customers, the top 20 or 30 in Europe, you need to be perceived as a credible long-term player.”

Compare that with the EU10 billion construction cost of BASF’s latest Verbund project in Zhenjiang, China. It’s an all or nothing project that should be completed by 2030: scaling it back in these times of geopolitical tensions wasn’t an option.

After the current splurge on Zhenjiang is done, BASF’s future investments will be much more balanced across Asia to diversify and create a more “solid regional footprint,” according to Brudermueller. BASF has big plans to be a major supplier of battery cathodes, for instance, and wants to tap value chains like nickel, the CEO said. That could lead it to investments in a country like Indonesia, he added.

Regardless, Brudermueller insists there’s plenty of life left in the Verbund concept. As well as being the most efficient way to manufacture chemicals, sustainability issues are far easier to address on a huge single site than trying to cut CO2 emissions at multiple plants dotted around the place, he added.

“The Verbund has always changed in the 158 years at Ludwigshafen. We always learned something from it. But with all the exercises, we always come to the conclusion that it’s a cool concept,” Brudermueller said.

And it’s not just BASF. That goes for the inter-company Verbund, where five or six companies are interconnected, he said.

“I’m deeply convinced the Verbund will play its role for decades going forward.”

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