# The chemical industry: what it makes and how it is organised: The sectors and why their economics differ

Source page: https://www.materialinsights.org/learn/chemicals/chem-industry-map/p2/

[Understanding Chemicals](https://www.materialinsights.org/learn/chemicals/) / [Module 1: The chemical industry: what it makes and how it is organised](https://www.materialinsights.org/learn/chemicals/chem-industry-map/) Part 2 of 5

## The sectors and why their economics differ

A sulphuric acid plant and a drug plant both belong to the chemical industry, yet they compete in completely different ways. This part sorts products into four business types (commodity, pseudo-commodity, fine and specialty), follows one molecule up the value chain, and then compares the main sectors on volume, value, growth, margins, research intensity and customer relationships.

### 2.1 Two questions sort every product: how much is made, and is it bought for what it is or for what it does?

Brennan, drawing on an older scheme by Kline, sorts chemical products with a two-by-two grid. One axis is annual volume, high or low. The other is whether the product is undifferentiated, with the same composition whoever makes it, or differentiated, sold on performance.

High volume and undifferentiated gives the true commodity: ethylene, ammonia or sulphuric acid, traded worldwide to the same specification and often made from captive raw materials. High volume and differentiated gives the pseudo-commodity. Polymers such as polyethylene and PVC began as commodities, but producers learned to vary process conditions to make dozens of grades for film, pipe or moulding, so they now behave partly as differentiated products. Low volume and undifferentiated gives the fine chemical, made to tight specifications such as pharmaceutical or food codes: aspirin, citric acid, tartaric acid. Low volume and differentiated gives the specialty chemical, designed to solve a customer's problem and described by its function: catalysts, water treatment aids, oilfield chemicals.

Pollak, writing about fine chemicals, adds rough numbers. Commodities usually sell for less than $1 per kilogram at cyclical, transparent prices and are made in dedicated plants. Fine chemicals are single pure substances, made in quantities of up to about 1,000 tonnes a year in multipurpose plants by multistep batch processes, and sell for more than $10 per kilogram. Specialties are formulations, usually sold under brand names. Fine chemicals are bought for what they are, specialties for what they can do. The thresholds are arbitrary: aspirin, paracetamol, lysine and methionine are each made in more than 10,000 tonnes a year at below $10 per kilogram.

Data Four business types in the chemical industry

| Feature | Commodity | Pseudo-commodity | Fine chemical | Specialty chemical |
|---|---|---|---|---|
| Volume | High | High | Low (Pollak: up to about 1,000 t/yr) | Low |
| Basis of sale | Composition, same everywhere | Performance of a grade | Composition, tight specification | Performance, often branded |
| Typical plant | Large, dedicated, continuous | Large, dedicated, many grades | Multipurpose batch | Small, flexible, multiproduct |
| Customers | Many, but volume concentrated in a few | Few large buyers | Few, buying moderate amounts | Many, each buying small amounts |
| Examples | Ethylene, ammonia, sulphuric acid | Polyethylene, PVC | Aspirin, citric acid, drug intermediates | Catalysts, water treatment aids, formulated drugs |

 Source: Brennan (2020), Ch 2 Market evaluation and forecasting, pdf pp. 27-29, Tables 2.1-2.3

- Brennan (2020), Ch 2 Market evaluation and forecasting · pdf pp. 27-29
- Pollak (2011), Ch 1 What Fine Chemicals Are · pdf pp. 25-27
- Pollak (2011), Ch 2 The Fine Chemical Industry · pdf p. 34

### 2.2 Value multiplies at every step from methanol to a packet of tablets

Pollak illustrates the value chain with Pfizer's cholesterol drug Lipitor (atorvastatin), the world's best-selling drug in 2009 with sales of $11.4 billion. The figures are indicative, but the pattern is the point.

The chain starts with methanol, a one-carbon molecule made at about 32 million tonnes a year by around 100 producers, with more than 100 applications, at about $0.2 per kilogram. Acetic acid, one step further on, sells at about $1 per kilogram, with 8 million tonnes a year and 25 producers. Then come the fine chemicals: a first intermediate at about $100 per kilogram and 200 tonnes a year from ten producers, an advanced intermediate at $200 per kilogram, and finally the active pharmaceutical ingredient (API) itself, atorvastatin, at about $2,000 per kilogram, 400 tonnes a year, made by one producer through about 20 manufacturing steps. Formulated into tablets and sold in pharmacies, it is worth about $80,000 per kilogram, and it has millions of customers.

Four things change together as you climb. Price per kilogram rises about 400,000 times (80,000 / 0.2). Volume falls from tens of millions of tonnes to hundreds. The number of producers and customers per product shrinks to one, before the formulated drug fans out again to millions of patients. And the plant changes from dedicated continuous units to multipurpose batch reactors, then to formulation and packaging lines. Pollak also notes that in pharmaceuticals the synthesis of the API is called primary manufacturing and the formulation into tablets secondary manufacturing. Most of the value sits not in the chemistry but in the patent, the clinical evidence and the distribution.

Data The value-added chain for atorvastatin (Lipitor), indicative 2009 figures

| Stage | Product | Price ($/kg) | Production (t/yr) | Producers | Manufacturing steps |
|---|---|---|---|---|---|
| Commodity | Methanol | 0.2 | 32,000,000 | 100 | 1 |
| Commodity | Acetic acid | 1 | 8,000,000 | 25 | 2 |
| Fine chemical | Early intermediate (hydroxynitrile) | 100 | 200 | 10 | 5 |
| Fine chemical | Advanced intermediate | 200 | 300 | 5 | 15 |
| Fine chemical | API (atorvastatin) | 2,000 | 400 | 1 | 20 |
| Specialty | Lipitor tablets | 80,000 | 400 | 1 | +2 |

 Source: Pollak (2011), Ch 1 What Fine Chemicals Are, pdf pp. 27-29, Table 1.1  Worked example

#### How much of a pack's price is chemistry?

Pollak gives a pharmacy price of about $400 for 100 tablets of 80 milligrams. That pack contains 100 x 80 mg = 8 grams of atorvastatin. At $2,000 per kilogram, or $2 per gram, the API in the pack costs about 8 x $2 = $16. That is 16 / 400 = 4% of the price paid, matching Pollak's estimate. The other 96% of the pharmacy price lies outside the chemistry of the active ingredient.

- Pollak (2011), Ch 1 What Fine Chemicals Are · pdf pp. 27-29

### 2.3 The main sectors differ in size, growth and how much value each tonne carries

Cefic groups chemicals into basic inorganics, petrochemicals, polymers, specialties and consumer chemicals, and treats pharmaceuticals separately. Add agrochemicals and fertilisers, and fermentation-based industrial biotechnology, and you have the map used in this course.

Basic inorganics are old, huge and slow. Sulphuric acid headed the US list of chemicals by volume in 2000 at 87 billion pounds (about 40 million tonnes), growing only 1.2% a year since 1993. Of the top 15 US chemicals, only five were organic. Petrochemicals are the olefins and aromatics and their first derivatives; US ethylene output grew 4.3% a year over the same period, faster than the economy, pulled by polyethylene. Polymers are the largest single outlet: Wittcoff estimates that over half of all organic chemicals end up in them.

Further downstream the picture changes. Kent puts world specialty chemicals turnover at about $200 billion around 2000, spread across very many suppliers. Consumer chemicals, the soaps, detergents and toiletries, are dominated by a few large consumer goods firms with heavy advertising budgets. Agrochemicals were a market of about $30 billion around 2000, while fertilisers are tied to ammonia, of which about 80% goes to agriculture. Industrial biotechnology products excluding ethanol were worth about $17 billion in 2002.

Pharmaceuticals carry by far the most value per tonne. In the US in 1999 they were 25.7% of chemical industry shipments but 32.3% of value added. Basic chemicals were the reverse: 25.5% of shipments but only 21.9% of value added. Products with small volumes and specialised markets add more value per dollar of sales, and are less capital-intensive but more labour-intensive to make.

Data US chemical industry by sector, 1999: share of shipments and of value added

| Sector (NAICS) | Shipments ($ billion) | Share of shipments | Share of value added |
|---|---|---|---|
| Basic chemicals (3251) | 106.9 | 25.5% | 21.9% |
| Resins, synthetic rubber, fibres (3252) | 62.5 | 14.9% | 11.9% |
| Pesticides, fertilisers, agricultural chemicals (3253) | 21.7 | 5.2% | 4.7% |
| Pharmaceuticals and medicines (3254) | 107.9 | 25.7% | 32.3% |
| Paints, coatings, adhesives (3255) | 27.5 | 6.6% | 5.6% |
| Soap, cleaning compounds, toiletries (3256) | 53.3 | 12.7% | 14.2% |
| Other chemical products (3259) | 40.0 | 9.5% | 9.4% |
| Total (325) | 419.7 | 100% | 100% |

 Source: Wittcoff (2004), Ch 1 The Chemical Industry, pdf p. 44, Table 1.2  In the data

#### Europe wins downstream and loses upstream

Cefic's 2024 data for EU trade with the rest of the world show the pattern. Specialties: exports EUR 75.7 billion, imports EUR 44.0 billion. Consumer chemicals: exports EUR 42.1 billion, imports EUR 13.0 billion. Polymers: EUR 34.7 billion out, EUR 30.2 billion in. Basic inorganics: roughly balanced at EUR 23.8 billion and EUR 22.5 billion. Petrochemicals: exports EUR 49.2 billion but imports EUR 69.9 billion, a deficit of EUR 20.7 billion. In 2004 the EU still had a petrochemical surplus of about EUR 4.8 billion. High-cost feedstock hurts most where products are least differentiated.

- Wittcoff (2004), Ch 1 The Chemical Industry · pdf pp. 44, 46, 77-78
- Wittcoff (2004), Ch 0 How to Use Industrial Organic Chemicals · pdf p. 29
- Kent (2012), Ch 1 Recent History of the Chemical Industry 1973 to the Millennium (Aftalion) · pdf pp. 32, 49, 53
- IEA (2018), The Future of Petrochemicals · pdf p. 24
- Kent (2012), Ch 30 Industrial Biotechnology: Discovery to Delivery · pdf p. 1133
- Cefic (2025), Facts and Figures data file · sheets 'Extra-EU27 Exports', 'Extra-EU27 Imports', 2004 and 2024

### 2.4 Margins, research intensity and customer ties all rise as products become more specific

Brennan contrasts the two extremes. A commodity business spends its research on process technology, runs large dedicated plants, sells large volumes to a few big customers with little technical service, and sees its prices swing with the business cycle. A specialty business spends its research on applications and field testing, runs small flexible plants, sells small volumes to many customers with a high degree of technical service, and its prices hold up much better through the cycle.

Research intensity follows the same gradient. Wittcoff reports that companies without a pharmaceutical arm and with little specialty business normally spend 3-4% of sales on R&D, that oil companies' chemical arms spend about 2%, and that research-based pharmaceutical companies spend 10-25%. True specialty companies sit at about a third of the pharmaceutical level. US data for 2000 show 3.6% for basic industrial chemicals, 1.0% for fertilisers, 4.2% for specialties and 14.5% for life sciences.

Margins depend on two different routes to advantage. Wittcoff observes that specialty sellers are generally more profitable; commodity firms can win only on cost. In 2000 ExxonMobil's chemical operating profit was 5.4% of sales and BASF's 8.5%, but SABIC, with nearly free gas, earned 22.8%. Monsanto earned 28.3% and the industrial gas company Praxair 24.2%.

Barriers to entry differ too. Wittcoff puts the minimum ticket for a basic chemical business at about $1 billion of capital. Pharmaceuticals needed about $500 million of R&D per new drug in the 1990s, and Kent notes that development time rose from three or four years to ten or twelve after the thalidomide disaster. The detergent business needs money for advertising instead.

Data Research spending as a share of sales

| Sector or company type | R&D as% of sales | Basis |
|---|---|---|
| Fertilisers (US, 2000) | 1.0 | Sector average |
| Oil companies' chemical arms | about 2 | Wittcoff estimate |
| Consumer products (US, 2000) | 2.7 | Sector average |
| Basic industrial chemicals (US, 2000) | 3.6 | Sector average |
| Specialty chemicals (US, 2000) | 4.2 | Sector average |
| Life sciences incl. pharmaceuticals (US, 2000) | 14.5 | Sector average |
| Roche, Novartis, GlaxoSmithKline (2000) | 16.4-18.5 | Company figures |

 Source: Wittcoff (2004), Ch 1 The Chemical Industry, pdf pp. 67-69, Tables 1.7 and 1.8  Case

#### The impossible marriage of drugs and crop protection

In the late 1990s Novartis, AstraZeneca, Pharmacia-Upjohn-Monsanto and Aventis put drugs and agrochemicals under one 'life science' roof. Kent records how quickly the logic fell apart. There was very little synergy between the two businesses. Margins in human health were far higher than in selling to farmers. Pesticide sales were cyclical because they depend on the weather and on crop prices, and the European backlash against genetically modified crops cut expectations for seeds. The agrochemical arms were soon spun out or merged, creating Syngenta and Aventis CropScience. Sector economics, not just chemistry, decide how companies are shaped.

- Brennan (2020), Ch 2 Market evaluation and forecasting · pdf p. 29, Table 2.3
- Wittcoff (2004), Ch 1 The Chemical Industry · pdf pp. 61, 67-69, 74-76
- Kent (2012), Ch 1 Recent History of the Chemical Industry 1973 to the Millennium (Aftalion) · pdf pp. 26, 49

### See it in the table
[H₂O Water](https://www.materialinsights.org/commodities/water/)[H2SO4 Sulphuric acid](https://www.materialinsights.org/chemicals/sulphuric_acid/)[NH3 Ammonia](https://www.materialinsights.org/chemicals/ammonia/)[C2H4 Ethylene](https://www.materialinsights.org/chemicals/ethylene/)[MeOH Methanol](https://www.materialinsights.org/chemicals/methanol/)[AcOH Acetic acid](https://www.materialinsights.org/chemicals/acetic_acid/)[PVC PVC](https://www.materialinsights.org/chemicals/pvc/)[APAP Paracetamol](https://www.materialinsights.org/chemicals/paracetamol/)[Cit Citric acid](https://www.materialinsights.org/chemicals/citric_acid/)

### Check your understanding

Polyethylene sold in many grades tuned for film, pipe and moulding is best described as which business type?
 Brennan uses polyethylene and PVC as examples of products that are made in high volume but have become differentiated through grades, which is his definition of a pseudo-commodity.

In Pollak's scheme, what most clearly separates a fine chemical from a specialty chemical?
 Fine chemicals are single pure substances sold on specification. Specialties are formulations sold on performance, usually under brand names.

A $400 pack of 100 tablets holds 8 g of an API that costs $2,000 per kilogram. What share of the pack price is the API?
 8 g at $2 per gram is $16, and 16 / 400 = 4%, the figure Pollak gives for atorvastatin.

[← Part 1: What the chemical industry is and how big it is](https://www.materialinsights.org/learn/chemicals/chem-industry-map/p1/)[Mark read · Part 3: A handful of raw materials and building blocks →](https://www.materialinsights.org/learn/chemicals/chem-industry-map/p3/)

## Other sections

- [Module overview](https://www.materialinsights.org/learn/chemicals/chem-industry-map/index.md)
- [What the chemical industry is and how big it is](https://www.materialinsights.org/learn/chemicals/chem-industry-map/p1/index.md)
- [A handful of raw materials and building blocks](https://www.materialinsights.org/learn/chemicals/chem-industry-map/p3/index.md)
- [How the industry's structure and geography changed after 1973](https://www.materialinsights.org/learn/chemicals/chem-industry-map/p4/index.md)
- [A map of the course](https://www.materialinsights.org/learn/chemicals/chem-industry-map/p5/index.md)
- [Key terms, quiz and sources](https://www.materialinsights.org/learn/chemicals/chem-industry-map/review/index.md)