Toll manufacturers serve a changing market

Custom chemical manufacturers anticipate increasing output this year but must contend with high domestic costs and rising imports.  Each type of chemical manufacturer has a different strategy for dealing with these issues.

By Nick Basta, editor at large

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This month’s Informex Show promises to be one of the biggest ever: the Synthetic Organic Chemicals Manufacturers Association., Washington, D.C., the organizer of the event, recently moved it to Las Vegas, and now expects upward of 500 exhibitors and 4,000 visitors. The show has evolved into the key forum for chemical companies involved in custom manufacturing, toll processing and outsourced chemical supplies.

Conversations with a cross-section of the show’s exhibitors give a picture of how this business is evolving. Historically, companies serving the pharmaceutical and specialty-chemical industries have dominated custom manufacturing. However, with the intense reshuffling of capacity, capital assets and product slates by major chemical companies in the past decade, the tolling business is seeing new opportunities in other types of markets, such as specialty plastics, performance materials and consumer goods. Nevertheless, it is still dominated by pharmaceuticals, where the outsourcing option has been a long-standing tradition.

Custom manufacturing, like all of the U.S. chemical industry, now is in a growth phase. According to the just-released Year-End 2004 Situation and Outlook from the American Chemistry Council (ACC), Alexandria, Va., the overall chemical industry finally achieved its long-expected upswing in production volumes and revenues during 2004, and the outlook for the next few years is strong (Table 1).


   2003  2004  2005  2006
 United States  0.2  5.5  3.4  2.9
 Western Europe  2.1  2.1  2.8  3.2
 Asia/Pacific  7.3  6.2  5.7  6.0
 Total World  3.4  4.7  4.1  4.1

ACC projects the value of 2004 U.S. chemical shipments (including imports and inventory adjustments) at $501 billion, a new record, with overall volume of U.S. plants up 5.5%. Output is projected to rise by slightly smaller amounts for each of the next two


Table 1. The table shows the percent change in chemical production volume from the preceding year for various industrial regions, actual and projected. Growth in Asia will dominate the U.S. and Europe.
Source: ACC


years. The “mañana” recovery, in which early positive signs did not pan out as time progressed, is over for the moment, says Kevin Swift, chief economist at ACC.

Within the specialty and pharmaceutical markets in which most custom manufacturers operate, the outlook according to ACC is even better. Growth in pharmaceutical output hit 6.6% in 2004. Perhaps more surprising, agricultural chemicals enjoyed an 8.8% uptick (Table 2).


   2003  2004  2005  2006
 All Chemicals  0.2  5.5  3.4  2.9
 Pharmaceuticals  0.6  6.3  4.9  5.1
 Agricultural Chemicals  0.7  8.8  1.1  0.5
 Specialties  1.9  5.1  2.4  1.2
 Coatings  5.1  3.5  1.8  1.5
 Other Specialties  1.3  6.0  2.7  1.1

SOCMA itself conducted a state-of-the-business survey last fall, and reports that the number of respondents saying that business is “good” has risen from 27% in 2003 to 56% in 2004. Members expect a 5% to 10% increase in sales during 2005.

Table 2. The table shows the percent change in chemical production volume from the preceding year for various industrial sectors, actual and projected. Growth in the pharmaceutical sector is projected to be very strong.
Source: ACC



Business models
According to Informex exhibitors, the overall business model for most of them is, “whatever works.” Being small, nimble and hungry, many of these companies will try to meet their customers’ needs however they can.

“Service is the key to succeeding in this business,” says George Austin, vice president and founder of ChemDesign Corp., Fitchburg, Mass. “You want a partnership where you act like an extension of your client’s business.”

Still, companies tend to operate under one of three general models:
True toll processors. They have a certain type of process equipment and can perform a specific unit operation efficiently and inexpensively. Examples are spray drying, milling and various types of filtration or purification.

Technology specialists. These firms have developed expertise in certain types of chemistries or reactions, either through experience or explicit company preference. They boast the necessary reactors and knowledge for processes like mammalian cell culturing, acetylation or Wittig reactions — and everything in between. Some of these companies are technology or product developers in their own right; they can be a development partner for, say, a pharmaceutical ingredient and then become a marketer of that product themselves.

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