27 September 2012 10:52 [Source: ICB]
While the media focus on renewable chemical companies seeking to change the commodity chemical landscape, other start-up companies are gaining ground by entering the specialty chemicals arena, attracted by lower capital costs and higher profit margins.
Skin products are prime candidates for bio-materials
"There is no way to set up volume production and distribution without a lot of capital. For a company like ours, launching into a commodity market is essentially akin to simply throwing out the product and hoping someone comes and buys it," says Jere Kolstad, president of Rivertop Renewables.
Commodity chemicals often have gross margins of less than 10% while specialty chemicals are higher, he says.
"Realistically, early-stage companies likely could not raise the capital that is needed to build a commodity chemical company so this approach is typically not even an option. Through our approach, we can earn solid margins in specialty markets, enabling us to build the business with relatively little capital," Kolstad explains.
Commodity chemicals are plagued by low margins but benefit from less market risk than specialty chemicals, says Kalib Kersh, analyst at US consulting firm Lux Research.
"Specialty chemicals have smaller markets, more penetrable by upstart molecules or drop-ins made from biomass, but developers will see larger margins and customers that will expect smaller volumes early on," says Kersh.
Because commodity chemicals typically sell for significantly less than $1/lb (€1.76/kg), one needs highly efficient processes at very large scales and reasonable sugar prices to compete effectively, notes Carolyn Fritz, CEO of US renewable specialty chemical company Allylix.
"With specialty chemicals, as they are of higher value, you can be competitive at lower productivity fermentation processes, smaller scales and at a broad range of sugar prices. You can produce in much smaller facilities with incremental investments in capital, which is a huge advantage for us because you don't have that significant capital risk," says Fritz.
The growth of bio-based specialty chemicals in the last decade has been significant and US renewable chemicals firm Blue Marble Biomaterials (BMB) expects this trend to continue and build momentum, says chief business officer Colby Underwood. The company says it is able to capitalise on the growing consumer trend for preferring natural and renewable-based ingredients.
"People have become more aware of what they put in [on] their bodies and are pressuring product manufacturers to cut petroleum oil derivatives out of the products they use everyday," Underwood says.
He adds: "The variability in the specialty chemical market allows us to focus our efforts on niche sectors, which leads to greater production efficiency. It also gives us greater flexibility to respond to trends in the market."
Any application that has contact with customers and end-users that value renewability and sustainability is going to preferentially demand bio-based specialty chemicals, he says.
MARKET PULL CLOSE TO THE SKIN
According to several industry players, the market pull for specialty bio-based chemicals at present is strongest where the end product is "close to the skin," such as in cosmetics, cleaning products and the like.
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"The variability in the specialty chemical market allows us to focus our efforts on niche sectors, which leads to greater production efficiency"
"We're seeing more interest in specialty chemicals but the investor base... still remains limited"
"We can earn solid margins in specialty markets, enabling us to build the business with relatively little capital"
"As the bio-materials here are used as a small proportion of the whole, in formulations and as additives, the cost issue is not so critical, as long as the technical properties and performance are equal or superior to existing oil-based chemicals," according to a participant at the second ICIS Bio-based Chemicals Roundtable held in May this year, organised in association with the Investment and Development Agency for the Northern Netherlands (NOM).
"In this area, chemical companies themselves are looking for more renewable raw materials and sustainable products, but there is also a very strong market pull not only from the public but also often from state procurement programmes, for example in the US institutional cleaning sector. Companies want alternatives and these will have to compete somehow," commented one participant.
Start-ups looking to enter the bio-based specialty chemical market should keep the end-user in mind, not only the distributors they might sell to, says Underwood. Companies such as BMB and Allylix are looking to offer biotechnology-based ingredient alternatives to the food, flavour, fragrance and cosmetic markets.
Allylix's first product, Nootkatone, was launched in late 2009, and its second, Valencene, was introduced in 2010. Nootkatone, a $30m (€24m) market as of 2008, was said to be a highly sought after sesquiterpene with a grapefruit flavour and aroma used in citrus juices and soft drinks as well as in the personal care industry. Valencene was estimated to be a $10m market as of 2008.
Allylix also announced in March that it will start commercially producing in the third quarter this year its rare and highly valuable terpene trademarked Epivone, which is structurally related to beta-vetivone, one of the key component of vetiver oil - an essential oil. The terpene is expected to be used in applications such as cologne, hair care and personal care fragrance.
Allylix expects to gain annual revenue between $20m-200m for the product based on revenues for similar terpene molecules used in fragrance applications.
US market research firm Freedonia said in 2011 that the US market for flavours and fragrances (F&Fs) is forecast to rise by 3%/year to reach $5.5bn in 2014.
Among the major product segments, essential oils and natural extracts are projected to see the most rapid gains.
FLAVOURS AND FRAGRANCES
BMB is also working on fermentation-based terpenes as well as organic acids and natural ester products. The company is using fermentation residues for feedstock such as spent grains from beer manufacture and spent coffee grounds.
The first product BMB plans to sell are thiol esters for savoury flavouring applications. The company started in 2011 its zero-waste 100,000 litres/month commercial biorefinery in Missoula, Montana, which will initially produce 60-70% carboxylic acids and 30-40% natural esters. The facility is expected to produce 72 tonnes/year of fine chemicals, says Underwood.
"Demand for our products far outstrips our current ability to produce. This has given BMB a very exciting future of growing rapidly in the next 3-5 years by expanding into an industrial-sized facility and opening multiple production facilities," he adds.
In March, Rivertop Renewables contracted DTI, a US custom manufacturer of fine and specialty chemical products, to produce the company's glucarate-based products. Product made in this initial phase of contract manufacturing will be used to fulfil Rivertop's commercial contracts for bio-based corrosion inhibitors.
Remaining volumes of manufactured product will be used to develop and test glucarate applications in a myriad of other industrial and consumer markets. Rivertop and DTI aims to scale up to a capacity of up to 10m lbs/year (4,540 tonnes/year) of contract manufactured product. This next scale of output is projected to come online in the fourth quarter 2012.
Rivertop is planning to first apply its glucarate products in the detergents market as alternative to phosphates.
"From our experience, consumer product companies are clearly showing interest and demand for renewable, specialty chemicals as evidenced by the flood of biotechnology scouts these companies have roaming the trade shows and by the number of joint development agreements they have established," says Kolstad.
"Additionally industries that currently purchase and utilise high-value, high-priced chemicals such as F&F companies are investing in research, development and partnerships to ensure stable, sustainable supply chains," he adds.
Major F&F companies such as Givaudan and Firmenich have announced partnerships with US renewable chemical company Amyris, which is also developing a sugar-based terpeneoid molecule called farnesene. US-based International Flavors & Fragrances (IFF) this year announced its partnership with Switzerland-based Evolva to develop a biosynthetic route for the production of two key flavour ingredients for IFF.
Allylix says it is working in exclusive arrangements with several F&F houses as well as with consumer product companies but did not disclose specific names. In March, Allylix received a $13.5m investment from German chemical company BASF, one of the biggest global producers of aroma chemicals.
BMB, meanwhile, has also partnered with two major flavouring houses although names were not disclosed. In February 2012, BMB announced a memorandum of understanding with US beverage company Anheuser-Busch to collaborate on a pilot facility that will convert waste grains and biogas from the brewing process into carboxylic acids that can be used in applications such as food cosmetics and personal care products.
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