The government has recently conducted many interventions in the chemical market. The reason is that the global production of key products is assumed to be too concentrated, COVID-19 has disrupted too many supply chains, and countries are at risk of being cut off from the supply of basic products. Therefore, chemical companies are under pressure to reassess their value chain. However, from an economic and risk point of view, only under specific circumstances where the following factors play a role can there be reasons to adopt a more regional approach:
Many chemical product categories have a high degree of supply concentration
Over the years, production has been highly concentrated in several value chains. This situation occurs in the following places: the critical quality of assets is high, intellectual property rights are concentrated in the hands of a few participants, demand is concentrated in mature terminal industries, or certain centers provide (usually government-funded) favorable production conditions. The early steps of the material value chain are particularly easy to concentrate, because the manufacture of raw materials and materials often requires economies of scale and access to raw materials. As a result, many basic chemical products or intermediates have become more concentrated in specific areas.
Product or precursor level detailed view showing geographic and supplier concentration
The analysis must focus on individual product lines and their applications in key end products. For example, more than 80% of global ascorbic acid (vitamin C) production capacity is currently concentrated in China, because local manufacturers use efficient fermentation processes, while international manufacturers are attracted by a low-cost and low-regulated environment. Severe global overcapacity and price pressure have left Scotland with only one large factory, while the Americas have no significant production capacity. In addition to general supply issues, this situation also makes manufacturers of products using vitamin C dependent on country-specific pricing decisions and regulatory changes (such as environmental standards). A detailed inspection of China's supply base shows that, except for the four largest vitamin C producers (accounting for 50% of the world's output), the remaining 30% of the global production share is scattered among smaller suppliers, making purchases diversified.
Special attention to precursors
Similarly, certain prodrugs are also concentrated in some areas. For example, more than 90% of the global production capacity of 6-APA, the main precursor of penicillin antibiotics, is also located in China. Four companies dominate the market. The largest factory outside of China is operated by Novartis in Austria, producing precursors for consumption at its own disposal. In recent decades, the production efficiency brought by global scale assets has promoted the gradual transfer of production capacity to China. With the tightening of environmental regulations and the expansion of the critical scale of economically viable production, even former Chinese industry leaders have withdrawn from the industry. However, there are currently no mid-sized suppliers that provide alternative options for pharmaceutical manufacturers. Obviously, downstream users need to reconsider their exposure to an over-concentrated supply market. Although such precursor cases are often not as transparent as the global known products in the above global capacity map, this is actually the biggest weakness of many global supply chains.
Three pillars: diversification, cooperation and trade
There are good reasons to support the diversification of the value chain. Due to the high concentration of supply, or because the supply chain is too long and too fragmented, logistics and lack of transparency have become a worrying issue, and the value chain is at risk of disruption. Diversification of supply sources can also reduce the risk of disruption caused by shocks such as export bans, trade conflicts or COVID-19. However, this does not necessarily mean the reflow of production.
A true local value chain requires multiple production steps, resources, technology, capital, a functional transportation and service ecosystem, and large-scale local demand. In many parts of the world, the local chemical industry is simply not feasible because most countries lack the required capabilities and needs, or both. Smaller production clusters often end up with import tariffs or local content regulations, relying on local supervision, and obtaining funding through taxpayer subsidies and rising consumer prices to avoid competition.
Diversification means finding alternative and effective sources of supply, and creating greater flexibility, not just "return", so that the value chain can respond more flexibly to shocks and efficiently provide it at an available price Chemicals in the world.
