The Prospects for Biobased Chemicals When Crude is under $40
Mike Guggenheimer, CEO and President
I typically attend a couple of the major biobased chemical and industrial biotechnology conferences each year. Last year, the mood for biobased chemical companies was somewhat somber with oil prices down from prior years. This year, oil prices are even lower. But, the mood at these conferences was more upbeat. Why?
If you are a biobased chemical player or developing products from biochemical ingredients and positioned as a low cost provider or a “drop-in” technology, then it is likely things have been tough for you. A value proposition based on cost is not holding up well in this environment. Plant and biobased ingredients are not experiencing the same drop in price that we see with petroleum derived ingredients – as a matter of fact, many are increasing.
Despite this, I believe there are several reasons for the more positive sentiment:
• Survival of the fittest: as the market for biobased chemicals evolves, companies that weren’t well positioned or that were overextended have faded away or are hunkering down.
• Differentiation strategies: biobased chemicals are finding target segments where they can deliver unique value (performance, safety, efficiency, etc.) that petroleum alternatives can’t deliver.
• Scaling up: plants are being built and producing volumes that downstream manufacturers need to be able to launch new offerings. The limited sample quantities of early stage companies are fine for skunk works projects, but not a foundation for creating commercialization plans.
• Value of stability: some biobased chemical companies are seeing predictable declines in cost based on scale and experience. More mature biobased ingredients may be increasing in price, but the volatility is very low relative to petroleum. Low cost crude can help in the short term, but the large year-over-year swings make product planning challenging and introduces a layer of management effort that is distracting and costly.
• End user risk mitigation: biobased chemicals—and sustainable solutions in general—are now seen by many downstream companies, OEMs, and users not as niche, feel-good projects but as essential to long term success given the risk and uncertainty created by rapid climate change.
I don’t mean to pretend that low oil prices don’t impact biobased chemical players. Even with a differentiation strategy based on biochemistry, $40 per barrel crude oil generates a headwind. But the fundamental long term value still exists for many biobased products and far outweighs the per unit cost differences. It is a bump along the road towards an exciting and sustainable future.