Specialty Chemicals

Perspective
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 A great place for those who focus and build winning platforms
Topics

Big challenges, big opportunities

McKinsey & Company 2

Specialty chemicals account for ~ 20% of the chemical industry and
include more than 20 sizeable segments

Global chemicals markets

2021
100% = ~ USD 1.0 trillion

Pharma fine chemicals

100% = ~ USD 5.8 trillion Paints & coatings The market for specialty chemicals
Agricultural
Adhesives and sealants is highly complex, with more than
Consumer Food, feed & nutrition additives
chemicals
products Specialty polymers 20 sizeable and (mostly) attractive
~10%
~10%
Electronic chemicals segments (demand growth of >3%
I&I cleaners p.a., with highly varying, but mostly
~ 20% Surfactants
attractive - >15% - EBITDA margins
Flavors and fragrances
specialty chemicals Construction chemicals per segment) and over 200
segments
~55%
Water soluble polymers product/ market-combinations
Catalysts
Commodity
Plastic additives
chemicals The market is mainly end-
Cosmetic chemicals
Separation membranes customer- and application-driven,
Printing inks although specific or regional
Pigments
dynamics can exist in each segment
Pulp & paper chemicals
Lubricating oil additives
Oil field chemicals
Textile chemicals
Others
Note: Others include water treatment chemicals, mining chemicals, rubber chemicals, flame retardants, biocides, advanced materials, industrial enzymes, etc.

Source: IHS Markit, ACC, McKinsey McKinsey & Company 3

Overall, the (specialty) chemicals industry was a great place for
investors in the last two decades

Total return to shareholders (TRS) Total return to shareholders

USD, indexed, 100 = Jan 2002 (TRS), CAGR, %
(Specialty) chemicals
MSCI World Specialty Chemicals Chemicals
1.100
20 years 5 years outperformed the
Jun ‘02 – Jun ‘17 – economy as a whole over
1.000
May ‘22 May ‘22 the last 2 decades – as
900 shown by performance vs.
800
MSCI
Specialty
11% 8%
700
Chemicals However, during recent
600
years and crises (specialty)
chemicals slightly
500
underperformed the
Chemicals 11% 9%
400 overall market (with tech
300
companies leading the
growth) but have remained
200
MSCI an overall attractive
100 11 12 13 14 1516 World Net 8% 10% segment for investors
Index
2002 2007 2012 2017 2022

Source: Capital IQ, S&P, MSCI, Datastream & Corporate Performance Analytics™, a McKinsey Solution McKinsey & Company 4
What characterizes successful players?
Focus and exposure to sustainability

Specialty chemicals players ...

5 year's TRS CAGR, June 2017 to May 2022

... with more bio-based, recyclable

... with more focused portfolios1 or low-carbon product portfolios2 ... exposed to sustainability tailwinds3

More sustainable Sustainability

Focused 8% 9% 11%
product portfolio tailwinds

Less sustainable Neutral or

Less focused 6% 7% sustainability 6%
product portfolio
headwinds

+2pp +2pp +5pp

1. Focused players make more than 80% of their revenues in maximum 2 chemical segments, n=39
2. More/less than 25% of sales in biologic, recyclable or low-carbon products, n=39
3. Companies with sustainability tailwinds are e.g., in EVs, energy storage, water reduction, energy efficiency, natural ingredients, circular packaging, while companies with sustainability headwinds are oil & gas, ICE automotive, guns,
ammunition, tobacco. n=39. Note: TRS values do not balance out as a weighted average is calculated for the same data set of 39 specialty chemical companies (17 EU, 13 Americas, 7 Japan&Korea, 1 APAC)

Source: Capital IQ, S&P, MSCI, Datastream & Corporate Performance Analytics™, a McKinsey Solution McKinsey & Company 5
Growth comes from capturing market momentum and executing
M&A – consistent market outperformance very hard to achieve

Decomposition of revenue growth in chemicals,

2007-18, Percent1 Definitions

Market Market growth across

40-50
momentum all players

A Where to play
Growth from
M&A 30-40
M&A activities

Market out- Growth from gaining

performance
10-20
or losing market share
B How to win

1. Based on a proprietary database of ~400 companies

Source: Company information, McKinsey McKinsey & Company 6

Strong positions are based on “platforms” that enable scale effects
via market access, cross-market technologies, or products

Case examples

Market Nutrition Broad portfolio for a single

(application) Energy Nu-
market for superior go-to-market
Various Trans- Pharma economics, customer insights,
platforms Elec- Re- Pers. trition/ Electronics
Indus- porta- / Health and relevance
tronics sour- Care Agri-
trial tion Care
ces culture Healthcare

Crop agriculture

Technology Adhesives Mastering a technology, using

platforms Enzymes cross-market scale to drive down
development costs and be
Cultures recognized as the go-to partner
Functional films for the most complex and
valuable problems
Additives
Various

Product Lithium, Structural cost advantage

platforms bromine
Only considered a specialty
PEEK when the company masters
Bromine, differentiating applications and
phosphate outperforms supply/demand
dynamics as a result – very few
sustainable positions
Source: McKinsey McKinsey & Company 7
A strong platform creates the ingredients for success

Seat at the
relevant Ability Mastering
tables to judge complexity
Why? No. 1 position in customer Understanding and capturing the Capturing value with (customer-
relevance to access pain points, (full) value of offerings specific) tailoring (esp. for small
innovation agenda, TCO and mid-sized customers) – at cost
perspectives, etc.

How? (Full) portfolio of relevant Real-life testing competencies Technologies (automation, AI) open
competencies (integrating end industry, up new horizons along entire value
Mimicking customer thinking in own application, and chemicals know- chain
setup (e.g., applications/effects) how), often requiring significant
investment (leading to scale)
M&A machine (roll-ups/buy-and-
build)

Source: McKinsey McKinsey & Company 8

 A great place for those who focus and build winning platforms
Topics

Big challenges, big opportunities

McKinsey & Company 9

Major trends and
challenges for the
1. Inflation and supply chain 2. Sustainability is here
specialty chemicals disruptions are at record highs for real
Inflation is soaring to levels not seen in Momentum for sustainability is
industry decades, volatile markets constantly growing, with high demand
for lower emission chemicals, which in
Supply chain pressures remain at historically turn will lead to supply shortages and
high level price premiums for “green” (raw)
materials

3. Growth is becoming harder 4. The talent challenge more

Previous GDP outperformance is coming serious than ever
down The chemicals industry struggles to
attract and retain top talent. The talent
China has pivoted from an endless demand challenge is further aggravated by
sink to self sufficiency unfavorable demographics as a
disproportionately high share of the
Most fundamental innovations date back
chemicals workforce is retiring
decades

McKinsey & Company 10

Major trends and
challenges for the
1. Inflation and supply chain 2. Sustainability is here
specialty chemicals disruptions are at record highs for real
Inflation is soaring to levels not seen in Momentum for sustainability is
industry decades, volatile markets constantly growing, with high demand
for lower emission chemicals, which in
Supply chain pressures remain at historically turn will lead to supply shortages and
high level price premiums for “green” (raw)
materials

3. Growth is becoming harder 4. The talent challenge more

Previous GDP outperformance is coming serious than ever
down The chemicals industry struggles to
attract and retain top talent. The talent
China has pivoted from an endless demand challenge is further aggravated by
sink to self sufficiency unfavorable demographics as a
disproportionately high share of the
Most fundamental innovations date back
chemical's workforce is retiring
decades

McKinsey & Company 11

1. Supply chains are under pressure and reliability is becoming a
critical differentiator

Global Supply Chain Pressure Index (GSCPI) Drop of global containership

capacity actively sailing1 to Supply chain disruptions have
6 < 0,5 million TEU2 become a major challenge for the global
economy – supply chain pressures
5
remain at historically high levels
4
Raw materials supply and transport
3 capacity have become key concerns,
and resilient supply chain management
2 is now a critical differentiating factor
for chemicals players
1

0
“There are bottlenecks everywhere…
-1
Especially when it relates to marine
pack cargo ... It’s a little hand-to-hand
-2
combat right now.” 3
-3 Jim Fitterling, CEO
2002 2006 2010 2014 2018 2022
1. Ships travelling 7.5 knots or more
2. Twenty-foot equivalent unit
3. Statement during Earnings Call 2021

Source: Federal Reserve Bank of New York, press search, McKinsey McKinsey & Company 12
1. Secure access to key materials and improve supply reliability
through dual- and local sourcing
Chemicals/advanced materials Other industries1 Key resilience focus

Typical actions taken to increase % of respondents per industry sector What now?
footprint resilience2 0 20 40 60 80 100
Do you have full supply chain
Redundancy Dual sourcing of raw transparency incl. risk exposure?
materials
Inventory Increasing inventory along the
supply chain Which materials are most critical for you?
Supplier & Regionalizing the supply How do you ensure you have access (e.g.,
production chain multiple sources)?
network Near-shoring of suppliers
How resilient is your production footprint –
Near-shoring of production do you need to diversify and localize?

Distribution Re-design of warehousing

Network network Could you redesign your products to
Increasing outsourcing of minimize dependency on volatile or one-
warehousing to 3PL / 4PL producer materials?
Change of mode mix (e.g.,
air, maritime, ground, etc.)
Are you capturing the willingness to pay for
1. Includes advanced electronics, automotive, aerospace, defense, commodity, construction, engineering, and infrastructure, consumer and retail, and reliable supply?
healthcare
2. Actions taken or initiated since May 2021

Source: McKinsey survey of global Supply Chain leaders (March 28 – April 19, 2022, N=113) McKinsey & Company 13
Major trends and
challenges for the
1. Inflation and supply chain 2. Sustainability is here
specialty chemicals disruptions are at record highs for real
Inflation is soaring to levels not seen in Momentum for sustainability is
industry decades, volatile markets constantly growing, with high demand
for lower emission chemicals, which in
Supply chain pressures remain at historically turn will lead to supply shortages and
high level price premiums for “green” (raw)
materials

3. Growth is becoming harder 4. The talent challenge more

Previous GDP outperformance is coming serious than ever
down The chemicals industry struggles to
attract and retain top talent. The talent
China has pivoted from an endless demand challenge is further aggravated by
sink to self sufficiency unfavorable demographics as a
disproportionately high share of the
Most fundamental innovations date back
chemical's workforce is retiring
decades

McKinsey & Company 14

 Chapter › Topic

2. Customers increasingly commit

<2040 2040-2045 >2045

66%
Scope 3 greenhouse gas emissions targets of leading 200 players (customers)

100%

Tires
of all players with
75%
Plastics, Chemicals medium-term targets
Construction Food
Personal care Automotive
Pharma

37%
50%

25% of all players with

Construction net-zero targets
Plastics
Food Tires
Today Pharma
Personal care
Automotive
0%
2015 2020 2025 2030 2035 2040 2045 2050

Source: Company information, McKinsey McKinsey & Company 15

2. Raw materials and “handprint” are key, own emissions “hygiene”

Typical specialty chemicals CO2e emissions split

85% Raw 15% Own operations Upside: lowering customers’
materials CO₂ emissions (“handprint”)

External heat
and power
Heat supply
CO₂
CO₂ CO₂ CO₂ CO₂
Production
site
Net energy consumption ∆E
Gate
Energy Use phase End of life
coupling ~CO₂
Raw materials Raw material Product outbound
inbound logistics CO₂ Gate logistics
Heat
!
Own power
& heat plant

Scope 3 – upstream Scope 1+2 Scope 3 – downstream

Source: McKinsey McKinsey & Company 16
2. Raw materials: “green” will
become short and expensive

Feedstock today fossil-based, green … so price premiums for “green” materials

alternatives hard to expand… are likely to increase

~10% Recycling:
not easy to scale, Price Market
limited in principle price

~85% ~5% Biomass:

competition with
Gap between
“spot” price and

fossil1 fuels, land use cost due to

issues Cost supply shortage

~0% CO2-based:
scalable but
requires low-cost
energy and
subsidies Today 2030 Time
1. 2019

Source: IHS, IEA, McKinsey Chemical insights McKinsey & Company 17

2. “Handprint”: growth opportunity for innovative players

Example: Food packaging

TODAY FUTURE
Low CO2e impact
High usability and
fast processing as Maximum recycling and minimum waste
main criterion Minimum usage of substances of high concern
Paper sleeve

Printed brand visualization Multilayer mono-material LDPE, LLDPE + coating

Multilayer multimaterial
LDPE, LLDPE, PET Resealable, water-soluble adhesive
Resealable adhesive
Transparent PET From collection scheme

Colored PET

Source: McKinsey McKinsey & Company 18

Major trends and
challenges for the
1. Inflation and supply chain 2. Sustainability is here
specialty chemicals disruptions are at record highs for real
Inflation is soaring to levels not seen in Momentum for sustainability is
industry decades, volatile markets constantly growing, with high demand
for lower emission chemicals, which in
Supply chain pressures remain at historically turn will lead to supply shortages and
high level price premiums for “green” (raw)
materials

3. Growth is becoming harder 4. The talent challenge more

Previous GDP outperformance is coming serious than ever
down The chemicals industry struggles to
attract and retain top talent. The talent
China has pivoted from an endless demand challenge is further aggravated by
sink to self sufficiency unfavorable demographics as a
disproportionately high share of the
Most fundamental innovations date back
chemical's workforce is retiring
decades

McKinsey & Company 19

3. Only a quarter of specialty players achieved profitable growth
Global GDP (CAGR 2010-19)
ROIC (Median 2010-19)2 ~ 3% Specialty and diversified chemicals companies

35
Margin optimizers Growth champions Value
30 36% 26% creation ~25%
25
of all specialty
chemicals players
20
grew profitably and
15 above GDP over the
10
past 10 years
Average chemicals
industry WACC
5 ~ 7.5%

-5
Poor performers Growth optimizers Value
30% 7% destruct-
-15 tion
-30 -18 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 24 26 52

N = 151 (top specialty and diversified players)

Revenue (CAGR 2010-19)
1. Excluding 25 companies who exited the market during 2015-19
2. ROIC for each year during 2010-2019 above average ROIC

Source: CapitalIQ, McKinsey McKinsey & Company 20

3. Market growth is slowing down

Gross output chemicals industry CAGR (relation to GDP)

USD trillions, 2015 prices Percent 2000s: 1.6x GDP
growth, driven by China
2005-10 2010-19 2021-30 Trend 1
6.1
2010s: 1.2x GDP
5.4 growth, driven by China
– yet slowing down
4.5 46% 24 (2.1x) 9 (1.2x) 4 (0.9x)
2020s expectation:
4.0 44%
~1.0x GDP or below, as
3.2
41% Asia’s growth
36%
“dematerializes” due to
2.4 26% 20% 3 (1.2x) 3 (1.2x) 2 (0.6x) increasing market
China 20%
12%
21% 21% saturation
APAC 23%
26%
w/o China Implication for
27% 26% 0.4 (0.4x) 0.4 (0.2x) 1 (0.6x)
34% 30%
Europe & NA 53% 41% players: just growing
RoW 10% 9% 9% 9% 8% 5 (1.3x) 3 (1.3x) 2 (1.0x) with the market yields
10%
2005 10 15 20 25 2030
growth below that of
World 6 (1.6x) 4 (1.1x) 3 (0.9x)
GDP
1. Growth trend of chemicals industry in relation to GDP

Source: Oxford Economics, McKinsey McKinsey & Company 21

3. Opportunity to innovate for new downstream needs
EV inverter example

From ...
Understanding own and competitors’ materials
High level understanding of needs of immediate customers
Optimization of cost and performance
Mainly formulations, combinations of existing chemistries

Inverter End-
ChemCo OEM End-of-life
supplier customer

To ...
Deep understanding of often new and sustainability-related (end)customers trends and needs
(e.g., range, CO2 emissions, recyclability)
Translation into requirements for chemicals and shaping the innovation agenda (e.g., range
improvements through lower battery heat stress)
More fundamental development enabled by technology (e.g., computational material design),
molecular innovation
McKinsey & Company 22
3. “How to innovate” – pivot the industry’s traditional model

…to cross-functional innovation

From “classical” R&D… team co-creating with customers

Marketing & Sales,

Frequent and early customer
Production Start-up
representatives iterations (will they pay?)
Selected
customers Cross-functional with business
accountability from day one

Stable teams

Analytics
Expert career track and
recognition
AI
R&D

Automation and digitalization

(following biotech’s tracks)

McKinsey & Company 23

3. “How to sell” – treat selling as a science and technology

Commercial Solution- Training and

analytics selling capabilities

2-5% Return on 5-10% Sales 10-20% increase in

Sales increase productivity

Enabled by technology
Having the right systems, tools and processes to make it work, seamlessly
McKinsey & Company 24
Major trends and
challenges for the
1. Inflation and supply chain 2. Sustainability is here
specialty chemicals disruptions are at record highs for real
Inflation is soaring to levels not seen in Momentum for sustainability is
industry decades, volatile markets constantly growing, with high demand
for lower emission chemicals, which in
Supply chain pressures remain at historically turn will lead to supply shortages and
high level price premiums for “green” (raw)
materials

3. Growth is becoming harder 4. The talent challenge more

Previous GDP outperformance is coming serious than ever
down The chemicals industry struggles to
attract and retain top talent. The talent
China has pivoted from an endless demand challenge is further aggravated by
sink to self sufficiency unfavorable demographics as a
disproportionately high share of the
Most fundamental innovations date back
chemicals workforce is retiring
decades

McKinsey & Company 25

4. The talent challenge: employees are resigning, hard to attract …
... and especially chemicals companies struggle
Companies across sectors lose existing talent... to find new talent
Likelihood that employees will leave their current job in next 3 "We are struggling to find talent across the board –
− 6 months, % of respondents operations managers for our remote plants, digitally-native
talent and future leaders for our businesses"

40% - Chemicals CEO

of employees stated that they are at least somewhat likely to leave "Candidates often ask us about our sustainability efforts –
their current job in the next 3 − 6 months this has become a key differentiator"
- Chemicals CHRO
Very Almost
Somewhat likely Likely likely certainly
22 7 6 5 "The chemical industry has lost its attractiveness to top
performing talent pools"
- Chemicals CEO

"We continue to struggle to increase diversity… For our

industry overall we see little progress in female share in
executive committees"
- Chemicals CEO
Source: 2022 Great Attrition, Great Attraction 2.0 survey (n=12’378) McKinsey McKinsey & Company 26
4. … and retiring. Holistically transform the entire „hire to retire“
cycle to keep your knowledge edge

Demographic challenge for chemicals Significantly fewer employees

Example Germany start in the job market than retire
Share of employees from it
Demographic curve, 2021 (population in 000s) per age group (# in 000s)
Male Age Female Age group Chemicals All sectors
800 600 400 200 0 0 200 400 600 800 Total 346 44,484 In the chemicals industry this
100 trend is even stronger with ~ 25%
90 of employees retiring in the next 10
> 65 1% (3) 1% (454) years
80

70

60 55-65 25% (87) 21% (9’080) Therefore, make the entire “hire to
retire” cycle a top management
50
priority including
40 25-54 66% (228) 67% (30’410)
 knowledge management
30
 talent attraction (incl. hiring)
20

10
< 25 8% (28) 10% (4’540)  retention

Source: Bundesagentur für Arbeit, BVAC, demographie-portal.de, McKinsey McKinsey & Company 27
Summary of
immediate priorities
1. Focus on resilience 2. Use sustainability as the
for specialty Ensure supply reliability as a key antidote to commoditization
differentiator Implement defensive (energy efficient
chemicals players Tackle inflation risks with immediate
operations, reduced emissions) and
offensive sustainability strategies
measures and long-term footprint (finding solutions to customers’
considerations sustainability needs) – one of the key
differentiators going forward

3. Find new growth motors 4. Make talent a priority

Define a clear north star to build a Develop a holistic approach to reform
winning position in a segment the entire talent management process
and find pragmatic solutions to the
Revive innovation to address the many new impending knowledge drain
challenges – even further downstream and
cross-functional

Upskill modern commercial practices to find

untapped growth potential

Invest into digital and analytics capabilities to enable functional

Embrace Digital excellence (e.g., in procurement and supply chain), accelerate
(critical enabler) sustainability efforts and drive growth through business model
innovation
McKinsey & Company 28