Identifying Growth Opportunities in Bio-based Chemicals

Petrochemical usage has increased dramatically over the past 70 years, enabling conventional chemicals to be produced efficiently and economically given the low feedstock costs of crude oil and gas. However, demand for bio-based, lower-carbon alternatives appears to be reaching a tipping point and gaining traction. In several end markets, companies are demonstrating increased willingness to pay a premium to access sustainable inputs. 

In the early to mid-2010s, several notable bio-based chemicals startups and joint ventures, such as Mascoma, Bioamber, Metabolix and Myriant, struggled to gain market acceptance. Hindered by challenges like customers’ unwillingness to pay a premium for sustainable products, significant capital requirements and manufacturers’ difficulty in replacing existing formulations with bio-based technology, these now-defunct companies offer a reminder of why the market’s enthusiasm for bio-based chemical development was somewhat dampened in the past. 

As of late, however, the bio-based chemicals market is facing a resurgence — and this time, the opportunities are greater and the outlook stronger.  

Today’s bio-based chemicals are ready for the next chapter 

The bio-based chemicals industry is being driven today by a broad array of companies, from large global chemical and feedstock companies spearheading significant R&D efforts and investing capex in production capacity (e.g., Croda, Cargill, ADM) to startups developing new technologies in chemical engineering and bioprocessing/fermentation (e.g., Genomatica). Many consumer brands, such as Coca-Cola, L’Oréal, Sweetgreen and Merck/Codexis, have announced or enacted product and packaging changes that plan to leverage bio-based chemicals. Through their pursuit of more sustainable consumer-facing products and updated company-led sustainability goals, they are playing a key role in further development in the industry. 

With innovation providing a diverse potential for applications, recent success stories in bio-based chemicals indicate much stronger market readiness for adoption than the previous wave of unsuccessful startups experienced. The three examples below are just a few where demonstrated customer interest and increasing willingness to pay for sustainable materials have led to rapid growth in demand: 

• Polylactic acid polymer (PLA) — a bio-polymer with compostable properties used across applications such as food and beverage packaging, flooring, electronics, housewares, and beauty and medical products 

• Polyhydroxyalkanoate (PHA) — a bio-polymer used primarily for single-use food and consumer goods packaging¹

• Bio-ethyl acetate — a bio-based solvent used in a variety of applications such as beauty and personal care, food and beverage, and more 

An open horizon for market growth 

Opportunities in the bio-based chemicals industry are greater than ever before, thanks to new technological capabilities and an increased willingness to pay by both end consumers and manufacturers. 

Key end markets of growing bio-based chemicals applications include packaging; beauty and personal care; food- and beverage-related products; and industrial products such as adhesives, paints, lubricants and other specialty performance chemicals. Based on a recent consumer survey, a significant share of consumers report an increased willingness to pay a premium for sustainable versions of products, including price premiums of up to 30% for beauty and personal care and closer to 40% for packaged and fresh food and beverage items (see Figure 1). 

To meet consumer demand, many companies are willing to pay premiums for bio-based chemical inputs — provided they offer equal or better performance than petrochemical alternatives (see Figure 2).

In addition to environmental, social and governance (ESG) pressures, accelerated R&D from academia and industry over the past 10 years has created a supportive environment for bio-based chemicals to excel. The American Chemical Society has seen a major uptick in mentions of bio-PE, bio-alkanes/-alkenes, bio-organic acids and bio-alcohols, and research manuscripts relating to bio-based chemicals have dramatically increased over the past 20 years (see Figure 3). 

Broad opportunities for investment 

Currently, the bio-based chemicals market comprises less than 10% of global specialty chemicals volume, and less than 5% of the estimated $4.7 trillion overall global chemicals market.  

With the industry reinvigorated by ESG initiatives and new technology, L.E.K. Consulting estimates that various segments of the bio-based chemicals market will experience GDP-plus-level to double-digit growth through 2026.  

Recent investments in bio-based chemicals are capitalizing on the improved conditions and customer interest, and the opportunity for growth from continued innovation and adoption is significant. While many uncertainties remain, the hope is that this influx of capital to scale production could allow the market to address lingering challenges like cost, feasibility and commercialization constraints.  

Product segments looking strong for investment include:  

• Bio-organic acids like bio butyric acid with food and beverage exposure 
• Bio-alcohols with cosmetics exposure, such as isosorbide 
• Bio-based lubricants and process fluids 
• Bio-based additives for beauty and personal care, textiles, and house and home applications 
• Adhesives and sealants, particularly for use in packaging 

To achieve successful investment in bio-based chemicals, companies should evaluate how to best align end markets and willingness to pay with underlying growth, consider customer receptivity and potential for products to serve as “drop-in” replacements, and determine the degree of performance differential. Additional considerations include the competitive and IP landscape, M&A availability, the growth prospects for the total addressable market, and company goals in the bio-based chemicals space.  

By taking advantage of market openings, companies on the forefront of this expected bio-based chemicals surge should see returns in both financial investment and sustainability goals. 

Solving market challenges to open investment doors 

To continue growth, the bio-based chemicals market must address challenges related to cost competitiveness, feasibility and commercialization. These include: 

• Cost comparison to petrochemicals — Petrochemicals is a very large and well-established market, with strong economics that bio-based chemicals currently do not have, which creates barriers for customers that seek switching opportunities 

• Need for product reformulation — Unless using true drop-in petrochemical replacements, customers are required to reformulate products to include bio-based chemicals in their manufacturing 

• Alternative in-demand uses of feedstocks — Bio-based feedstocks are already in high demand for other markets such as food and energy, creating potential supply constraints for bio-based chemicals 

• Technological and IP barriers — Given the relatively early stage of bio-based chemicals, many players have patents on production methods and technology, making it difficult to organically enter the space 

• Ability to commercialize — Scaling up bio-based chemicals projects from the R&D phase to commercialization requires substantial capital, technical expertise and time to complete 

Today’s opportunities for investment to drive overall growth remain high. However, only when these challenges are addressed will the market see significant expansion. 

Expand for more on bio-based chemicals and organic feedstocks

The organic materials that comprise bio-based chemicals are redefining several end markets:

What are bio-based chemicals?

While not new to the market, bio-based chemicals are gaining support from companies seeking substitutes for crude-oil-derived petrochemicals in the manufacturing of products such as plastics, detergents, solvents, drugs, fertilizers, paints, pesticides and more. 

Using biomass-derived organic compounds predominantly found in organisms — such as sugars, oils and animal fats — bio-based chemicals provide a variety of benefits (see Figure 4). 

The three uses of bio-based chemicals are drop-in (direct replacement for a petrochemical-based chemical in an established market), bio-replacement (replacement that uses a different formulation pathway) and bio better (a reformulation of an existing petrochemical-based chemical). 

Key bio-based chemicals end markets include beauty and personal care, food and beverage, and other industrial end markets, with a wide array of potential applications. 

What are organic feedstocks?

Feedstocks are any raw materials used in the mass production of chemical products; bio-based feedstocks are the diverse, renewable group of source materials that can be transformed into bio-based chemicals through a variety of conversion processes.  

• Animal fats (tallow) 
• Starches: cassava, corn 
• Lignocellulose: wood, organic waste 
• Plant oils: canola, palm, sunflower 
• Sugars: dextrose, sugar cane 
• Aquatic biomass: algae, CO2 

For more information, please contact industrials@lek.com. 

L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective owners. © 2023 L.E.K. Consulting LLC

Endnotes
¹PHA and PLA can be combined; modifying PLA with amorphous PHA can improve properties like toughness, ductility and biodegradability.