The American chemical industry is a significant player in the economy of the United States and the rest of the world. Although the sector contains more than 10,000 companies, the barriers to entry are prohibitively high for businesses that want to compete at the top levels. Many of the barriers center on costs, which remain high throughout the lifetime of a chemical business.

Funding Requirements

One of the most significant barriers to entry in the chemicals sector is the high capital requirement. Before a chemical company can go into business, it must secure the financing to build production facilities, which usually include expensive manufacturing equipment, safety systems and raw materials. To make a profit, the facilities must be large enough to turn out large quantities of each chemical product. Additional costs include maintenance, replacement parts and equipment upgrades. These high fixed costs are a significant deterrent to businesses without large financial reserves.


Businesses in the chemical sector are highly sensitive to changes in the market because of their high fixed costs. If the demand for a particular product drops, the drop in sales can cause the profits to decrease dramatically. Since many chemical products are exported to other industries, chemical companies are impacted by the success or failure of other sectors. Chemical manufacturers often require large amounts of fuel, so a small shift in fuel prices can have a strong ripple effect on the rest of the business. When natural gas prices were low in 2011, chemical companies enjoyed a period of high growth. To survive, businesses must be able to withstand changes in consumer demand and economic activity; doing so requires motivated investors and a large cash reserve. Without a steady stream of capital, many businesses are unable to compete.

Research and Development Costs

Companies in the chemical industry often conduct ongoing research and development in order to stay competitive. This process requires that companies operate state-of-the-art laboratories, invest in supplies, pay scientists and research teams, and buy new equipment. Once a new product is developed, the company conducts extensive testing in both the scientific and marketing realms. A company that plans to enter the chemicals sector must be able to finance continuous research and development activities. For existing businesses with revenue streams, finding research dollars may not be a struggle; for a new company, it can be prohibitive.

Environmental Protection Agency (EPA) Regulations

The EPA regulates the chemicals sector carefully to ensure that companies do not release harmful substances into the environment. The regulations are specific and numerous, which can be daunting to new businesses, and the EPA requires strict compliance with its guidelines. State environmental agencies also impose their own regulations on chemical manufacturing companies. To stay compliant, companies must hire legal, safety and environmental personnel.

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