The two segments of the chemicals sector that have the highest profit margins are agricultural chemicals and pharmaceuticals, although specialty chemicals have made substantial profit gains in recent years. Net profit margins in the chemicals sector range between 9% and 14%, with agricultural chemicals and pharmaceuticals near the top of that range. The average net profit margin for the overall sector is approximately 12%.
The chemicals sector is one of the largest market sectors and is subdivided into five industry segments: basic chemicals, specialty chemicals, consumer products, agricultural chemicals and pharmaceuticals. Together, these segments serve a wide range of consumer, industrial and manufacturing markets. Two very large consumer markets, those of detergents and cosmetics, are included in the chemicals sector. Basic chemicals include such well-known products as chlorine, nitrogen, ethanol and ammonia. Specialty chemicals include sealants, adhesives and the expanding market of treatment chemicals used for a number of environmental and industrial purposes.
The chemicals sector is also one of the market sectors that spends a great deal on research and development. R&D expenditures are highest in the sector's agricultural chemicals and pharmaceuticals segments.
Agricultural chemicals have successfully been used to improve food production worldwide through the use of fertilizers and pesticides. This segment has seen large growth through increased demand for food production worldwide and a recent boom in agricultural commodity prices. This major market expansion has also notably benefited companies that supply active ingredients and aromatic feedstock, as well as a number of mining chemicals.
Pharmaceuticals is the largest segment of the chemicals sector, manufacturing medicines, hospital supplies and consumer health products such as ointments and creams. This segment spends the most on R&D and also has the highest net profit margin, averaging around 14%.
Two of the largest companies in the chemicals sector are the well-established U.S. firms Dow Chemical Co. and DuPont. Both of these firms are heavily involved in the agricultural chemicals industry and other segments of the chemicals sector. Within the agricultural chemicals market, Dow concentrates more on producing pesticides, while DuPont produces more fertilizer and agricultural growth enhancement products. Dow has also made recent gains in the specialty chemicals area with advances in water purification products and processes.
The chemicals sector tends to be very capital-intensive. Therefore, superior management of companies in the chemicals sector is often determined by working capital management and by how intelligently and efficiently the companies allocate their long-term capital expenditures. Return on invested capital is a significant factor in net profitability for businesses in the chemicals sector.
In terms of emerging market economies, China has made the largest strides in chemical production, with a particular emphasis on producing basic chemicals.