Steady as it goes for 2008 chemical distribution

If one thing can be said for the chemical distribution industry, it is steady.

And that steadiness is a good thing for both buyers and distributors looking to navigate the rough seas of volatile commodity price fluctuations. Looking ahead to 2008, the general consensus is that there will be

"The hard and true industries like chemicals and chemical distribution tend to have shallow spikes, but we don't have the big dips either," says Peter Hess, president of chemical distributor John R. Hess & Co. in Cranston, R.I., and president of the National Association of Chemical Distributors in Arlington, Va. "It is a very steady business. We don't reap the huge rewards other industries have, but we don't have the big downturns either."

Hess admits that business in general "isn't booming" and he is "hard-pressed to say it will go into a big turnaround in the next year or so" but he also believes that chemical buyers will increase their use of chemical distribution on a percentage basis.

"Whether or not total pounds or dollars are up is contingent on a lot of factors," he says, including the less-than-robust U.S. economy and the continuing shift of U.S. manufacturing to China and Mexico.

The chemical industry is one of those going through that transformation, with more production coming online outside of North American and Western Europe, a trend expected to continue in 2008.

"We, as an industry, need to recognize that and transform our thinking to use that as an advantage in our economies," says Gary Pruitt, CEO of chemical distributor Univar in Bellevue, Wash. "We have tremendous domestic producers, and some of their production capacity is coming on-stream elsewhere. They need to reach those markets and we—including distributors and end-users—need to recognize that the game is changing."

Due diligence

Just as chemical buyers will continue due diligence to offset rising costs and replenish supplies with large quantity buys for more economic sourcing in 2008, chemical producers and distributors will continue to analyze their business strategies and identify market segments that best fit their capabilities to spur growth.

Morris Owen, vice president of the Western Region for Dublin, Ohio-based Ashland Distribution, sees producers "concentrating on fewer, larger end-use customers with their own internal sales organization. That, in turn, would mean producers are looking more at distribution to provide a broader reach to other customers."

Producers, distributors and end-users in the chemical supply chain are finding that the quantity of the buy going through the distribution channel is rising, adds Pruitt. "As production changes its plans, the distributor's role is changing—we're moving up the scale of end-use customers we are able to service. I think we will see larger customers or quantity buys going through distribution than what we had a few years ago."

The economic benefits may not be in direct, but buyers could achieve a lower overall cost of delivery as more sourcing goes through distributors. "If there is a unique kind of packing that would reduce their inventory and make manufacturing more efficient, the cost of the production process is cheaper," Pruitt says.

Pricing pressures

Cost reduction, of course, is a major priority for chemical buyers and distributors alike, but it's easier said than done. The days of trading off pricing have become more difficult as pricing has become more transparent.

"It's clear what has been going on with raw material pricing; there are no secrets," Pruitt says. "Sophisticated purchasers, sophisticated distributors; and sophisticated producers understand that. It's a matter of trying to best utilize the most cost-effective channel to meet that replenishment need and not disrupt production."

The cost of energy—whether it be fuel prices' effect on delivery or the effect of natural gas and petroleum on chemicals feedstocks and manufacturing—is one issue that remains foremost on the chemical distributor's mind today and will continue into 2008.

Distributors realize that energy price increases will continue to be a thorn in the side of the chemicals supply chain in 2008. In past cycles, energy and fuel costs would rise sharply, but eventually subside. The current cycle of energy prices has chemical distributors thinking it may be different this time.

"Now you have a feeling that they [price increases] are here to stay," NACD's Hess says, adding that transportation costs are becoming a growing concern for distributors. "You have to recoup those costs and pass them on."

Packaging costs have followed oil prices up, since they are tied to price hikes in the raw materials, such as ethylene and propylene, used to make plastics.

Consolidation concerns

Like many manufacturing industries, the chemical distribution industry has experienced consolidation in recent years. Univar's April acquisition of ChemCentral and Brenntag's purchases of Los Angeles Chemical and Quadra Chemical in the previous two years have reduced the number of distributors.

While it creates economies of scale for distributors, buyers naturally are concerned that they will have fewer options. Buyers, of course, want as many distributors as possible from which to choose, but they want these options to be viable, sustainable, profitable companies. With more than 800 distributors associated with chemical distribution in the U.S., Owen believes there are plenty of distributors still available and market shrinkage should not be a concern for chemicals buyers.

There are segments within chemical distribution that are expected to buoy the industry and distributors continue to get more creative in meeting buyers' needs. Hess sees certain niches that consistently show strength—particularly the industrial institutional cleaners. Even in a recession, Hess said that segment is "a growth market in the U.S."