North American chemical distributors weigh the effects of the economic downturn

Deliver the goods

23 November 2009 00:00  [Source: ICB]

Previous recessions have prepared North America's chemical distributors for this latest period of financial turmoil

Rex Features/Chris Eyles

THE WORST of the recession may be over for North America's chemical distributors, and now they are waiting for the signals of recovery, notes the head of the US-based National Association of Chemical Distributors (NACD). "There is cautious optimism in the industry," says Chris Jahn, the NACD's president.

Sales during the summer and the past quarter have been better for distributors than the previous few quarters, Jahn indicates, but he adds: "Everyone is waiting for more signs."

Sales were up for chemical distributors in 2008, despite reduced growth rates, says the NACD. For 2008 compared with 2007, NACD members showed a 16.7% increase in sales, according to the NACD's Company Productivity Report (CPR), released in early November. Adjusted for inflation, the increase was 14.5%.

Additionally, companies showed an increased return on investment (ROI). Firms with 75% or more of sales from bulk or repackaged liquids showed an increased ROI of 15.2%.

Companies with 75% or more of sales from factory-packaged products (FPPs), either liquid or dry, increased their ROI by 34.2%, and distributors providing a balanced product mix that is neither liquids nor FPPs had an ROI increase of 32.4%.

On the other hand, the NACD points out that growth by actual tonnage was flat or negative: -1.6% for liquids and -4% for FPPs, with balanced products growing by 0.03%.

"Like any company, we are not immune to the megatrends of the industry," says Terry Hill, senior vice president and chief commercial officer for distributor Univar USA. "One of our key industries is coatings, and with construction and auto manufacturing very hard hit, that has been tough recently in North America and Europe."

DIVERSIFY FOR SUCCESS
US-based Ashland Distribution reports seeing declines in all major markets, with the most significant falls taking place in the industrial market segment.

There has been less of an impact on Ashland's specialties business portfolio, and Robert Craycraft, Ashland Distribution's president, says, "The life science and energy markets, while down, have shown better stability than others. The most challenging product segments have been in the commodity arena."

Some segments, usually those considered essentials by end-consumers, such as food, personal care, pharmaceuticals or water treatment-related products, never dropped as far as other segments, says Jahn, but he adds: "You will know the economic recovery is real when segments like paints and coatings or electronics pick up. When folks start making more stuff, our guys will start selling more chemicals."

Overall, North American chemical distributors are going through the recession with more flexibility and fewer problems than most producers, comments Marc Fermont, senior partner of Switzerland-based consultancy DistriConsult. "To stay ahead or afloat, cost-cuttings, inventory reductions, downsizing were most common distributors' survival programs," he says.

The spike in commodity chemical pricing last year, as well as accompanying reductions in sales volume essentially prepared the industry for the recession.

NACD members weathered the storm, says Jahn, because "they do a good job running lean."

For example, William Fidler, president and CEO of US-based Brenntag North America, says his company was "certainly not immune from the impact of the global economic storm that struck in 2008, but we were prepared."

"Our customers are beginning to build back inventory" Robert Craycraft, president, Ashland Distribution

Fidler adds: "We adjusted our inventory levels and cost structures quickly to address the reality of substantially reduced demand."

But an economic downturn can be an opportunity as well, says Univar's Hill. "It has allowed us to have some different strategic conversations about how we can better help a supplier or customer respond to the economic downturn."

U.S. Chemicals fared well during the economic downturn, protected by a combination of cost controls, cash management and diversification, says company president Carol Piccaro. "The diversification of products and our customer base has been successful," she says.

The company also increased its advertising budget, and Piccaro believes this helped in securing new customers and suppliers.

"A slowdown in the economy can be a great wake-up call for companies to look at their expenses and tighten credit," Piccaro comments. "In boom times, these areas can be overlooked."

Mexico-based distributor Pochteca managed to sustain 12.5% growth in volume, says Eugenio Manzano, the company's executive director, despite Mexico's GDP growth of -6% for 2009. Pochteca's positive results are "mainly due to diversification, good margin management and focusing on profitable customers, products and segments," says Manzano.

SPECIAL SERVICES
In addition to personal care, water treatment and food-grade products doing well, Fidler notes "reasonably strong HI&I" demand, as well as "industrial business overall demonstrating some improvement."

Fidler notes that coatings, adhesives, sealants and elastomers customers are reporting some increase in demand, "but from very low levels."

Craycraft adds: "This slight rise is brought about by a number of factors, but includes the Cash For Clunkers [car allowance rebate system] program and that our customers are beginning to steadily build back modest levels of inventory."

Meanwhile, U.S. Chemicals points to renewed strength in flame retardants and some coatings. But a particular strength during the downturn was the company's special services division.

"As companies get squeezed on personnel, we have been able to fulfill many special requests and save our customers time and money," says Piccaro. "These requests may consist of breaking down products for smaller shipments, special packaging requests and importing of products from overseas." U.S. Chemicals is planning on adding marketing and operations personnel.

"[We looked] for industries that were more sustainable" Terry Hill, vice president, Univar

The downturn also pushed Univar into a non-traditional response: the company added more technical support, like reformulation experts and food technologists, for the various industries the distributor supports.

"Diversification and additional tech support are the result of the conversations Univar has been having with its customers," explains Hill.

"We started doing this at the end of the 2001-2002 downturn, when we saw traditional manufacturing bases disappear and started looking for industries that were more sustainable."

MORE THAN MONEY
While the economy is No. 1 on the minds of North American chemical distributors, Jahn points out: "Government regulation of the industry is a significant area of concern."

Distributors have to deal with several major federal agencies, like the Environmental Protection Agency, Occupational Safety and Health Administration, the US Department of Transportation, the various national security departments, and - depending on what is being shipped - the Drug Enforcement Agency can become involved.

Then, there is "the alphabet soup of state and local agencies," says Jahn. "Chemical distribution is already the most regulated industry out there."

Manzano notes that in addition to tight credit and a slow economic recovery in the US, a major challenge for 2010 will be increased regulation.

IPO LOOMS
International financial investor BC Partners is planning an initial public offering (IPO) for Germany-based Brenntag, parent of Brenntag North America, for the first half of 2010. Estimated to reach $2.2bn (€1.5bn), the IPO would be Germany's largest.

Fermont says this IPO and its outcome will be the main global topic for distributors in 2010. "A success for the Brenntag IPO will be good for other equity investors in distribution who may follow suit," the consultant says.

But he adds a caveat: "A Brenntag IPO failure would grip the distributor scene and may block any significant M&A [mergers and acquisitions] in the sector for a while."

Otherwise, Fermont notes that the credit crunch and uncertain exits for private equity have killed M&A in chemical distribution in 2009. "Without access to new funding like successful IPOs, the distributor M&A market will remain slack, as consolidation in chemical distribution was historically financed by external sources of funds."

Sign up for our free CEO Opinion e-newsletter

By: Ivan Lerner
+1 713 525 2653

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly