INSIGHT: Chemical distributors battle with complexity

07 June 2010 17:29  [Source: ICIS news]

By John Baker

LONDON (ICIS news)--While chemical producers have been streamlining portfolios for many years and focusing on core businesses, their partners in the distribution sector have been grappling with increasing complexity as they expand in size, product offering and geographic coverage.

In today’s challenging economic climate, should distributors now be thinking more about consolidation and focus, or should they continue to push for greater scale? But then you have to ask, is there a limit to size arising from the associated complexity?

And complexity there certainly is. Spain’s leading distributor Quimidroga is active across 15 end-market sectors and operates no fewer than 23 business units. It supplies 7,000 products to its 6,700 customers, achieving sales of 400,000 tonnes/year, giving a turnover of €500m ($595m).

Or take the pan-European distributor Azelis. It handles 30,000 products, with an aggregate volume of 1.3m tonnes/year, and boasts 40,000 customers. The complexity is reflected in its matrix structure that sees the company organised across eight application-driven markets and seven geographical units in Europe.

Still not convinced? Consider Germany’s Ter Group, with sales from speciality chemicals and polymers of €400m from 7,000 products. It operates with eight product line business units coordinating activities across almost all countries in western and eastern Europe.

And all the time, there is a need to remain close to suppliers and customers and, especially with specialty distribution, to provide extensive technical support and product development. Leading players will even be attempting to create further value by differentiating their service offerings to individual customers.

Modern IT systems make the management of such complexity feasible but there have to be sophisticated internal barriers to the leakage of customer and market-sensitive information across the huge number of client accounts. Joris Coppye, CEO of Azelis, believes this complexity has to be managed and, indeed, can be managed.

Coppye argued at last week’s FECC annual congress in Barcelona, Spain, that distributors need to have a good spread of geography, products and customers to ride out the swings in the market. To manage complexity, he argued, you need commercial excellence, good supply chain management and a good relationship with principals. But, he added, to be successful, above all you need scale, which is a huge investment but allows you to build critical mass and achieve specialisation.

Given the number of distributors in Europe – three times the number found in North America - there may well still be scope for consolidation in Europe. But with demand growth most likely limited in Europe for some time, given public spending cutbacks as governments address the problem of huge public debts, now might well be the time for Europe’s distributors to focus on geographic expansion as the engine of growth rather than product or customer extension.

Several speakers at the FECC congress pointed to faster growing chemical demand in Africa and the Middle East as offering attractive potential for distribution activity. Godefroy Motte, vice president of Europe, Middle East and Africa (EMEA) for Eastman Chemical, commented that his company has been focusing on emerging markets of Russia, eastern Europe and Turkey to good effect.

Turkey, Poland and Russia are now in its Top 10 markets in the EMEA region and it is now turning its focus to Africa. The potential for distributors is evident from the fact that Eastman uses 71 distributors across its European businesses, and 25% of its sales go through distribution channels.

His advice for distribution companies wishing to grow was to focus on M&A activity in Europe and to go outside the region for organic growth.

Speakers from IMCD and REDA Chemicals also highlighted the growing opportunities in north Africa and the Middle East, as chemicals demand there grows on the back of investment in the oil and petrochemicals sector and expanding downstream industries. Both warned, however, of the complexity of the region and the challenges of investing there.

Saudi Arabia-based REDA, for instance, operates in 17 countries across the Middle East and North Africa region, with 50 locations and a full range of specialty chemicals in all industrial markets. Founder and CEO Abboud Smadi emphasised the need to provide technical support and good logistics across the huge region, to supply pockets of demand arising from local manufacturing investments.

This brings us back to the question of complexity in the chemical distribution chain. Increased scale will certainly be necessary to ensure sustainable growth. But growth will inevitably increase complexity. Perhaps management of this has to become a core competency of the successful players.

If several of Europe’s leading distributors are to return to the quoted sector, following in the footsteps of the recent Brenntag IPO, they will certainly need to scale up and increase profitability to attract the interest of investors.

To discuss issues facing the chemical industry go to ICIS connect

By: John Baker
+44 20 8652 3214

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