The ICIS Top 100 Chemical Distributors: Europe's chemical distributors see a steady pick-up in demand

Sector remains resilient

04 October 2010 15:09  [Source: ICB]

While business trends are positive for Europe's chemical distributors, there are still plenty of issues for the sector's trade body, FECC, to deal with - notably Reach and CLP

Europe's chemical distributors are in a positive mood despite the recent turmoil in chemical markets and the economic slowdown. Demand for chemicals has seen a resilient bounce back this year and the outlook for next year is also looking reasonable, although it may not be quite as strong, as government public spending cutbacks may begin to have an impact.

Also positive for the longer term, explains Edgar Nordmann, president of the European Association of Chemical Distributors (FECC) and director of German chemical distributor Nordmann, Rassmann, is the trend among producers to seek to outsource more business to distributors and demand more value-added services from them. This, he believes, will give distributors the opportunity to do well as both producers and distributors alike seek to optimize the supply chain.

"We can expect distributors increasingly to offer services such as mixing, blending and filling, logistics and warehousing, as well as recycling. Already requests are being seen for these services." He adds that it is an opportunity for the whole sector, although it does mean that the smaller and medium-sized distributors "have to become more professional in the way they approach business."

Nordmann also sees more consolidation in the chemical sector, among producers and suppliers. "Merger and acquisition activity is picking up again and I think we will see more moves in this sector, especially involving private equity firms." There is still plenty of money looking for a home, he notes, adding that good multiples of earnings before interest, tax, depreciation, and amortization (EBITDA) have been achieved in the past.

Chemical distribution is an attractive home for private equity investment, he says, as the sector is not too cyclical - with no extreme peaks and troughs - because the distributors are widely diversified in their product lines and the end sectors they serve. "It's a steady business. For those focused on specialties there are good chances in the market, although you have to be very specialized in your business offering"

GEOGRAPHIC EXPANSION
Nordmann also sees opportunities for Europe's chemical distributors in geographical expansion, whether it is in Europe, to fill in market coverage, or in Asia or South America, to serve regional customers. Many firms are looking at Asia - especially China and India, but also Southeast Asia - to source materials for their European customers. And in the process they have found opportunities to invest in the region.

However, it is hard to make greenfield investments these days, so any moves will be through acquisition. The targets, he argues, need to be active in four or five countries in Southeast Asia, if they are to be large enough to be attractive. Also, buyers need to be very aware of how these companies operate, as corporate governance and compliance issues are becoming increasingly prominent in Europe and globally.

"You need to be very careful where you are going to," advises Nordmann. The EU is looking ­closely at these ­issues and taking note of the UN's Global Compact.

"A mandatory approach [to Responsible Care] would definitely be good" Edgar Nordmann President, FECC

This voluntary initiative, launched in 2000, is a policy platform and a practical framework for firms that are committed to sustainability and responsible business practices. It seeks to align the way business is done around the world to agreed and accepted principals (see box overleaf), that cover corporate citizenship and compliance, including anticorruption, competition, environment and labor issues.

The initiative is voluntary and operates at company CEO level. Today, 5,300 businesses in 130 countries have signed up. Already, several large chemical producers and financial ­institutions are members and these will look to see that people they do business with have good corporate social responsibility (CSR).

Nordmann expects the Global Compact and greater awareness of CSR will lead to more regulations in the future. This raises the need for distributors planning to do business in Asia to be fully aware of what they are buying to make the move into the region. "In critical areas, it could be a factor against M&A [mergers and acquisition] expansion in Southeast Asia," he says.

REGULATORY ISSUES
Turning to issues closer to home for FECC, Nordmann points to new legislation as occupying a lot of FECC and its members' time at the moment. Two Regulations with large impacts on distributors are being implemented by the European Commission:

• Reach, covering registration, evaluation, authorization and restriction of chemicals, and
• CLP, covering classification, labeling and packaging of substances and mixtures. This brings into force the UN's Global Harmonized System (GHS) of Classification and Labeling of Chemicals in the EU.

 

FECC has been active on its members' behalf and has been receiving plenty of questions to deal with. On Reach, it is involved on the Directors' Group, established by the Commission to improve communication of issues at this critical time, coming up to the first registration deadline later this year. Nordmann is hoping a similar initiative might be forthcoming on CLP, as it raises similar issues.

The larger distributors are well prepared, says Nordmann, but there are concerns over whether the smaller and medium-sized operators are ready or if they have left things too late.

Reach is the earlier of the two Regulations and is really just something industry needs to accept and get on with, says Nordmann. However, FECC has started internal discussions regarding possible improvements of Reach, to prepare itself for the 2012 revision process.

From the distributors point of view, explains Nordmann, the main concern is the limited flow of information in the supply chain, not particularly from suppliers to distributors, but more so from the customer to the distributor. "This is a problem for SMEs and also for how good the customer connection is." Indeed, improved communication toward downstream users would reduce uncertainties and in that sense decrease the flow of questions sent within the supply chain.

CLP is slightly more recent. It was adopted at the end of 2008 and replaces former rules for substances (Directive 67/548/EEC) and mixtures (Directive 1999/45/EC). The deadline for substance reclassification according to the new CLP rules is December 1 and for mixtures June 1, 2015. After these dates, all labeling and packaging has to conform to CLP rules.

In the business arena, as well as becoming more professional, distributors are looking at green issues in the supply chain as these gain greater prominence among suppliers and customers alike. The dimensions of sustainability, such as environmental, social and economic aspects are incorporated into the FECC European Responsible Care program via regular reporting of industry's Key Performance Indicators, the presence of an action improvement plan and regular exchange of best practices.

Issues around carbon footprint, fuel efficiency and supply chain efficiency are all being discussed and ideas and solutions aired.

"Everyone is trying to see how to improve and will have to do something - but in the end, we still need to make a margin on our business to survive," says Nordmann. "The question is, who is going to pay for a lot of the initiatives and improvements."

IMPROVED EFFICIENCY
One way distributors can help, he says, is to reduce the truck mileage, with less frequent deliveries and optimizing storage accordingly.

FECC already has a number of initiatives members can use to help them, which are designed to assess distributors' operations on health, safety and environment criteria.

Last year, FECC implemented a European Responsible Care program in the distribution sector and has had some early success in take-up for the scheme. The Belgian and Danish national chemical distributor associations are using the program, tailored to their needs, and a number of firms are looking at it, including those operating in Hungary, Romania and Slovenia.

However, signing up to Responsible Care is still largely voluntary across Europe. One goal Nordmann has set is to press for mandatory participation as a condition of association membership. This is already the case in the UK and Denmark, and in Germany for those distributors in the international division of the association. But it is not the case in many countries.

"We will market the advantages of Responsible Care implementation and achieve better harmonization across Europe, especially in central and eastern countries of the now enlarged EU, as well as addressing the needs of SMEs. A mandatory approach would definitely be good for the sector - in terms of performance and public image."

Find out more about the FECC's activities on behalf of its members

 

THE TO PRINCIPLES OF THE UN GLOBAL COMPACT
The UN Global Compact asks firms to embrace, support and enact, within their sphere of influence, a set of core values in the areas of human rights, labor standards, environment and anticorruption.

Human rights

1. Businesses should support and respect protecting internationally proclaimed human rights; and

2. make sure that they are not complicit in human rights abuses.

Labor

3. Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;

4. the elimination of all forms of forced and compulsory labor;

5. the effective abolition of child labor; and

6. the elimination of discrimination in respect of employment and occupation.

Environment

7. Businesses are asked to support a precautionary approach to environmental challenges;

8. undertake initiatives to promote greater environmental responsibility; and

9. encourage the development and diffusion of environmentally friendly technologies.

Anticorruption

10. businesses should work against corruption in all its forms, including extortion and bribery.

SOURCE: UN Global Compact

By: John Baker
+44 20 8652 3214

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