The ICIS Top 100 Chemical Distributors: Chemical distribution companies adapt to a changing environment

06 October 2010 11:07  [Source: ICB]

With sales rebounding strongly in 2010, companies are turning their attention to strategic M&A, geographic expansion and regulatory compliance

The recovery of the chemical distribution industry in the first half of this year was a pleasant surprise for ­everybody.

The whole chemicals sector has bounced back from the dramatic drop in demand ­during late 2008 and most of 2009. Driven by minimal stocks held by customers that had to be replenished, and a general pick-up in ­industrial activity, larger chemical distributors, such as Belgium-headquartered Azelis, Germany's Brenntag, IMCD of the Netherlands and US group Univar, reported significant increases in sales and operating profits for the first six months of 2010, compared with the recession period last year.

Equally, many privately owned distributors, which do not publish results, have been very upbeat lately. Chemicals are, after all, an early indicator of positive momentum in the global recovery.

But that strong momentum now seems to be fading, so that some are beginning to worry about a so-called double-dip or a return to ­recession.

Headwinds from budget deficit cuts and other austerity measures in many countries will be felt, but moderate growth for the next few years may just be a normal development after the tremendous post-recession improvements we have seen over the past six to nine months.

Volatility will remain high and visibility limited, because many customers have changed their order patterns to smaller, but more frequent orders. That forces distributors to focus on inventory monitoring and working capital management.

User industries remain under pressure to manage their costs and many have followed their customers to the growth markets of the BRIC (Brazil, Russia, India, China) countries or Asia. Their European facilities may not ­always receive the funds to support upgrades or expansions.

On the contrary, production and certain unit operations may be downsized or outsourced. That, of course, provides opportunities for distributors to promote their blending and filling capabilities and to supply customised product formulations.

To many small start-up companies, distributors can also be an important provider of technical expertise, and laboratory and development resources.

This seems to be particularly the case in specialized industries such as food and cosmetics, and a number of specialty chemical distributors have responded to this need by investing in laboratory facilities. This will certainly lead to attractive internal growth opportunities, but will also generate pressure to ­amortize their investment.

Chemical distributors are also looking for external growth by acquisition. The biggest event so far this year was UK-headquartered private equity group BC Partners' successful initial public offering (IPO) of Brenntag at the end of the first quarter.

It is interesting to note that the structure of the offering was changed late in the process. Initially designed as a sale of existing shares only, the final split was about 30% existing shares and 70% new shares - a decision that enabled Brenntag to pay down debt to a significant degree.

This was well received by the market, and investors have also been very supportive of Brenntag's acquisition of Thai group EAC Industrial Ingredients, a strategic move that really puts the company on the map in Asia, albeit at a steep price. The acquisitions of Metausel in eastern France and Houghton Chemical Corp in the US, were small "bolt-on" acquisitions.

Global No. 2 player Univar also made merger and acquisition (M&A) headlines in February with its planned acquisition of European rivalQuaron, a transaction that, to date, has been only partially approved by the European Commission for Quaron's Benelux operations.

As regards Quaron France, the French competition authorities are now responsible for investigating and deciding on the deal. This is the first time a transaction in chemical distribution has ever been suspended by the competition authorities.

In June, US private equity firm CVC Capital Partners announced a potential IPO of Univar, only to follow up a few weeks later with a refinancing initiative and, in August, the secondary sale of 42.5% of the shares to Clayton Dubilier & Rice (CD&R), another US private equity firm.

This is a noteworthy deal, not least because William Stavropoulos - ex-chairman and CEO of US-based Dow Chemical - has been named nonexecutive chairman of Univar, a move that brings onto the scene a knowledgeable and experienced industry leader who is familiar with channel management concepts.

Another deal between two private equity-owned companies was the acquisition of UK-based Warwick International Distribution by IMCD. In Europe, this is mainly a consolidation move, but in Malaysia, where Warwick has been operating for a few years, this is an addition for IMCD, helping to enhance its Asia-Pacific footprint. Overall, the transaction adds about €80m ($108m) or 9% to IMCD's sales on a 2009 pro-forma basis.

Privately owned Caldic acquired Norfoods, a distributor of food ingredients and raw materials that are sold to Scandinavia's food industry. The deal extends Caldic's market presence significantly by adding Scandinavia to its pan-European coverage. Norfoods has sales of €85m and is based in Malmo, Sweden.

Some other transactions are rumored to be in the pipeline for specialty chemicals and polymer distributors. Because of the more conservative stance of private companies, most deals are likely to be bolt-on acquisitions, either to add new application segments or to enhance geographical coverage.

In North America, two leading distributors, Ashland Distribution and Basic Chemical Solutions, are reported to have been put up for sale by their parent companies.

Part of the regulatory framework that governs chemical distribution is formed by Reach and, to an ever-more relevant degree, competition law. Also, the new initiatives on classification, labelling and packaging (CLP) of substances create an extra workload for the distributors' health, safety and environmental (HSE) and compliance staff.

Although Reach mainly concerns producers that must register their first batch of high-volume substances, it continues to have a bearing on distributors, which monitor developments closely.

Competition law is also an area to watch. The revised EU block exemption rules (BERs) for the distribution of goods and services, which came into force on June 1, have introduced a market share threshold of 30% for all parts of the value chain in the relevant products and geographical markets.

A distributor that exceeds this threshold will not be eligible for the safe harbor created under the block exemption. The new guidelines also take into account the internet as a force for online sales and cross-border commerce.

As to the more strategic actions, consolidation will continue to some extent, with privately-owned specialty chemicals distributors playing an increasing role
Prohibition of internet sales of products by a distributor would be considered a hardcore restriction by the manufacturer, although certain other requirements can be set by producers. There is a phase-in period and it is strongly recommended to review existing agreements by the time this period expires on May 31, 2011.

In France and Germany, the authorities have yet to publish their verdicts on a number of antitrust investigations that have been going on for several years now.

Overall, the increasing demands of regulatory requirements continue to make business more complicated for smaller companies, which, typically, do not have the full-time resources to track all developments and ensure compliance.

As business is generally healthier than last year, particularly in northern Europe, the first imbalances between demand and available supply can be felt. Many products are in short supply and prices have started to rise.

The drivers behind this upswing certainly include stronger-than-expected demand, but also the fact that marginal production capacity has been mothballed or removed altogether during the recession.

On the other hand, in the medium term, the capacities of plants being built or already commissioned in the Middle East and Asia will also push into Europe. This will bring new suppliers and therefore new opportunities for distributors, but at the cost of having to support these new entrants in developing a market for their products.

As the established suppliers continue to streamline their own commercial organizations, they are also regularly reviewing their distribution networks for performance and strategic fit.

In summary, the current situation is looking much brighter for chemical distributors. However, efforts must continue to maintain and enhance operational excellence under the ­ever-increasing demands from suppliers and ­customers alike.

As regards the more strategic actions, consolidation will continue to some extent, with privately owned specialty chemical distributors playing an increasing role.

They came out of the recession with strong balance sheets, but also with the growing insight that size matters - not so much in absolute terms, but in terms of reaching and maintaining critical mass in the industry sectors and application areas they serve.

Small distributors will have to focus on defendable niches in order to survive as independent entities. The large groups, such as Azelis, Brenntag, IMCD and Univar, are looking more and more outside Europe for growth - for the time being mainly in Asia, but also in other emerging markets in the Middle East, Africa and South America.

The wheels of change in chemical distribution continue to spin.

Guenther Eberhard is senior and lead partner for Switzerland-based chemical distribution consultancy DistriConsult. Contact:

Author: Guenther Eberhard

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