INSIGHT: Seeking to serve a widening distribution market

13 October 2010 17:49  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The prospect of slower growth and a tougher regulatory environment should not necessarily worry chemical distributors.

Having stormed out of the recession due to strong downstream demand, they might expect to lose some momentum as national austerity measures kick in. But the experts believe that this may just be a return to normal after the bounce back from the slump.

And yet the world has changed. Customers are placing smaller orders and doing so more frequently. They are managing working capital more closely.

The change forces distributors themselves to follow suit, to focus on inventory and working capital management. But it also gives them the opportunity to expand service offerings.

As producers cut back, so there is more room for distributors to expand blending and filling capabilities and to help producers customise certain product formulations.

This seems to be the case particularly in speciality chemicals and in food and cosmetics, says Guenther Eberhard, the senior and lead partner in Switzerland-based consultancy Districonsult, in this week's issue of ICIS Chemical Business.

Indeed, some distributors have responded to a broader spectrum of customer requirements by investing in laboratory facilities and product development resources.

This gives the distributors further room for growth, although at a cost, alongside the geographical shift of a great deal of business to growth markets in the BRIC (Brazil, Russia, India and China) countries.

Making headway in developing markets is not easy but companies are establishing new sales offices and snapping up local rivals.

A key strategic focus for the largest chemicals distributor, Brenntag, for instance, is Asia-Pacific, Latin America and eastern Europe, says Brenntag CEO Stephen Clark, although it is clear that the company will not ignore its strong European and North American core.

The challenge for distributors certainly is one of size. But in distribution, size is not necessarily better if it means supplying even more product lines to even more customers in even more countries.

At some point the complexity of operations overwhelms the profit to be made from them.

There are also other restrictions, as Eberhard points out: in the EU, competition authorities introduced this June a market share threshold of 30% for all parts of the value chain, with internet sales included in the ruling.

But the geographical expansion surely will continue as distributors in the established markets in Europe and North America run through a period of slower growth with opportunities largely elsewhere.

Given the number of distributors worldwide there is a great deal of room for manoeuvre as the stronger firms seek to gain critical mass in certain industry sectors and applications.

“Smaller distributors will have to focus on defendable niches in order to survive as independent entities,” Eberhard says.

The strong return to growth and to profitability of the major distributors in the first half of the year has prompted at least the prospect of more mergers and acquisitions (M&A) activity.

The private equity owners of the largest firms in the business have been active this year. At the end of the first quarter, UK-based private equity group BC Partners was successful with its initial public offering (IPO) of Brenntag. Private equity shareholders in the company gained further from a public share offering at the beginning of October.

CVC Capital Partners was thinking about an IPO for the world's number two chemicals distributor, Univar, but refinanced the company and then sold 42.5% of its shares to private equity firm Clayton, Dubilier & Rice.

The world’s third-largest chemicals distributor, Ashland Distribution, has been put up for sale by its parent company, it was reported in August, which raises the prospect of further consolidation among the leading players.

That trend was underscored on 12 October with the news that Univar is to buy commodity chemicals distributor Basic Chemical Solutions, a company with a turnover of $889m (€640m), for an undisclosed sum.

Chemicals distributors have always been a diverse bunch and will continue to be so, reflecting the needs of multiple players in multiple markets operating in multiple supply chains.

But shifting market needs and the drive for a greater geographical spread are forces for change.

($1 = €0.72)

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By: Nigel Davis
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