03 June 2011 18:39 [Source: ICB]
Quimidroga's new state-of-the-art logistics facility (in the centre foreground) in the port of Barcelona, covering an area of 70,000m2, with a capacity of 30,000 tonnes of packed products and 12,000m3 in 155 tanks for bulk products
In some countries, revenues are almost at 2007-08 pre-crisis levels. A few companies have even been able to show record figures, be it top or bottom line.
It is the fine print, some sentences later in the statements, where the current issues and concerns are raised. Recently, the increase in crude oil prices has reflected strongly on petrochemicals and downstream derivatives. Price volatility for many product groups is an issue, as is supply security.
Although detailed data are hard to come by, for many products marginal capacity was taken out during the downturn, either mothballed or shutdown altogether. And the "light maintenance" regime employed in many production facilities, which was adopted during 2009 and practised during most of 2010, is taking its toll.
One just cannot run plants for an extended period on a below-average maintenance budget. Eventually, events will catch up with you, as some people found out the hard way. A steady hand pays off here.
The pricing power of the chemical industry, when compared with other sectors, is quite high, but not for all products and applications. Consequently, margin pressure has become an issue in some sectors. Nevertheless, people seem to be more at ease and the general mood is good.
Those companies that reacted early on in the downturn are freeing up a nice cash flow, some of which is of course reversed as purchase prices go up and working capital requirements increase again, driven by higher price levels for raw materials and the need to have sufficient stock to compensate supply delays and disruptions.
M&A IS BACK ON THE AGENDA
On the merger and acquisition (M&A) side, activity is up as well. Not quite at the precrisis level, but still enough to make headlines every now and then. The first months of 2011 saw the closing of deals announced during the second half of 2010, including the formation of Nexeo Solutions (the buyout of Ashland Distribution sponsored by TPG).
The big chemical distribution players, such as Brenntag, Univar, IMCD and Azelis, are increasingly seeking to expand their activities in countries outside Europe (and also outside the US). In these regions, they have more perceived room to grow. Today, these geographies still contribute less than 20% to the business in many cases (eg Brenntag derives about 14% of its earnings before interest, tax, amortisation and depreciation [EBITDA] from operations from business in Asia-Pacific and Latin America, even after the EAC acquisition last summer), but this is bound to change over time.
In Europe, mid-sized privately owned firms are increasingly getting into the M&A game, as the examples of Caldic with the acquisitions of Norfoods in Scandinavia and Omnichem in the UK (2010) and the acquisition of Quaron France by Kem, the 50:50 joint venture founded by Overlack and Stockmeier in Germany (2011) show. Many of these companies have accumulated cash and want to put it to good use by strengthening their market positions. IMCD, which saw its tertiary buyout by US-based Bain Capital last December, is looking for growth through bolt-on acquisitions on the way to a company size that would make it suitable for an initial public offering (IPO) a few years down the line.
Azelis' owner, UK-based 3i, was reported a few weeks ago to have launched a thorough strategy review. However, nobody could obtain firm comments on what this might mean as to the next steps the owner and the company might take. The observable facts are that it too is making bolt-on acquisitions, lately by buying Belgian distributor YDS Chemicals, Finkochem in Serbia and substantial parts of the activities of S&D Group in the UK, India and several other European and non-European countries.
There are a number of mid-sized distributors that are controlled by financial investors, such as Safic-Alcan, Solvadis or Unipex. Their private equity owners, some of whom have invested for a number of years, will eventually seek an exit. They may be led by the perception that valuations have improved and the fact that a number of potential buyers are in the market. Other private equity companies may take yet another look at the sector, contemplating investments, as they are observing their compatriots generating nice returns on their investments.
SUPPLIER AND CUSTOMER NEEDS
On the supplier side, the conscious outsourcing of non-core activities and non-key customer segments by large producers to distributors continues. Many smaller producers have begun to manage their channels to market, be it agents or distributors, in a more systematic way. This provides new opportunities for strong distributors with a clear strategy and a concise value proposition.
Many chemical producers appear to focus their investment programmes and expansion plans increasingly on the fast-growing economies of the BRIC countries (Brazil, Russia, India and China) and other emerging markets, while making mere replacement investments and launching only a few well-targeted expansion projects in Europe. DistriConsult recently asked a sample of (speciality) chemicals distributors what this would mean for their industries. The answers can be found in the table below.
Customers are looking at enhanced services, as they contemplate "make versus buy" decisions, when it comes to replacing ageing facilities or upgrading and expanding existing production capacities. This opens up opportunities for distributors that are willing to invest to provide customised services. Examples in this area are Brenntag's blending and services business unit throughout Germany, CSC Jäcklechemie's non-flammable liquids filling plant in Nürnberg, Quimidroga's new warehouse facility in the port of Barcelona or Univar's new "white room" in France, licensed to (re-)pack pharma, food and cosmetics products in line with Good Manufacturing Practice (GMP) guidelines.
Investments like these enable distributors to increase their share of the customer spend on chemical products. In some application sectors, such as food and cosmetics, the ability to provide laboratory services is becoming an important differentiator.
A glossy brochure will not suffice. Customers want to touch, feel, smell or taste the development product sample. Some distributors have reacted to this by putting their own laboratories in place, such as Nordmann, Rassmann in Hamburg for cosmetics. A number of others are considering similar investments. This is on top of a number of very large companies and specialists that have had their own application-specific laboratories for quite a while, and not just limited to life sciences.
Also in technical applications, such as paints and coatings, the provision of in-house laboratory services is practised by a number of companies such as Brenntag, Grolman, IMCD and Univar. Another area where local laboratory facilities are a must is water treatment.
WHAT WILL THE FUTURE HOLD?
The way things look, the overall rather benign business climate will continue for a while, save massive political disruptions in the Middle East or other geopolitical hotspots. Across Europe a broad range of growth rates is expected, depending on the overall economic outlook of each region. Some countries on the southern periphery will continue to face hard times, as they try to bring their fiscal house in order, and austerity measures will have a significant impact on their economies.
For the distribution industry in general, the requirement to constantly adapt and change will continue to drive strategies in a highly competitive environment. The need to provide additional services, either to grow the business or to differentiate companies from competitors, will require significant investments in capital expenditures.
As investments must always be amortised over a reasonable time period, the underlying business must have sufficient size to carry the financial burden. This in turn will continue the drive to maintain enough "critical mass" to be able to further grow activities.
In our view, this lies in the €100-120m ($140-170m) range for more diversified distribution companies; therefore, not-so-big companies only have the option to focus on a few selected applications, in order to avoid dilution of their efforts and to add depth. Only then will these smaller companies continue to be attractive partners for suppliers and customers.
Guenther Eberhard is managing director of Swiss-based chemical distribution consultancy DistriConsult. For more details email firstname.lastname@example.org or go to www.districonsult.com/
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