NACD: Riding the shale revolution

North American distributors are upbeat about their performance so far this year and they have every reason to be cheerful. The region is seeing a resurgence of manufacturing, primarily driven by the shale gas revolution as well as the re-shoring of production by companies attracted by the US’ advantaged feedstock position.

The advent of spring brought record months for some, following a pick-up in demand in April. A harsh and extremely cold winter heralded a slow start to the year, but the pace continued to improve as the months progressed, and all the distributors canvassed are reporting increased business this year compared with last.

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Roger Harris, NACD chairman and president and CEO of Producers Chemical, which is headquartered in Sugar Grove, Illinois, says the company is having one of its best years ever and he is anticipating growth of some 4-5% versus 2013. “Construction has picked up again after the downturn and automotive has been very strong,” says Harris.

Both Brainerd Chemical Company and Barton Solvents are also predicting growth of around 4% this year.

Consistent growth is reported across the food, water, personal care and healthcare industries. KODA Distribution Group (KDG) has had a good year in its coatings, adhesives, sealants, and elastomers (CASE) business. CEO Frank Bergonzi says: “It’s been a strong year so far for CASE, along with personal care and specialty ag, and we’re well positioned for a strong 2015.” He adds that the market overall has been fairly flat over the past few years but is now seeing a nice surge and business is being supplemented by new supply deals.

Specialty chemical and ingredients distributor Horn, based in La Mirada, California, says its advanced materials group, which includes aerospace and electronics, has outperformed this year. Horn’s president, administration and operations, Jeff Martin, says he is hopeful of a small growth for the business overall in 2014 compared to 2013, which he says was a very good year for the company.

Martin sees some unique opportunities for the company, which covers the West and Southwest US, in chemicals for hydraulic fracturing – or fracking – from food industry by-products, such as carbohydrates. “We have found that the uniqueness of our different business units has given us some opportunities for food-grade products that we can cross to the oil and gas sector. We have tapped into this to pursue opportunities with green materials,” Martin says.

SHALE BOOM

Unsurprisingly, given the ongoing developments and investments in shale, distributors report oil and gas as the strongest performing sector in 2014, and many of them are picking up new business and exploiting the opportunities on offer. Brenntag North America has seen double-digit growth in the shale plays in North Dakota and Texas this year, says chief operating officer Steven Pozzi.

The US’ low-cost oil and gas position and the significant volumes that will be available for several years have generated investment totaling many multi-billions of dollars in new manufacturing facilities, particularly chemicals, and project announcements have been made by both domestic and foreign companies. Mat Brainerd, chairman of Brainerd Chemical Company, says: “The return of producers to the U.S. and continuation of growth in our goods manufacturing infrastructure will have a huge impact on distribution as there will be more products to sell.”

Brainerd has been preparing for the future. In 2013, his company’s spending jumped from its usual level of around $1m to $3.8m, which was invested in increasing truck and trailer capacity as well as expanding and improving the organization’s infrastructure and facilities. Brainerd has been taking advantage of the current low interest rates to borrow and build now, with the view that rates will no doubt rise in the next 18-24 months.

PURSUING GROWTH

“We will slow down and not make any major investment in 2015-2016,” says Brainerd. “We are preparing for a [economic] blip in 2018-2019. We have positioned ourselves so we are ready for a downturn and have put money into our facilities and people to pursue growth for the future.”

Horn’s efforts are also centered on staying ahead of the curve. Martin says it is important that the company has everything in place for when the economy picks up properly. Horn is buying a warehouse in Dallas, Texas, to increase its services capability such as packaging and blending. The company operates two warehouses in California – Oakland and La Mirada – and uses public warehouses elsewhere.

Distributors have continued to spend on items such as adding or expanding warehouse and storage facilities, equipment, laboratories, trucks, and trailers – not forgetting people too as they hire more support and technical staff.

Barton Solvents typically invests $2.5m-3m annually on improving and growing its operations, according to president David Casten. The company, which has its corporate office in Des Moines, Iowa, has warehouses in six locations across the Midwest and may add another new facility, possibly in 2015. Casten says it will also expand the Kansas City warehouse next year and add more tank storage there as well as at West Bend, Wisconsin. A relocation of its offices in Bettendorf, Iowa, to bigger premises is being considered for 2016.

Producers Chemical has plans to add a solvent tank farm to its facility in Illinois. Harris hopes construction will start in the middle of next year with completion expected by the end of 2015.

Nexeo Solutions has invested in an innovation and application laboratory near its corporate headquarters in Houston, Texas, which will focus on its specialty portfolio. The 20,000 square foot facility opened last June and is ramping up to full scale with projects already underway on behalf of suppliers and key customers.

Joey Gullion, Nexeo’s vice-president end markets, chemicals, says: “We see an opportunity to support formulation and application innovation for our true distribution customers or as a further extension of our suppliers’ strategy in the marketplace.”

The laboratory is one of this year’s key achievements for Nexeo and complements its acquisition of specialty chemicals company Archway on April 1. Prior to this, Nexeo lacked a strong specialty line and had a large exposure to commodity chemicals. The purchase of Archway changed that and added a comprehensive CASE product portfolio.

Gullion says Nexeo’s other major achievement this year has been the successful integration of Chemical Specialists and Development (CSD), which it purchased in December 2013. The acquisition expanded Nexeo’s capabilities in formula preparation, custom blending and laboratory testing, and also enhanced its contract and private label chemical packaging. CSD operated Startex Chemical, Prist, Arpol and ST Labs.

“We have made significant investment around our end markets with a focus on coatings, personal care, oil and gas, household, industrial and institutional products, and lubricants,” says Gullion.

Brenntag North America, has continued to invest in safety, quality and reliability across its locations, says Pozzi, as well as improving its infrastructure and capabilities in geographies with growth potential. One recent investment was in Dickinson, North Dakota, where Pozzi says its distribution center can now offer a complete range of products and services with improved rail access, increased tank capacity and extensive warehouse storage, as well as mixing and blending services. Next year and beyond, several investments are planned in new facilities to support the company’s growth in focus industries such as oil and gas, food and water treatment.

The purchase of Houston-based PhilChem last June has also given Brenntag capability in managing individual supply and demand imbalances, a move designed to help its customers and suppliers deal with the shift in global product flows as a result of the shale gas developments. Pozzi says: “The energy revolution currently occurring in North America is resulting in up to $180bn of new capital investments in chemical production over the rest of this decade. This new capacity will lead to a re-emergence of chemical capacities in North America, particularly ethylene-based products. This will result in a fundamental change in global chemical flows versus the predictions made as little as five years ago.”

Univar opened a second facility in Dickinson, North Dakota, last July to support its oil and gas business in the Williston Basin. The facility encompasses two warehouses, one 15,000 square foot general storage area plus a second 3,000 square foot warehouse rated for indoor flammable storage. A truck base and tank farm are also included. The distributor filed with the Securities and Exchange Commission last June with regard to a proposed initial public offering.

KDG is present in the oilfield chemicals ­segment, primarily through its Ribelin subsidiary, which is headquartered in Garland, Texas, and Bergonzi says it will grow in this market space going forward as it is a key market for both ­Ribelin and KDG. Bergonzi emphasizes too that KDG will continue its M&A strategy of adding strategic partners in high-growth markets, while maintaining its North American strategy of going to market via regional, specialty-focused ­companies.

DRIVER SHORTAGES CONTINUE

Despite the healthier economic picture, distributors are facing battles on several fronts. One of the biggest issues at the moment, and one that looks to be here for a while, is a severe shortage of drivers. When the economy turned down and the need for drivers waned, many of them left the industry and have not returned. In addition, the change in hours of service that came into effect on July 1, 2013, has cut the maximum average working week for truck drivers to 70 hours from 82 hours.

“It is a tough time for transportation in the industry. Costs are being pushed higher and we do not see drivers added to the workforce as fast as they are retiring,” says Gullion. Harris adds that Producers Chemical is now facing lead times for product received by common carrier of two to three weeks instead of two to three days.

The industry is also facing a problem with rail capacity. “There is not enough rail capacity to move as much material as that being produced and everyone is having difficulty in getting railcars on a timely basis,” says Casten of Barton Solvents. Chemical companies and distributors have been complaining for some time that a lack of competition in the rail freight industry is forcing them to pay prices that are too high and unfair. Again, this is a challenge that looks unlikely to be resolved any time soon.

LOGISTICS PROBLEMS

Tank car standards in Canada were highlighted by Pozzi of Brenntag North America. He explains there are new requirements on hazardous materials tank cars in Canada following the oil train crash in Lac-Megantic, Quebec, in the summer of 2013. “An extreme shortage of appropriate tank cars will cause logistics problems. Similar requirements are going to impact the US as well,” Pozzi says.

Another challenge surrounds industry regulation, which distributors say is becoming an increasingly difficult part of operating. Harris and Brainerd highlight the “find and fine” approach that has been adopted by federal agencies, as giving growing concern. They say they have seen many companies fined for violations of the General Duty Clause, which is regulated by the Environmental Protection Agency and the Occupational Safety and Health Act (OSHA), because it is “very broadly worded” and open to interpretation.

“The find-and-fine approach, rather than identifying and assessing us in our competence and safety, is a real and growing concern. Regulation focused on safety concerns and not revenue is the appropriate response,” says Brainerd.

According to Pozzi, OSHA is considering requiring that companies report employee accident information on a quarterly basis. OSHA will make the information public, which Pozzi feels could lead to the potential for misinterpretation of the data.

The new Hazard Communication Standard will come into force on June 1, 2015, as part of the US’ alignment with the Globally Harmonized System of Classification and Labelling of Chemicals. ­However, Casten says there is still a lot of confusion about these requirements and Brainerd explains that because producers are not passing down all the information quickly, NACD has asked for an extension.

The outlook for 2015 remains positive, with distributors expecting a similar performance to this year, and growth of between 2-5% for the sector overall. Casten is seeing a growing confidence in the market with people placing more orders and Harris says 2015 through 2017 will be strong in terms of the US’ general economy.

CHALLENGING TRADITION

There is no doubt too that the North American distribution industry is undergoing a transformation, with companies offering more services than ever before. Gullion says cost pressures in the value chain and the way in which distributors provide services to their key suppliers and ­customers are challenging the traditional business model.

However, a word of caution should be sounded for the future – and that word is consolidation. “There is a wildcard in our landscape, which is consolidation, and it is gaining speed,” says Brainerd. He says the impact, as yet unknown, will be a key factor in the long term, both for the industry and for NACD.

It is an issue that Pozzi also highlights. He says that, with the changes in energy markets, there is an expectation that North America will “re-­industrialize” over the next decade. “A low-cost ­energy environment, predictable regulatory and legal ­systems, dollar-based production and a ­reliable political structure will likely cause manufacturers all over the world to move or add new production in North America. During that period, consolidation of industry players is inevitable as companies look to maximize the efficiency of their ­operations and expand globally,” Pozzi comments.

As the North American economy enjoys the benefits of shale gas in the years to come, multiple opportunities will feed down to distributors. An adaptable and focused approach will put companies in an advantaged position for the future – whatever that holds.