2 BULKDISTRIBUTOR September / October 2017 Chemical Industry
2 BULKDISTRIBUTOR September / October 2017 Chemical Industry
Commodity traders
How are chemicals manufacturers and distributors adapting to growing commoditisation in their respective markets ?
Chemical distribution has been riding a wave of mergers & acquisitions since the end of the most recent global recession . Market leaders like Brenntag and Univar have steadily added to their portfolios by buying smaller and mid-sized firms . Yet despite all the activity , it is still a fragmented industry . Five companies – Brenntag , Univar , IMCD , Azelis , and Nexeo Solutions – have a combined global market share of about 40 percent . With the exception of Azelis , all are publicly traded and have ample capital for additional acquisitions . They are continuing to buy smaller firms , with Brenntag alone acquiring or announcing 12 acquisitions over the past two years . A big driver behind this trend has been a shift within the chemicals sector towards more ‘ specialty ’ chemicals . Because these products are manufactured to perform specific enduse functions , they provide manufacturers with opportunities for product differentiation and branding , and by extension , higher margins than commodity chemicals . While the history of the chemical sector is one of relentless commoditisation as one generation ’ s innovations become standard products of the next , the pace is increasing .
Brenntag and other big distributors have steadily added to their portfolios by buying smaller and mid-sized firms
Struggle to innovate
There are a number of causes behind this . According to McKinsey , a consultancy , in some sectors specialty players are struggling to create the innovative products that offer significant additional value to customers and differentiate themselves from competitors . Meanwhile , the combination of new , low-cost market entrants — especially from China — and too much capacity means that the prices of increasing numbers of products are determined not by the value they deliver to customers but by their production costs and freight to market . Commoditization of specialty chemical businesses poses a structural challenge for the industry . How should these enterprises respond ? Chemical companies must recognise that commoditised businesses can earn attractive returns if they are run in an entirely different way from specialty businesses . The key is to tailor the new operating model to the business ’ s true needs and the costs it can bear . To turn commoditisation from a threat into an opportunity , companies should take three steps , McKinsey says . First , they need to spot commoditisation coming , so that they can start to act before they are outpaced by others . Second , they should design an appropriately tailored operating model for their commoditised businesses . Third , they must embark on a comprehensive change effort to put that new model to work . Companies that get this right can capture significant rewards , with a return-on-sales uplift of as much as five percentage points .
Getting to market
But what of the firms that distribute chemical products to manufacturers ? In the past they have been perceived as high
Our Way to Your Destination sustainable – intermodal – global
Aakash is a growing distributor that has evolved from an importer of dyes for the textile industry into a global distributor of pigments , liquid colorants and specialty resins
volume , low margin businesses with few opportunities to establish distinctive branding . However , Grace Matthews , a Chicago-based investment bank , points out , well-managed distributors can have steady cash flows and growth potential equal to specialty chemicals . These advantages haven ’ t gone unnoticed , and both strategic and private equity buyers have been actively acquiring distribution companies . Typical of a consolidating industry , chemical distribution is characterised by a handful of national or multi-national companies that have the lion ’ s share of the market , and a huge number of
small , medium-sized , or regional players , Grace Matthews says . Just like their chemical manufacturing customers smaller distributors have been developing ‘ value-added ’ business models that keep them close to those customers and , in some cases , have allowed them to create their own branded products . “ Value-added distribution has really caught on since the end of the recession , with the result that successful distributors today often specialize in a particular market and offer services that enable their customers , many of whom may have felt under-served by the majors , to focus on their core strengths ,” the banking firm said in its Spring newsletter . “ Far different from the old ‘ pallet breaker ’ model of distribution , the value-added approach allows distributors to partner with customers and realise ‘ specialty-type ’ margins . In addition to the classical services like warehousing , repackaging and logistics , distributors are being compensated for services their customers are more than willing to outsource to them . The scope of value-added services distributors provide can be very broad , encompassing quality control , inventory management and logistics , regulatory compliance , and even custom blending and application development .” In many cases , distributors can add value at both ends of the chain , partnering with suppliers as well as customers . Some have even established in-house R & D labs that essentially act as a manufacturer ’ s outsourced product and application development arm . Sales reps usually have degrees in chemistry or chemical engineering and can work with suppliers and customers on a peer group basis understanding their needs and requirements . Being closer to the end markets , value-added distributors decrease the risk of new product development for manufacturers and play an important role in bringing new products to market .
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A case in point
Grace Matthews highlights the experience of Aakash Chemicals which it recently represented in a recapitalisation and investment by private equity firm CenterOak Partners . Based in Glendale Heights , Illinois , Aakash is a growing distributor that has evolved from an importer of dyes for the textile industry into a global distributor of pigments , liquid colorants , specialty resins and other additives for the plastics , coatings , inks , textiles , and agricultural industries .
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