Chemicals Distribution 2007: Big deals

Demand continues strong for chemicals—and for the distributors who provide them, as a new wave of consolidation begins.

By Susan Avery -- Purchasing, 5/3/2007 6:00:00 AM

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A consolidating chemical distribution industry is one of purchasing's biggest concerns, say the nation's chemical distributors responding to Purchasing's annual Top 100 survey. And rightly so.

As companies in any industry merge, buyers' choices—at least in terms of the number of suppliers they can choose from—narrow. Vaughn McCoy, senior global procurement manager at Eastman Chemical Co., in Kingsport, Tenn., says that some buyers may feel they have less leverage in pricing and other negotiations. "Fewer suppliers, due to consolidation, can force up prices," he says.

And chemical buyers this year are witnessing some interesting consolidation activities. In March, Univar, which takes the top spot on Purchasing's Top 100 chemical distributor list, with $4.4 billion in sales, made an offer to acquire the fourth biggest chemical distributor, Chemcentral, which had $1.4 billion in sales. Then, number-three Brenntag, with $2.5 billion in sales, made its own offer for Chemcentral, whereupon Univar upped its original offer.

While it appears that Univar's acquisition of Chemcentral is a done deal, industry watchers are wondering whether other big players will make moves that further consolidate the industry. One, of course, is Brenntag which just purchased Ulrich Chemical in March. Other distributors that say acquisitions may be in the works in 2007 are Harcros, Itochu Chemicals America and Hydrite.

The Univar/Chemcentral deal—the combined company will have nearly $6 billion in sales—takes place after a year that saw Brenntag finalize its acquisition of Los Angeles Chemical after purchasing Quadra Chemical in the fall of 2005. Big specialty chemical distributor KODA Enterprises Group also made a purchase in 2006. It bought Ribelin Sales.

Of course, important as they are, consolidations weren't the only things on the minds of distributors responding to this year's survey. Here are some of the other things they say:

• Many report having a record year. Sales for the Top 100 averaged $215.9 million in 2006, a $23 million jump from 2005.

• Price increases, overseas competition and product shortages are their customers' biggest concerns.

• Purchases of paints and coatings for manufacturing and housing softened toward the end of 2006, not surprising given the economy.

• But purchases of chemicals for pharmaceutical and electronics applications should be strong in 2007.

Pruitt: "2006 was a good year for focusing on improving the business and customer service."

Remarkable year

Gary E. Pruitt, chairman and CEO of Univar in Bellevue, Wash., says 2006 was "a good year for us and a good overall environment for chemical distribution. There were no huge pricing spikes or product shortages. It was a good year for focusing on improving the business and improving customer service."

As chemical producers and chemical purchasers work to rid the supply chain of inefficiencies and costs, Pruitt sees chemical distribution becoming a more vital link in that chain. "Those that make the right investment and move in the right direction have a lot to gain in the coming years, and it will help both producers and end-use customers tremendously."

Of Univar's move to acquire Chemcentral, Pruitt says that Univar is constantly looking for ways to broaden its footprint "that allow us to become more critical to producers and to our end-use customers." Chemcentral's expertise and product lines are expected to be especially helpful to Univar in serving customers in these industry segments: coatings, household and industrial and personal care. Executives at Chemcentral in Bedford Park, Ill., declined Purchasing's invitation to be interviewed for this story.

"Last year was really a continuation of the strong economy and strong demand we saw in 2005—at least through the first three quarters of 2006," says William A. Fidler, president and CEO at Brenntag North America in Reading, Pa. "I think the fourth quarter saw a little softening in some sectors, but all in all 2006 was a very good year." While Fidler notes that demand for chemicals was strong across the board, he adds that chemical buyers did face some pricing challenges early on the year, namely continued upward pressure on fuel and energy costs.

Of the Chemcentral acquisition, Fidler says it's evidence that consolidation of the chemical distribution industry will continue. As for Brenntag, "we continue to focus on the fundamentals of our business and to look for opportunities for strategic acquisitions. That's something we've been doing for quite some time." He also expects the company to continue to expand its portfolio of specialty chemicals, "which is very important to the growth of the organization going forward."

Morris Owen, vice president, Western region for Ashland Distribution in Dublin, Ohio, says, "We have been long-time competitors with Univar and Chemcentral, and, from our perspective, we look to continue to compete with them whether they are one or two companies." With $4.1 in sales, Ashland Distribution is the second biggest chemical distributor on Purchasing's top 100 list.

Jahn: "Because chemical distributors sell to many markets, the industry a reflects the overall economy."

The rest of the year

Owen is optimistic about the months ahead. "If we continue to keep serving our customers and working with our suppliers, we will be able to come up with product and service offerings that customers will want to place their business with us." One especially hot area where Ashland Distribution expects to expand is in its environmental services business.

Because chemical distributors sell into many different markets, the industry is a reflection of the overall economy, says Christopher L. Jahn, president and COO of the National Association of Chemical Distributors in Arlington, Va. "So, for many chemical distributors who are NACD members, 2006 was a record year. However, many members also saw a softening toward the end of the year that continued into 2007." Among these are market sectors related to manufacturing and housing such as paints and coatings. Areas that still see strong growth in 2007 are: pharmaceutical and electronic components, such as semiconductors.

In addition to a slowing economy, chemical distributors also face challenges of keeping up with federal, state and local regulations, including new U.S. Dept. of Homeland Security rules and hazardous material transportation legislation. For NACD's part, distributor members started at the beginning of the year a third cycle of responsible distribution process verifications.

For the rest of 2007, Pruitt at Univar doesn't see anything that indicates the economy is going "to really slow down from 2006, and that's across all the distributor's markets." Also, he's looking for a slightly stronger economy in Europe than in the past couple of years.

Brenntag's Fidler says business conditions began to change in the fourth quarter of 2006. "Some customers, sensing a change in the pricing environment, really drew down inventories. And, now we are in a period where there are almost conflicting strong pricing movements." That is, prices on some products such as liquid caustic soda, ketones, alcohols and some specialty chemicals, which had fallen late in 2006 now are starting to rise.

Purchasing's Top 100

Eighty-nine percent of chemical distributors responding to Purchasing's Top 100 survey report sales increases in 2006. Ten percent saw sales fall. The remaining 1% had a year that was essentially flat.

For the Top 100, sales averaged $215.9 million in 2006, compared to $193.8 million in 2005. Last year, sales at the Top 100 chemical distributors increased 10.2% from the previous year.

Size doesn't seem to matter. Big and small chemical distributors alike recorded strong sales in 2006. For the Top 50, sales averaged $404.6 million in 2006. A year ago, this figure was $363 million, a 10.2% increase. For distributors with sales of $100 million or more, the average tally for 2006 was $688.7 million, up from $617.4 million, an increase of 10.3%.

The top five chemical distributors shifted positions somewhat on Purchasing's list. The four biggest players still are Univar ($4.4 billion), Ashland ($4.1 billion), Brenntag ($2.59 billion) and Chemcentral ($1.4 billion). New to the fifth spot with 2006 sales of $1.1 billion is Helm America. ICC Chemicals, which had claimed the spot in previous years, comes in at number six on this year's list, with $796 million in sales.

Itochu Chemicals America ($443 million) and Harcros Chemical ($345 million), which both saw sales increases in 2006, remained firmly planted in the seventh and eighth spots on the Top 100. With sales of $331 million, JLM Industries moves up a spot from number 10. Taking its place, and rounding out the top 10, is Hydrite Chemical, with $300 million in sales in 2006. Aceto, which placed in the number-nine spot on last year's list, declined to return a completed survey to Purchasing this year.

The next five, which comprise the top 15, are: Canada Colors & Chemicals ($251 million), KODA ($250 million), Interstate Chemical ($225.2 million), Premium Ingredients ($200 million) and Superior Solvents & Chemicals ($185 million). KODA's acquisition of Ribelin Sales helped it move from the 20th spot, while Los Angeles Chemical which had been at number 15 was acquired by Brenntag in 2006. Premium Ingredients is new to the list this year.

As one company, the independent chemical distributors that make up the Omni-Chem 136 alliance would fit between Brenntag and Chemcentral on the top 100 list. Its sales were approximately $1.6 billion (including sales of Ulrich Chemical which, after being purchased by Brenntag, will no longer be an Omni-Chem 136 member.) Rather than list the companies together as an alliance, Purchasing chooses to list each individually.

The same holds true for the Chemical Distribution Network (CDN). Together the 21 independent chemical distributors belonging to the CDN have estimated sales of $948 million which would place the alliance after Helm America. For more information on these alliances and their capabilities, please see the accompanying sidebar on p. 32C13.

The remaining 10 spots on the top 25 chemical distributor list for 2007 saw some slight shifting, which isn't unexpected. Those in slots 16 through 25 are: Quadra Chemicals ($184 million), EMCO Chemical Distributors ($179 million), Mays Chemical ($155 million), K.A. Steel Chemicals ($150 million), PVS Chemicals ($144.8 million), Hawkins Chemical ($143.3 million), The C.P. Hall Co. ($125 million), E.T. Horn Co. ($124 million), Barton Solvents ($122 million) and the M.F. Cachat Co. ($115.7 million)

More survey results

Purchasing's Top 100 chemical distributors were managing an average of 11 stocking locations at the end of 2006, according to results of the survey. This figure is slightly lower than last year, when it was 11.8. Of the distributors responding to the survey question, 29% opened stocking locations in 2006, while 9% closed them. Last year, these figures were 20% and 10%, respectively. Twenty-nine percent plan to open new locations in 2007, roughly the same figure as one year ago (28%). Of those who say they'll open new locations this year, 12% expect to open more than one in the months ahead. Last year, this figure was 13%.

Chemical distributors on the Top 100 list have stocking locations mainly in the U.S. and Canada. A growing number now have stocking locations in Mexico (10%) and Latin and South America (8%). Some sell product in Europe (14%) and Asia (9%).

At year end 2006, Purchasing's Top 100 chemical distributors had an average of 3.6 million gal. of bulk storage capacity and an average 349,000 sq ft of warehouse space. On average, survey respondents have 50 trucks, 15 vans, 62 trailers, 38 tankers and 73 railcars in their vehicle fleets.

Chemical distributors on this year's list have on average 186 employees. Average sales per employee is $1.5 million. Last year, this figure was $1.3 million.

In 2006, the top 100 chemical distributors sold products to buyers in these industries: cosmetics/personal care (89%), paints and coatings (86%), adhesives and sealants (77%), soaps and detergents (76%) and food and beverage (69%).

Eighteen percent say they serve a niche market, down dramatically from the 26% who said the same last year. Of those who responded to Purchasing's survey, 38% serve customers in more than 13 different markets, meaning they are fairly or very diversified. This is up from 29% a year ago. On average, the top 100 today sell product to 11 markets.

Chemical distributors on Purchasing's list provide their customers in those markets with a variety of products. Of respondents, 43% offer 9–16 different kinds of products. On average, respondents carry 13 lines. Classifying themselves as specialized chemical distributors are 29% of the top 100; they offer 1–8 product lines.

2007 distributor profile

Source: Purchasing
Average bulk storage capacity:	3.7 million gal
Average warehouse space:	377,000 sq ft
Average delivery fleet size:	142 vehicles
Of those who say they have	% that have one or more
Trucks:	48%
Vans:	14%
Trailers:	62%
Tankers	37%
Railcars:	37%
Other vehicles:	8%

Sales per employee

Source: Purchasing
Average number of employees in 2006:	194.6
Average sales per employee:	$1.3 million

Other regions with stocking locations
In addition to the U.S. and Canada, the top 100 chemical distributors have stocking locations in the following regions:

Source: Purchasing
Europe	14%
Mexico	10%
Asia	9%
Latin/South America	8%
Other areas:	4%

Other services offered
(beyond delivery and warehousing)

Source: Purchasing
Service	%
Blending	67%
Contract packaging	54%
Technical training	47%
Safety training	38%
Customer product research	37%
Manufacturing	35%
Hazardous waste removal	17%
Solvent reclamation	13%
Other	16%
No extra services offered	10%

Industries which purchase through distributors

Source: Purchasing
Market	%
Cosmetic/personal care	89%
Paints and coatings	86%
Adhesives and sealants	77%
Soaps and detergents	76%
Food and beverage	69%
Pharmaceuticals	68%
Plastics	67%
Primary chemical processing	65%
Pulp and paper	57%
Automotive	56%
Electronics	52%
Municipal	44%
Metals	44%
Agriculture	44%
Textiles	42%
Tires and rubber	39%
Petroleum refining	35%
Glass and refractory	33%
Appliances	11%
Other	20%

Most popular lines among distributors

Source: Purchasing
Product line	%
Surfactants	75%
Amines	68%
Inorganics	67%
Alcohols	64%
Esters	63%
Solvents	61%
Acids	60%
Food additives	57%
Glycol ethers	56%
Resins	52%
Chlor-alkali	49%
Thickening agents	48%
Chelating agents	47%
Ketones	47%
Chlorinated solvents	44%
Plasticizers	43%
Polyglycols	42%
Fatty chemicals	41%
Lubricants	40%
Pigments	40%
Catalysts	37%
Hydrogen peroxide	36%
Specialty quats	34%
Flavors and fragrances	31%
Adhesives and sealants	22%
Aldehydes	21%
Industrial gases	14%
Institutional maintenance	10%
Other	33%

Distribution's plans for 2007

Source: Purchasing
Add products	44%
Expand geographically	24%
Add services	22%
Improve operations	16%
Hire personnel	16%

Top customer concerns

Source: Purchasing
Price increases/stability	51%
Overseas competition/mfg. going offshore	27%
Product availability/shortages	21%
The economy	20%
Fuel/energy/transportation costs	17%
Regulatory compliance	17%
Consolidations/shrinking markets	12%
Business survival/profitability	12%
Hiring & retaining qualified personnel	5%
Transportation/logistics	4%

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