Coping in uncertain times
Price hedging, free trade zones and centralized purchasing help chemical firms wring out excess costs.
Gordon Graff -- Purchasing, 11/4/2004 2:00:00 AM
With energy and raw materials costs continuing their upward spiral, procurement managers in the chemical and pharmaceutical industries must be even more diligent in wringing out excess costs from their operations. That was the "how to" advice offered by analysts and executives at a recent Strategic Sourcing Summit & Showcase.
(The session, hosted by the Drug, Chemical and Associated Technologies Association, the Institute for Supply Management and Chemical Market Reporter magazine, was held in early October in East Rutherford, N.J.)
Taking the macroscopic view, Mark R. Gulley of Banc of America Securities in New York told the gathering that overall industrial production growth will probably slow from about 4.5% this year to about 3.5% in 2005. He cited figures from the American Chemistry Council that U.S. chemical industry growth will similarly taper off—from about 5% in 2004 to 4% next year, largely due to recent energy price increases.
With regard to spending and production, the chemical industry is still in the retrenchment mode, Gulley said. He noted, for example, that the industry's ratio of capital spending to sales has remained nearly unchanged from the historically low level (about 5%) it reached during the 2001 recession. Also, industry operating rates, which bottomed out at about 72% in 2003, have risen only to 76%. Despite the fact that the cyclical recovery of the chemical industry that began in the fourth quarter of 2003 continues, chemical firms plan to rein in spending for "the next year or so," Gulley said.
As chemical and pharmaceutical companies seek to reap rewards from the economic powerhouse of China, more and more of them are building plants there. But pharmaceutical companies seeking to transplant their proprietary technologies to China should be careful that details of their products and processes don't leak out, advises Stefan Doboczky, director of global marketing at DSM Pharma Chemicals. Intellectual property protection "is the single biggest issue that must be managed" for foreign companies building pharmaceutical manufacturing plants in China, he told the meeting. Designers of such facilities should maintain high security for their engineering plans and avoid discussing specifics of their technologies with local authorities, Doboczky said.
Another issue highlighted at the conference was energy price fluctuations and how chemical and pharmaceutical buyers of energy can deal with them. David Traylor, of Deloitte & Touché USA in Houston, suggested two approaches: hedging, where companies buy long-term energy supply contracts that lock in prices; and arbitrage, where firms buy and store energy assets in anticipation of future upward movement in energy prices. Which option is best, he told the session, depends on a company's goals. "You have to decide," he said, "whether you want to manage price volatility or have the least cost for your energy" in a given time period. He cautioned, however, that the "least" cost for a period may still be exceptionally high compared to what a company is used to paying. (For more tips on energy buying in the chemical industry, see PURCHASING June 3, 2004, p?.)
For large companies with global spending on diverse products and services, centralizing purchasing under one organizational roof can also save considerable sums. Anthony E. Santiago, vice president of global strategic sourcing for Bristol-Myers Squibb in Princeton, N.J., described the ways his company has saved by leveraging its worldwide purchasing power in chemicals, packaging, lab supplies, computers, travel, maintenance and repair, advertising and a host of other categories. (For details on Bristol-Myers Squibb's global strategic sourcing program, see PURCHASING, April 3, 2003, p. 23; and October 9, 2003, CPI Edition, p. 24C1.)
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