Prices, demand weigh heavily on chemical distributors' minds
Executives at chemical distributors say the picture for 2009 is still blurry, but two factors are top priority.
By Alan R. Earls -- Purchasing, 11/13/2008 7:00:00 AM
Chemical distributors are between the proverbial rock and a hard place these days with material suppliers raising prices while buyers are tightening their belts and looking for lower costs from distributors. So it's no surprise that chemical distributors are unsure about what trends to expect in 2009. While they may not be expecting the sky to fall, many have specific and serious concerns about their market in the coming year.
Stephen Barney, president and CEO of the Monson Companies in Leominster, Mass., is among the chemical distribution executives who might be considered cautiously optimistic. "Demand has softened, and we expect to see this continue through the first quarter of 2009," he says. Barney also anticipates that the general ramp up in petrochemical prices will stabilize or abate next year.
Indeed, there seems to be a general consensus that commodity prices will moderate as supply trends change. Shondra Garrigus, vice president of purchasing at chemical distributor TRInternational Trading Co. in Seattle, Wash., says demand is down in several key markets. "We move a lot of products such as glycol, solvents, hydrocarbon and epoxy resins for the paint and coating industry and ultimately for the construction industry." But Garrigus sees a broader line of products coming from the Middle East and China, which is helping to reduce overall costs.
But the larger message is one of further change and not a little uncertainty. "We don't yet see that we are at an inflection point because [prices of] everything is still trending up, especially acids," says Andrew Skipp, president and CEO of Hubbard-Hall in Waterbury, Conn. As a consequence, Skipp says his company is being very tentative about long-term purchases and operating on a more day-to-day basis.
"Potassium hydroxide, for example, has tripled in price and caustic soda is still going up so that is a problem for us as far as forecasting," he says. Along those lines, Barney says commodities driven by the fertilizer markets such as urea, could continue to climb because of the dynamics in the Chinese market. As a consequence of the uncertainty, he notes, "We plan on tightening our inventories and packaging of petrochemical commodities to hedge against price declines."
Energy concerns
Energy costs are another bugaboo facing chemical distributors today. Despite recent softening, energy costs remain a major factor in the chemicals supply chain and distributors are getting hit on both sides via price hikes from suppliers and increased fuel costs on the distribution side. "Our energy bills have increased 35% over last year so in the summer months we have worked on tweaking our demand for fuel in our heating process both for product and for comfort," says Barney. On the fuel cost front, Barney says his company's main response has been to optimize volume and weight.
Chemical distribution giant Univar USA in Redmond, Wash., which has its own vehicle fleet, has taken a similar approach by working with customers to combine deliveries, says Terry Hill, senior vice president and chief commercial officer at Univar. And according to Skipp, Hubbard-Hall has imposed fuel surcharges on its shipments to customers while shifting more loads to commercial carriers, which are in a better position to achieve higher utilization levels.
"Now that crude oil prices have moderated, my bargaining position has improved on shipping," says Garrigus. "I'm hoping to be in a better position by April of 2009 with reduction or elimination of some of the fuel surcharges we have been paying," she adds.
Of course, all of these financial concerns have contributed to an acceleration in chemicals industry consolidations, which Barney expects to continue into next year. Some of these huge deals are a benefit to chemical distributors while some are not, he says. "We try to limit exposure to losing a key product line due to an acquisition by having a second source or at least access to a second source," he says.
Likewise, notes Garrigus, her company does not expect to see too much impact, even with large deals like the combination of Huntsman Corp. and Hexion Specialty Chemicals in the resins area. "Companies our size may just need to be a little more agile," she adds.
Skipp says Hubbard-Hall has benefited through some "small acquisitions of our own. And with the bigger acquisitions in the industry, we find that customers sometimes begin to look for other supplier options, which benefits us."
Demand on the run
Looking ahead, though, the biggest question facing chemical distributors in 2009 is demand: Which chemical-buying industries will be thriving and which ones will be on the ropes and for how long?
Garrigus, perhaps the most optimistic executive, sees demand rebounding after the November elections when financial markets hopefully stabilize. In the meantime, though, she admits good customers in some industries have dropped their requirements from two or three containers a month to just one container every two or three months.
And at Monson, Barney says that those same dynamics have put him into direct competition with producers in the plastics sector. "As demand has weakened they have begun to look for business at the second tier level." Defending against attacks on market share, both Univar and Hubbard-Hall say a diversified customer base will be their key to success in the new year, as industries take turns riding the economic rollercoaster.
Somewhat surprisingly, one element of demand that does not seem to be figuring too much in anyone's plans is Green products.
"We have not been asked to offer Green chemistry in many of our focused markets...it has just been a factor of price," says Barney. However, he notes, when customers are forced to offer Greener products, that may change. "We are watching things like REACH in Europe which will further drive demand in this area," says Hill.
REACH and other global demand drivers, and global opportunities, are on the mind of others, too. Barney says 2008 presented expanded export opportunities for his company thanks to the weaker dollar.
But John Sammons, senior vice president and chief administrative officer at Univar, says his company and others are also watching as their customers move more operations offshore. "We need to follow those customers," he says. In some cases that goal may be pursued through local partnership and in other cases by building capacity overseas. "We want to meet customer demand in those regions," he says.
In short, 2009 looks to be a year with a lot more potential for variation along the way. "It could go either way," says Garrigus. "I'm hoping that after the election and when we get through the big scare on subprime financing that people will be in a more positive mental position."
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