Specialty chemicals buyers put focus back on cost concerns
Prices, supply issues continue to frustrate specialty chemicals buyers
By Gordon Graff -- Purchasing, 11/13/2008 2:00:00 AM
It seems specialty chemicals buyers can't get a break. Even though specialty chemical makers along the Texas Gulf Coast took only a glancing blow from Hurricane Ike in mid-September and most manufacturing infrastructure was undamaged, the storm knocked out some transportation and utilities and caused worker evacuations, this curtailed chemical production and supply in the region. By early October, production was nearly back to normal in the specialties supply chain, just in time for buyers to focus on how tightening credit and slumping markets will impact things like chemical prices, a shrinking supply base and soaring logistics and energy costs.
After numerous shutdowns related to Hurricane Ike, "many Houston-area refinery and petrochemical facilities are fully operational," stated Chemical Market Associates Inc. (CMAI) in a post-hurricane update on October 3. One company, Solutia, initially reported that the hurricane created snags in barge and rail traffic near its Alvin, Texas, plant that could slow recovery. But a spokesman for the firm told Purchasing that operations at the unit were returning to normal by the first week of October.
At Dow Chemical, a representative said that the storm had caused "widespread disruptions" at its Gulf Coast facilities in power and utilities, feedstock and raw materials supplies and logistics, but added that recovery efforts were underway and that all personnel at its plants had returned to work. Asked to assess the situation three weeks after the storm, a spokeswoman for AkzoNobel which declared a hurricane-related force majeure for peroxide-related additives made at its Pasadena, Texas, plant, said that conditions at the plant "continue to improve," adding that the force majeure would be lifted soon. And a source at Huntsman, which also declared force majeure for specialty products at several of its Texas plants when the hurricane hit, noted that four of the five manufacturing sites shut down by the storm had resumed operations by the beginning of October.
With the effects of the hurricane receding, rising prices have returned as the single biggest factor impacting North American buyers of specialty chemicals. For example, the producer price index of the U.S. Bureau of Labor Statistics shows big jumps in the August 2007–2008 period for a wide range of specialties, including agricultural pesticides, water treatment compounds, plasticizers, gum and wood chemicals, and in-vitro diagnostic agents (see table below).
But despite the recent plunge in crude oil prices, buyers of specialty chemicals "aren't seeing much price relief yet," says Bill Polk, research director at AMR Research, an industry consulting firm based in Boston. "It takes a while for the price of crude to work its way through the supply chain and impact the cost of a final product," he adds. One sign of that trend, Polk notes, is that the rate of price increases in specialties has slowed down over the past few months.
Part of the reason specialty chemical prices continue to climb is that the market is still adjusting to a long line of energy price hikes. "The momentum is such that we've sustained for the better part of two years a systematic increase in energy costs, with few corrections," says Bob Zieger, a category manager at Ariba, a sourcing and procurement services provider based in Sunnyvale, Calif. "So this train has been moving for quite some time," he adds. In terms of their sourcing decisions, buyers of specialty chemicals are not sure what to do about the new realities Zieger notes: "They're waiting to see how this current situation plays out," he says, weighing such questions as the sustainability of oil price declines, whether the U.S. dollar will continue to appreciate against foreign currencies, and the likely impact of government infusions of capital on global economies.
Concerns over future price trends come amidst a backdrop of continuing supply consolidation. The latest examples of this are Dow Chemical's acquisition of specialty chemicals giant Rohm and Haas, and BASF's bid to acquire Ciba Specialty Chemicals. Consolidations have created "a more narrow supply base" in the U.S. for some specialties, notes Zieger. He adds that some buyers, worried at the prospect of just one or two domestic suppliers of their key chemicals, have been turning to overseas sources to find other competitive options and mitigate their supply risks.
Unlike the case with commodity chemicals, buyers of specialty chemicals do not quickly change suppliers in response to small price fluctuations. One reason, Zieger explains, is that many chemical processes have engineering specifications built around particular grades of specialties provided by specific suppliers. "So there are often costs involved in switching sources for specialty chemicals," he says. "If a buyer has a domestic source it may be impractical under any market conditions to import from another country."
In any case, the current economic climate has not caused any change in purchasing paradigms such as a wholesale rush to overseas sourcing by U.S. specialty chemical buyers. But that could change, he notes, as the future direction of the economy becomes clearer.
One effect of the slumping U.S. economy is demand for specialty chemicals in the U.S. has begun to shrink, as downstream industries like automotive and housing have throttled back their operations in a slowing economy.
According to the American Chemistry Council, a trade group, U.S. production of specialty chemicals in the U.S. during August was 3.5% less than the same month a year earlier. While domestic demand for specialties has been weak, exports from the U.S. to Europe and Asia has been robust the past few years. The reasons for this, Polk says, were the weakness of the dollar against foreign currencies and lower energy and feedstock costs in the U.S.
But, in the past few months, the dollar has begun to recover, while demand for all chemicals in Europe and Asia has grown sluggish. As a result, export opportunities for U.S. specialty chemical makers "are quickly drying up," says Zieger. Overall, "the signs are not looking good" for specialty chemicals or other manufacturing industries, he adds.
Meanwhile, buyers of specialty chemicals are doing all they can to offset rising prices. At KMG Chemicals, Sheldon Martinez, a purchasing agent in the Houston-based company's animal health business, says that "cutting logistics costs are our main concern right now." To help reach this goal Martinez says his company is combining shipments of different products that would normally be shipped separately, and also buying in larger quantities.
Still, the exorbitant cost of diesel fuel, which has stubbornly remained at record-high levels of around $4/gallon, has made it hard to rein in logistics costs this year, Martinez says. Even modest but sustained drop in fuel prices would provide much needed relief, he adds.
| *Source: SRI Consulting | |
| Global market* (2007) | $440 billion |
| Average annual growth rate, 2006–2011* (U.S., Western Europeand Japan) | 3.2% |
| Key products | Plastics additives, Catalysts, Active pharmaceutical ingredients, Pesticides, Electronic chemicals, Specialty coatings, Imaging chemicals, Flavors and fragrances, Food additives, Cosmetic chemicals, Specialty pigments, Imaging chemicals |
| Products | Percent change, producer price index, Aug. 2007–Aug. 2008 |
| Source: Bureau of Labor Statistics Momentum from past energy and feedstock hikes will keep specialty chemical prices on the rise well into the fourth quarter of 2008, say analysts. |
|
| All specialty chemicals | 7.2 |
| Agricultural and commercial pesticides | 14.7 |
| Iron oxide pigments | 9.8 |
| Water treatment compounds | 9.0 |
| Gum and wood chemicals | 7.8 |
| Titanium dioxide pigments | 4.6 |
| In-vitro diagnostic reagents | 3.8 |
| Synthetic organic plasticizers | 3.7 |
| Inorganic paint pigments (except titanium dioxide and iron oxide) | -1.8 |
| Chrome colors | -8.3 |
| Prepared photographic chemicals | -9.6 |
| Production change (%) from same month in 2007 | May 2008 | June 2008 | July2008 | August 2008 |
| Sources: Federal Reserve Board; American Chemistry Council The biggest declines in specialty chemicals demand have been in coatings-related products, which are tied to the depressed housing and construction sector. |
||||
| Total chemical industry (excluding pharmaceuticals) | -1.8 | -2.2 | -2.4 | -2.8 |
| All specialty chemicals | -1.0 | -1.4 | -2.8 | -3.5 |
| Coating-related specialty chemicals | -3.7 | -5.4 | -7.2 | -8.1 |
| Non-coating specialty chemicals | 0.2 | 0.5 | -0.7 | -1.4 |
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