Chemical Purchasing Summit brings forecasts, strategy for chemical buyers heading into 2010
Conference for chemical buyers provides marco and microeconomic views.
-- Purchasing, 10/15/2009 2:00:00 AM
Chemical buyers and chemical industry professionals gathered at the Seaport World Trade Center in Boston last month to hear presentations in the 2nd Annual Chemical Purchasing Summit hosted by ICIS and Purchasing. Presentations ranged from macroeconomic forecasts to chemical market outlooks and supplier relationship tips.
Forecasts and supply
On the first day of the Summit, American Chemistry Council chief economist Kevin Swift said that the global chemical industry is undergoing a V-shaped recovery, following industrial production, which is expected to last at least through the third and fourth quarters.
"Destocking is ending and leading indicators suggest a trough with recovery of final demand and inventory swing engendering an upturn," said Swift.
"We see a V-shaped recovery into Q3 and Q4, and more signs of an industrial recovery in 2010," he added. The economist said he is seeing V-shaped recoveries across the board in plastic resins, chlorine, polypropylene (PP) and polyvinyl chloride (PVC). "Chemical recoveries have historically been V-shaped," he added.
For 2009, global chemical production is expected to fall 5.9% before recovering to 3.5% growth in 2010, led by strong growth in Asia Pacific, Latin America, Eastern Europe and Africa & Middle East regions, said Swift.
U.S. chemical production is projected to decline 7.2% in 2009 and bounce back 1.7% in 2010. Excluding pharmaceuticals, chemical production will decline 10.7% in 2009 and recover by 1.5% in 2010, he noted.
The recovery in the overall economy from the depths of late 2008 and early 2009 is driving chemical demand, said Swift.
"This time last year we stood at the abyss and there were the sounds of shoes dropping—Lehman Brothers, then AIG. Things were spinning out of control," he recalled.
"But now, the picture is clearer. A virtuous cycle is emerging and the economy will return to a growth trajectory, with a stabilizing and improving housing sector and consumer spending," he added.
However, the sustainability of any long-term recovery will depend on final demand from consumer spending and investment, Swift noted. Swift also predicted that cap and trade legislation may provide clarity about what the government wants from manufacturers, but it will increase the cost of energy derivatives and have a direct impact on the energy-dependent chemicals industry. Swift said the downstream impact of cap and trade would not only raise costs for energy and chemicals, but also expedite the move of ongoing shift of chemicals production capacity to lower-cost regions, which likely have less strict emissions standards. So at the end of the day, cap and trade may in fact increase emissions globally.
"The higher energy prices will also impact consumers' discretionary spending in the U.S.," Swift said, which will reduce end-product consumption.
With the macroeconomic trends addressed, it was time to get into commodity-level outlooks. Greg Smith, vice president of engineered resins at Resin Technology, said buyers of ABS and polycarbonate resins can look forward to flat or slightly lower prices over the next 90 days. Smith said his organization saw benzene contract prices drop in September by 86¢/gallon. The reason, he said, is lower-priced Asian imports, improved supply and soft demand.
Smith said demand growth for ABS will be 6% lower than in 2008. He also said feedstock costs for polycarbonate will be lower over the next 90 days. In the third quarter of 2009, the cost to produce polycarbonate is 18¢ below the cost in the third quarter of 2008.
"You have to know that you're paying the right price every day," Smith said. "Most likely, buyers don't know that." That's why staying abreast of feedstock costs is a critical factor for buyers to take into consideration when forecasting their costs for resins, he told attendees.
In another presentation on the first day of the Chemical Purchasing Summit, Randy Velarde, founder and president of the Plaza Group, said the recession has expedited the drive of petrochemical supply to low-cost markets. "We all knew margins would suffer due to new capacity coming online overseas, but the economy of the past two years has expedited the exit of much capacity in the domestic market," he told attendees.
Specifically, Velarde said the rapid increase of petrochemicals capacity in the Middle East has driven the closure of chemical plants around the world and put more stress on older plants in many markets. In Asia and India, there has also been a buildup in capacity, which has reduced the region's need for imported materials.
"We as buyers must plan for a volatile market going forward and develop a sustainable buying strategy for the long-term and act on it," Velarde advised attendees. And while suppliers are more hungry for business now than pre-recession, partnering with the right chemicals firm can be a major success factor for a company's supply chain.
Supplier management tips
But it wasn't all about the numbers at the Chemical Purchasing Summit, there were presentations to help buyers manage supplier relationships. Even more than price, Velarde recommends evaluating suppliers based on their financial standing, their ability to recognize the buyer's issues and priorities and their ability to monitor different global factors that could impact the buyer-supplier relationship.
True supplier collaboration is driven not by periodic meetings, but by letting down the walls and sharing more information-specifically demand forecasts. Purchasing organizations that anticipate demand fluctuations and share that information with suppliers gain overall cost benefits from the deeper level of supplier collaboration.
"Today it's less about whose problem it is because it's everyone's problem," said Rick Bushnell, vice president of sales Americas for chemicals industry hub Elemica. And the best way to provide more accurate demand signals is to integrate business systems with the most closely-held suppliers, says Bushnell.
Supplier collaboration can serve as a risk management strategy, Bushnell said, as it more closely matches the buyer's needs with the supplier's capacity and avoids a possible mismatch where buyers need what suppliers cannot deliver. It's also an effective way to keep track of a supplier's financial health.
Bushnell suggests buyers approach this level of supplier collaboration primarily with sole-source suppliers that already have a deeper commitment to the buyer's needs. And moving to a vendor-managed inventory model is another show of commitment between the two sides. But for VMI to work best, "the suppliers need better visibility into the demand signals than you did prior to moving to VMI. They need visibility into the silo so they can decide the optimal shipping method to a given location, for example."
While Bushnell acknowledged getting suppliers to share their cost structures is not always possible, a good first step is to ask a trusted supplier "Where am I adding expense to the processes?" Also, he suggests logistics costs as a good first conversation.
Cap and trade will increase energy costs
09/16/2009
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