Chemical distributors convey cautious optimism on 2010
A renewed sense of supply chain collaboration helps chemical distributors balance manufacturing capacity, inventory levels, customer demand and pricing heading out of a recession.
By Rich Weissman -- Purchasing, 11/19/2009 2:00:00 AM
Top 100 Chemical Distributors
The depth and severity of the recession has sent shock waves throughout the chemical industry. But, like a patient who gets a dreadful diagnosis from a doctor and then mends his ways to a speedy recovery, the chemical distribution industry seems poised to exit the recession with a new found appreciation for inventory management, cost controls, better supply side relationships and a spirit of improved communication throughout the supply chain. In fact, for some chemical distributors, the recession may have been a much needed wake-up call.
Some chemical distributors weathered the storm better than others. "We hit bottom in the fourth quarter of 2008 but we've had three great quarters since then," says Bruce Schechinger, president and CEO of Salt Lake City-based distributor BHS Marketing. "We were able to align our inventories with our customers' needs and managed to avoid some of the pricing pitfalls that were prevalent in our industry." Still, Schechinger is concerned with the balance of manufacturing capacity, inventory levels, customer demand and pricing.
Schechinger, who is also the current chair of the National Association of Chemical Distributors (NACD), credits the specialty chemical market for a good part of his company's success. "While the commodity chemicals market was hard hit, distributors of specialty chemicals seem to have done better during the downturn." Schechinger, who is optimistic for 2010, sees strength in the food services market, especially for cleaning and sanitation products. He also sees growth in the environmental and water treatment markets.
"When it comes to inventory, cash is king," says Schechinger, who advocates for close relationships with both suppliers and customers to manage supply and demand, and subsequently pricing. "We need to actively manage our inventory and capture the best pricing possible for our customers. That takes a lot of planning and communication throughout the supply chain."
In order to gain better market knowledge and stay closer to their customers, Schechinger's sales force actually made more sales calls than usual during the economic turmoil to get a thorough handle on market demand. "Our relationships with our customers are huge and we stay in tune to their needs," says Schechinger. "Not only can we service them better, but it allows us run our business more efficiently."
Suppliers benefit from the customer-facing work as well by gaining a better understanding of demand trends. "We work with our suppliers as much as we work with our customers," says Schechinger. "If you don't have good suppliers you cannot have happy customers." Schechinger opts for transparency in the supply chain. "We want our suppliers to understand where and how their products are used so we can maintain our focus on best practices and responsible distribution."
William Fidler, president and CEO of the Reading, Pa.-based distributor Brenntag North America, sees a fragile and slow recovery for the chemical distribution market in 2010. "Brenntag saw some improvement in overall business beginning in April, with most signs pointing to a continuation of a modest increase in demand across multiple industry segments for the balance of the year," says Fidler. "However we're prepared for something other than a normal recovery."
Fidler notes that overcapacity, improving but still weak demand, high unemployment, unprecedented government intervention in the economy and unsolved remnants of the financial crisis will make the recovery painful and questionable in terms of sustainability.
"We were prepared for the economic downturn that struck in 2008 but we certainly were not immune from its impact," says Fidler. "At Brenntag we have a variable cost structure and we managed our expenses well. We were even able to grow in certain customer segments and service areas."
Fidler sees a recent increase in optimism from chemical buyers. "There seems to be some sense of renewed optimism as consumer confidence improves, the stock market continues to rebound and inventory corrections run their course," says Fidler. "Along with an overall reduction in energy prices, customers are benefiting from reduced costs for packaging and transportation." Fidler sees coatings, adhesives, sealants and elastomer buyers providing some increase in demand, but he notes stronger demand coming from the food, personal care, and water treatment business segments.
Things are also looking up for Brenntag's domestic and global suppliers as well. "The recovery may be fragile but suppliers are reporting the same sense of renewed optimism that we're seeing from our customers," says Fidler, with an eye towards an industry ramp-up. "Operating rates are low and more capacity will have to be rationalized. The recession spared few if any chemical suppliers that distributors depend on."
Roger Harris, president of the Batavia, Ill.-based Producers Chemical Company, sees plenty of supply and falling prices heading into the first quarter of 2010. "It's been an interesting year to say the least," says Harris, who is also treasurer of the NACD. Yet, he is optimistic as well. "I think we've reached bottom in the Midwest and some areas of business have picked up a lot," says Harris. "We have a broad base of customers and serve a variety of industries."
History shows Harris that the best years of the chemical distribution industry are the ones just coming out of a recession.
Harris notes that there have been some situations where supply and demand has been out of balance, causing some price spikes and tight supply, but it looks as if things have evened out. "Inventories are low and supplies are long and I see prices dropping in the short term."
However, in the long term there may be some pricing pressures and constraint in supply. "Many chemical manufacturers have struggled through the recession and have scaled back production significantly," say Harris. "It could be hard to catch up and their might be pressures on prices and supply during the second quarter of 2010."
While Harris feels that things will eventually get back to normal after the recession, business has indeed changed, especially from the supply side. "We are very much closer to our suppliers than we have been in the past and we visit them as often as we visit customers," says Harris. "We have a lot more interaction with suppliers now and that has allowed us to better share customer information with them."
Economics drives the supply chain for Shondra Garrigus, the vice president of purchasing for TR International Trading Company (TRI), the Seattle-based chemical distributor. In her position, the focus for Garrigus is on the supply side, and she carefully watches economic indicators to adjust her buying practices. "I do see some signs of recovery but I am looking at longer trends rather than short term bumps," says Garrigus. "I have not seen any appreciable demand generated from stimulus programs like the recent cash for clunkers program. I want to be careful with the inventory decisions I make and be sure they are based on solid economic data."
TRI imports 70% of its products and Garrigus says there is some confusion in the global markets about demand and pricing levels in the U.S. "Chemical prices are higher in Asia and foreign suppliers want to charge higher prices here, but domestic demand cannot support it," says Garrigus. "I work hard trying to make our global suppliers understand our domestic needs and that can be a challenge." Garrigus adds that she is looking to source through more domestic suppliers.
Looking ahead to 2010 and beyond, Brenntag's Fidler sees new supply chain relationships and opportunities forming, as customers and suppliers will expect broader product lines and services from chemical distribution. "Continued consolidation of suppliers, customers, and distributors will lead to new supply chain relationships," says Fidler. "That will allow distributors with the right network of facilities, operational expertise, technical capabilities, and customer relationship management tools and skills to thrive."
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