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Newsletter 15, October 2005 (No comments so far)
Specialty Chemicals distribution: New challenges ahead?
This article was published in the leading German magazine CHEManager on October 20th 2005 under the title “Distribution von Spezialchemikalien, Welche neuen Herausforderungen stehen der Branche bevor?”.
During the last ten years, the distributor market for bulk commodity chemicals has witnessed a major rationalization due to the following reasons: significant capital requirements to bring logistic sites to the best environmental and health and safety standards, investments in new tanks capacity, drumming, blending and formulation capabilities as well as rising difficulties to obtain new permits to build and operate Seveso 2 and 3 sites. Consequently, the number of bulk chemical players decreased significantly to leave only a handful of distributors in each European country to serve the needs of customers buying bulk chemicals. As a result, commodity chemicals distribution is characterized now by higher entry barriers, fewer players, higher relative margins and increasing complexities to manage supply chain and environmental aspects.
Meanwhile, the distribution of specialty chemicals, sometimes called the “Producers’ factory packed sector” experienced so far fewer structural changes. However, the sector is now perceived to be influenced by new trends which are expected to change the sector outlook very significantly in the coming years. The main drivers for change which we will discuss here are the shifting competitive environment, the needed development of new professional competencies, changing European strategies of suppliers and distributors, knowledge and customer relationship management and the role of private equity investors.
1. Key market drivers
The specialty chemicals distribution market became a better defined area of the chemical industry with distinct and specific market drivers, namely:
During the last few years, many specialty distributors like Azelis, Algol, Arpadis IMCD, Barentz, Biesterfeld Spezialchemie, Caldic, Orffa, Indukern, Nordmann Rassmann, Stanley Black, Omya Specialties, Jan Dekker, Grolmann, C.H Erbsloeh emerged as true European groups and are competing effectively with the two “larger scale” distributors: Brenntag and Univar. Several of these companies acted previously as regional companies before expanding their reach on a European basis and on a global basis for what concern their sourcing activities.
2. European coverage
Specialty chemical distribution due to the customer relationship aspects and local market knowledge seemed protected from the chemical industry internationalization trends as many producers and customers preferred in the past to deal mainly with national or regional specialized distributors. The European expansion of the large scale distributors like Univar and Brenntag stimulated in turn the formation of companies like IMCD or Azelis who adopted a focused specialty strategy. Similarly, CH Erbsloeh, Stanley Black, Jan Dekker, Orffa, Indukern, Biesterfeld Spezialchemie, Barentz, Caldic, Omya Distribution, BTC and Helm are among others true specialty European distributors offering their suppliers a wider geographical coverage for the industry sectors they serve.
More suppliers understand the benefit of working with European distributors as they offer them both industry competencies and centralized “low touch” coordination. Most distributors are regionally driven and lack the ability to manage industry sectors “transversally” across national markets. By contrast, those distributors who manage industry sectors on a European basis give their suppliers the benefit of increased expertise and cross fertilization, as well as supply chain optimization opportunities.
Many producers who drastically reduced the size of their own regional operations become more attracted towards such European players who in many instances show above average revenue growth and a better profit performance.
3. Knowledge management
Specialty distribution is driven by market knowledge as well as staff professional skills. Traditionally, the staff expertise was controlled by a few employees whose knowledge and experience was lost when they left their companies. A few specialty distribution companies like Biesterfeld Spezialchemie, IMCD or Redachem understood the value they can bring to their partners by managing “on line” their Customer Relationship Management programs. Biesterfeld Spezialchemie and IMCD have the capabilities to store the data and understand their customers’ needs in several countries and share the knowledge acquired internationally for each industry sector with their suppliers.
They both follow projects and specification processes transversally on all the markets and industries they serve. This gives them an edge on their competitors who are not involved in CRM processes on a regional or European basis.
Biersterfeld Spezialchemie is using the proprietary “BIT Serv” CRM system, IMCD uses the JD Edwards CRM program and the Dubai based Middle East distributor Redachem developed an in house solution called “Redamine” to monitor their customer and supplier requirements and performance in all of the Middle East countries where they are present.
4. Global sourcing
Many of the larger specialty distributors stepped up their role as importers since they realized that India and China are becoming major sources of competitively priced quality fine and specialty chemicals. China is a reliable source of chemicals of agricultural or natural origin, like minerals, plant extracts, aromas, flavors, food additives while India is more present on the active pharmaceutical intermediates and performance chemicals sectors.
By sourcing in Asia, distributors are able to enlarge their product portfolio and replace less competitive European sourced chemicals. They are in a position to provide the technical assistance which the Asian producers cannot provide from far away. Many of the larger European distributors have opened sourcing offices in China and India.
It is worth noting that some companies, such as Helm AG and Univar in Shanghai or S. Goldmann of Bielefeld in Cheng Du, not only buy chemicals in China to resell abroad, but also buy chemicals to resell them in Yuan, as full fledge regional Chinese distributors. The possibility to act as a local distributor is legally possible for foreign companies since early 2005.
5. Role of private equity investors
Private equity investors are attracted by this sector as documented by the successive involvements of Permira and Electra into Azelis as well as the Alpinvest and ABN Amro investments in IMCD. Equity investors wish to invest in specialty chemical distribution due to significant growth expectations, further industry rationalization opportunities, steady cash flows, low investment risks and limited environmental issues. During the last few years and with the support of their successive owners, IMCD became a major specialty player in Europe with sales revenue of 450 mn Euros and Azelis achieved complete European coverage with the recent acquisition of Broste which gives them a 2005 revenue above 800 mn Euros, including agency sales.
The specialty chemical distributor transactions are easier to manage as there is no complex environmental due diligence audit to conduct.
In addition, specialty distributors tend to follow clear professional models as they take the chemicals they buy “in stock”, bundle them with other products and services and ship them in larger product portfolio to their customers. Their model is different from those followed by agents and traders who generally do not hold stocks and mostly rely on their suppliers’ logistics to serve their customers.
Private equity investors involved in specialty chemical distribution preferably monitor the number of products sold to each customer and the average size of each shipment rather than the overall volumes sold. Specialty distributors who create value by focusing on a true chemical distribution model are able to attract premium P/E multipliers, as some recent transactions demonstrated it.
Conclusion
As a result of new market trends and the chemical industry globalization, the specialty chemical distribution sector is likely to undergo significant changes in the years to come. The specialty distributors, who are able to master the increasing complexities of the sector and who have the means to invest in knowledge and customer relationship management systems, will influence and lead the sector. In addition, they will be able to attract new sources of funding to manage successfully their organic growth and new M&A projects.
During the last ten years, the distributor market for bulk commodity chemicals has witnessed a major rationalization due to the following reasons: significant capital requirements to bring logistic sites to the best environmental and health and safety standards, investments in new tanks capacity, drumming, blending and formulation capabilities as well as rising difficulties to obtain new permits to build and operate Seveso 2 and 3 sites. Consequently, the number of bulk chemical players decreased significantly to leave only a handful of distributors in each European country to serve the needs of customers buying bulk chemicals. As a result, commodity chemicals distribution is characterized now by higher entry barriers, fewer players, higher relative margins and increasing complexities to manage supply chain and environmental aspects.
Meanwhile, the distribution of specialty chemicals, sometimes called the “Producers’ factory packed sector” experienced so far fewer structural changes. However, the sector is now perceived to be influenced by new trends which are expected to change the sector outlook very significantly in the coming years. The main drivers for change which we will discuss here are the shifting competitive environment, the needed development of new professional competencies, changing European strategies of suppliers and distributors, knowledge and customer relationship management and the role of private equity investors.
1. Key market drivers
The specialty chemicals distribution market became a better defined area of the chemical industry with distinct and specific market drivers, namely:
- Industry focus
- Sector related product mix
- Specialized staff
- End use market knowledge
- Management of outsourced logistics
During the last few years, many specialty distributors like Azelis, Algol, Arpadis IMCD, Barentz, Biesterfeld Spezialchemie, Caldic, Orffa, Indukern, Nordmann Rassmann, Stanley Black, Omya Specialties, Jan Dekker, Grolmann, C.H Erbsloeh emerged as true European groups and are competing effectively with the two “larger scale” distributors: Brenntag and Univar. Several of these companies acted previously as regional companies before expanding their reach on a European basis and on a global basis for what concern their sourcing activities.
2. European coverage
Specialty chemical distribution due to the customer relationship aspects and local market knowledge seemed protected from the chemical industry internationalization trends as many producers and customers preferred in the past to deal mainly with national or regional specialized distributors. The European expansion of the large scale distributors like Univar and Brenntag stimulated in turn the formation of companies like IMCD or Azelis who adopted a focused specialty strategy. Similarly, CH Erbsloeh, Stanley Black, Jan Dekker, Orffa, Indukern, Biesterfeld Spezialchemie, Barentz, Caldic, Omya Distribution, BTC and Helm are among others true specialty European distributors offering their suppliers a wider geographical coverage for the industry sectors they serve.
More suppliers understand the benefit of working with European distributors as they offer them both industry competencies and centralized “low touch” coordination. Most distributors are regionally driven and lack the ability to manage industry sectors “transversally” across national markets. By contrast, those distributors who manage industry sectors on a European basis give their suppliers the benefit of increased expertise and cross fertilization, as well as supply chain optimization opportunities.
Many producers who drastically reduced the size of their own regional operations become more attracted towards such European players who in many instances show above average revenue growth and a better profit performance.
3. Knowledge management
Specialty distribution is driven by market knowledge as well as staff professional skills. Traditionally, the staff expertise was controlled by a few employees whose knowledge and experience was lost when they left their companies. A few specialty distribution companies like Biesterfeld Spezialchemie, IMCD or Redachem understood the value they can bring to their partners by managing “on line” their Customer Relationship Management programs. Biesterfeld Spezialchemie and IMCD have the capabilities to store the data and understand their customers’ needs in several countries and share the knowledge acquired internationally for each industry sector with their suppliers.
They both follow projects and specification processes transversally on all the markets and industries they serve. This gives them an edge on their competitors who are not involved in CRM processes on a regional or European basis.
Biersterfeld Spezialchemie is using the proprietary “BIT Serv” CRM system, IMCD uses the JD Edwards CRM program and the Dubai based Middle East distributor Redachem developed an in house solution called “Redamine” to monitor their customer and supplier requirements and performance in all of the Middle East countries where they are present.
4. Global sourcing
Many of the larger specialty distributors stepped up their role as importers since they realized that India and China are becoming major sources of competitively priced quality fine and specialty chemicals. China is a reliable source of chemicals of agricultural or natural origin, like minerals, plant extracts, aromas, flavors, food additives while India is more present on the active pharmaceutical intermediates and performance chemicals sectors.
By sourcing in Asia, distributors are able to enlarge their product portfolio and replace less competitive European sourced chemicals. They are in a position to provide the technical assistance which the Asian producers cannot provide from far away. Many of the larger European distributors have opened sourcing offices in China and India.
It is worth noting that some companies, such as Helm AG and Univar in Shanghai or S. Goldmann of Bielefeld in Cheng Du, not only buy chemicals in China to resell abroad, but also buy chemicals to resell them in Yuan, as full fledge regional Chinese distributors. The possibility to act as a local distributor is legally possible for foreign companies since early 2005.
5. Role of private equity investors
Private equity investors are attracted by this sector as documented by the successive involvements of Permira and Electra into Azelis as well as the Alpinvest and ABN Amro investments in IMCD. Equity investors wish to invest in specialty chemical distribution due to significant growth expectations, further industry rationalization opportunities, steady cash flows, low investment risks and limited environmental issues. During the last few years and with the support of their successive owners, IMCD became a major specialty player in Europe with sales revenue of 450 mn Euros and Azelis achieved complete European coverage with the recent acquisition of Broste which gives them a 2005 revenue above 800 mn Euros, including agency sales.
The specialty chemical distributor transactions are easier to manage as there is no complex environmental due diligence audit to conduct.
In addition, specialty distributors tend to follow clear professional models as they take the chemicals they buy “in stock”, bundle them with other products and services and ship them in larger product portfolio to their customers. Their model is different from those followed by agents and traders who generally do not hold stocks and mostly rely on their suppliers’ logistics to serve their customers.
Private equity investors involved in specialty chemical distribution preferably monitor the number of products sold to each customer and the average size of each shipment rather than the overall volumes sold. Specialty distributors who create value by focusing on a true chemical distribution model are able to attract premium P/E multipliers, as some recent transactions demonstrated it.
Conclusion
As a result of new market trends and the chemical industry globalization, the specialty chemical distribution sector is likely to undergo significant changes in the years to come. The specialty distributors, who are able to master the increasing complexities of the sector and who have the means to invest in knowledge and customer relationship management systems, will influence and lead the sector. In addition, they will be able to attract new sources of funding to manage successfully their organic growth and new M&A projects.
Specialty chemical distributors offering extensive European coverage
This list is purely descriptive, incomplete and not limitative
This list is purely descriptive, incomplete and not limitative
| Large scale distributors | Multi industry distributors | Single industry distributors | Industry served |
| Brenntag | Arpadis | Barentz | Food additives |
| Univar | Azelis | Orffa | Animal feed |
| Biesterfeld Spezialchemie | Indukern | Life science | |
| BTC-BASF Group | Jan Dekker | Cosmetics | |
| CH Erbsloeh | Stanley Black | Cosmetics | |
| Caldic | Caldic Food | Food additives | |
| Grolman | Druckchemie | Inks & solvents | |
| Helm AG | Tieffenbacher | Natural oil | |
| IMCD | Safic Alcan | Rubber | |
| Keyser & Mackay | Friske | Food additives | |
| CQ Masso | Colorcon | Tablets coating | |
| Nordmann Rassman | Worlee | Coatings | |
| Omya Distribution | |||
| Pluschem Alliance | |||
| Velox | |||
| Warwick International |
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