Specialty Chemical Distribution-Market Update

Specialty Chemical Distribution-Market Update

          
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Specialty Chemical Distribution-Market Update

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    Market Context

    The chemical distribution market continues to grow. From 2008 through 2013, the compound annual growth rate (CAGR) was 6.5 percent, resulting in an overall market size of approximately €168 billion as of 2013. The overall market-growth rate is driven mainly by the underlying growth of chemical consumption, which averaged 4.4 percent during the same period. Furthermore, the share outsourced to third-party distributors grew from 9.1 percent in 2008 to 9.7 percent in 2013.

    Chemical distribution is growing fastest in emerging markets. In some regions—particularly emerging economies—the distribution market has expanded more rapidly than others. For example, growth rates in the Asia-Pacific region, the Middle East and Africa, and central and eastern Europe all averaged around 10 percent from 2008 through 2013, followed by Latin America at 8.6 percent. By comparison, growth rates in mature markets such as North America and western Europe were lower, at 2.6 percent and 1.6 percent, respectively. Within the Asia-Pacific region, China is the fastest-growing market at well over 10 percent, compared with approximately 6 percent in the rest of the region. This is in line with our earlier studies, which showed that distribution markets follow overall chemical consumption, which in turn tracks economic growth. As emerging markets emphasize infrastructure, construction, and greater industrialization, their chemical demands increase, and the distribution market grows correspondingly.

    Currently, a significant part of Asia’s chemical-distribution market is only partially accessible to Western distributors. In many cases, local suppliers work with captive distribution subsidiaries or local relationships. However, we expect the Asian market to become professionalized, making it even more accessible to Western distributors. Asian distributors with a trading heritage, such as Sinochem International’s distribution subsidiary, are also developing their capabilities through international supplier relationships that will strengthen their position in Asia’s third-party-distribution market (primarily in China).

    Specialty chemical distribution is outpacing overall market growth. Third-party distribution of specialty chemicals grew 7.0 percent annually from 2008 through 2013 to a total market size of €71 billion in 2013 (compared with a 6.2 percent CAGR and a €97 billion market size for commodity distribution). That outpaced the 6.5 percent CAGR in the overall market. (See Exhibit 1.) The force behind the higher growth rate for the distribution of specialty chemicals relative to commodity chemicals is the underlying growth of the end markets. For example, from 2011 through 2013, European specialty-heavy markets such as pharmaceuticals (6.1 percent annual growth in total production), food (4.0 percent), and personal care (4.7 percent) grew at higher rates than European end markets that rely more on commodity chemicals, such as coatings (0.7 percent), wood and wood products (2.0 percent), and machinery (3.1 percent).

    exhibit

    Growth in the specialty segment is driven mainly by volume, and price increases are less of a factor. The pricing of specialty chemicals is based primarily on the added value to the customer—less on raw-material prices. Therefore, apart from general inflation, structural price trends are much less relevant; in the medium term, prices are driven by the life cycle of specialty chemical products. Furthermore, distributors of specialty chemicals typically carry a broad range of products, serving the needs of many different end markets. Given this, standard volume-versus-price-split analyses are not applicable. By contrast, prices of commodity chemicals are typically more volatile and move in tandem with underlying macroeconomic growth, supply-demand balances in specific markets, and oil prices.

    The regional patterns of the industry as a whole are reflected in specialty chemical distribution as well. The market grew fastest in the Asia-Pacific region (11.0 percent from 2008 through 2013), followed by central and eastern Europe (10.5 percent), Latin America (8.9 percent), and the Middle East and Africa (8.4 percent). The growth in mature markets is comparatively slower: 2.8 percent in North America and 1.9 percent in western Europe.

    Continued market growth is expected, but it will be slightly slower. The third-party- distribution market will likely continue to grow as the chemical industry expands. Further growth of underlying chemical consumption worldwide will remain critical. The growth rate will, however, slow slightly (to 5 to 6 percent per year), largely owing to a flattening of growth rates in chemical consumption in China, which represents approximately 30 percent of global chemical consumption, and other emerging markets. An increase in the growth rate is expected only in North America and western Europe, driven by the ongoing economic recovery in these regions.

    Specialty distribution will continue to outpace the overall market for two reasons: continued strong growth of the underlying end markets and suppliers’ greater reliance on third-party distributors to gain access to small clients in local regions and to secure the knowledge required to serve customers in specific application domains.

    The distributor landscape remains highly fragmented. The chemical distribution market is characterized by fragmentation, which is most pronounced in emerging markets: in the Middle East and Africa and the Asia-Pacific region, the top three players collectively hold 6 to 10 percent of the market. By contrast, in North America and Europe, the top three players hold 30 to 40 percent and 15 to 20 percent, respectively. As shown in Exhibit 2, Brenntag is the clear global leader in the mixed-model segment, which includes both specialty and commodity chemicals. Companies in this category are also called full liners. In the specialty segment, IMCD and Azelis hold leading positions, but they are significantly smaller than Brenntag.

    exhibit

    More and more, suppliers are professionalizing their sales-channel strategy, rationalizing their distributor base, and strengthening the management of individual distributors. Suppliers are developing more sophisticated distribution-channel- management models in order to reduce structural costs and deepen their product knowledge regarding specific applications. They are increasingly focusing their direct sales on large strategic clients while outsourcing distribution to smaller clients. This effect is strongest in the specialty segment, given the more challenging aspects of market access and the segment’s need for more technical knowledge. Suppliers, which expect that this trend will lead to further rationalization of their distributor bases, aim to focus on a small group of large distributors. Furthermore, they indicate that they intend to professionalize the way in which they manage their distributors.

    Selected distributors have outgrown the market by combining organic growth with selected acquisitions. Successful players combine organic growth with acquisitions to fill gaps in their regional footprint and product lines. For example, Brenntag made 28 acquisitions from 2008 through 2013, IMCD made 20, and Univar, 6. (See Exhibit 3.) These offered a basis for above-market organic growth through cross-sales of products from the extended supplier base.

    exhibit

    Further consolidation of distributors is likely. Chemical distributors are expected to continue targeting inorganic growth to build out their product portfolios and extend their regional coverage. Further professionalization in emerging markets will increase demand for panregional third-party distributors, which will replace in-house supplier activities and local distributors and will, therefore, act as a catalyst for inorganic growth. This is particularly true in the specialty segment, in which exclusive contracts between suppliers and distributors—specifically with respect to “anchor products”—are an important mechanism (as described in the next section). Such contracts might limit the potential attractiveness of M&A targets if, for example, an acquisition led to conflict among several suppliers working with the same distributor.

    Mexico is included in Latin America, not North America.