INSIGHT: Chemical distributor evolution accelerates as North America opportunities abound

NEW YORK (ICIS)–The evolution of chemical distribution is accelerating to serve growing and ever more complex needs on both the supplier and customer side, while big opportunities in North America open up with reshoring of manufacturing.

Distributors have come a long way from being small family-run businesses serving niche markets or convenient outlets for producers with excess capacity, to an essential partner for suppliers as an extension of their sales organisations, as well as a one-stop shop for customers seeking customised solutions from a broad range of chemistries.

“Back in the day, suppliers that had excess capacity gave some to distributors and didn’t really care where it went. That’s changed tremendously over the years where we’re now really an extension of their direct selling,” said Frank Bergonzi, CEO and president at Azelis Americas.

“We’re technically trained, have market expertise, and suppliers rely on us to get the market reach they can’t get themselves,” he added.

Bergonzi and other chemical distributor executives spoke on a panel at a meeting of the Societe de Chimie Industrielle in New York, which was moderated by Mark Casiano, senior vice president, sales & customer experience at Odyssey Logistics & Technology.

REDUCING COMPLEXITY, PROVIDING A MARKET VIEW
Major consolidation in the manufacturing sector has led to the customer base becoming more complex, thus requiring distributors to help reduce that complexity by better serving individual customer needs, said Jean-Paul Scheepens, president of IMCD US.

“Finding ways to help with that complexity, distribution partners are an obvious choice,” he pointed out.

Distributors have helped modernise the chemical industry by providing value-added services such as lab capabilities to help customers develop customised formulations, as well as giving insight to suppliers on where the growth opportunities might be, he noted.

“With the transparency a distributor can bring to a manufacturer about the market – the types of applications [its products are being used for], and where the opportunities are, it goes much further than just being a middleman,” said Scheepens.

As distributors have gotten closer to the market, manufacturers can now better forecast demand – what the next couple quarters may look like – and can optimise operations around a consolidated view of the market, said Terry Hill, member of the supervisory board at Barentz.

“During times of pressure, there’s a tendency to rely on your partners more. We see customers asking us very different questions this cycle [in terms of inventories], as well as from manufacturers trying to plan. We’re the market insight for them,” said Hill.

CHEMISTRY-AGNOSTIC
Greater volumes being outsourced by manufacturers to distributors is a testament to their value in the supply chain. Distributors’ share of chemical sales have risen from about 4-5% 40 years ago, to around 10-11% today, Hill estimated.

Distributors also can bring unique capabilities to customers, customising solutions based on all kinds of chemistries rather than just the ones available from a particular supplier, he pointed out.

“I remember talking to a researcher who said he really likes distributors coming in and helping them technically… ‘because when you come, you’re chemistry-agnostic – you’re problem solvers. If I talk to one manufacturer, the solution is always going to be their chemistry’,” Hill recalled.

“Technical expertise is one of the things that have changed in my career – from distributors not having anything other than QC (quality control) labs, to having application labs and all these services. That’s been an evolution, where the customers don’t have to do it [on their own] anymore and neither do the manufacturers,” he added.

“A key for the customer is our ability to innovate and formulate… We can provide solutions, not just based on a manufacturer’s product but multiple manufacturers’ products. We can create a formulation and solve their problem,” said Bergonzi.

Greater trust and transparency have also developed between suppliers and distributors as their relationships have evolved.

“We’re doing a lot more exclusivity in specialties so you’re a lot closer to the marketing strategies and understanding what the supplier wants to do – truly an extension of that selling effort… It didn’t use to be that way,” said Bergonzi.

“Now we’re sharing application and market intelligence. You can learn a lot from small customers. A lot of times, they’re on the advent of something new,” he added.

Distributors are in a sweet spot as manufacturers view them more as strategic partners, while on the other side, customers are essentially outsourcing procurement and supply chain functions to distributors, Hill pointed out.

“I’ve seen both sides of the fence growing. We see more and more manufacturers using distributors as their channel to market, and customers themselves are also opening up greater spend to distributors,” said Hill.

BUFFER DURING SUPPLY CHAIN STRESS
The value proposition of distributors shines bright in times of supply chain disruptions, as was seen throughout much of 2021 and 2022.

Customers can often rely on distributors to take care of the supply chain for them, as lead times for delivery can be as short as 24-48 hours, said Hill.

“Also, our ability to pivot from one chemistry or one supply chain to another has been key,” he said.

“There are some chemistries that are not made anywhere else but China or in another place, but there are functional equivalents. We’ve seen that start to change where people say, ‘I’ve got to have a second source – not that chemistry but a functional equivalent’,” said Hill.

M&A OUTLOOK
The executives from all three distributors at the event – Azelis, IMCD and Barentz – see consolidation in the distribution space continuing with no signs of a slowdown, despite challenging economic and financing conditions. Private equity will also play a sizeable role, providing funds for distributors to make targeted acquisitions, they said.

“There’s high fragmentation – there are a lot of distributors in many markets that can be consolidated, so I don’t see it slowing down,” said Bergonzi.

In North America, the level of fragmentation in distribution is around 60% of the market in the bottom tier, with Europe higher at about 70% and Asia even higher at around 80%, noted Hill.

“Our companies have all grown tremendously in the last 3-4 years, organically and through acquisitions. We have acquired some of the smaller and mid-sized regionals, but I also think in the next 3-5 years we’ll see the big guys start coming together as well,” said Hill.

“That will be driven a lot by private equity and the financial world because there is no one in our business that has enough market share on a global basis, that regulators would look at it,” he added.

Univar Solutions expects new ownership under private equity firm Apollo Global Management to accelerate growth, its CEO said.

In March, Apollo agreed to buy Univar in a deal valuing the company at around $8.1bn in enterprise value – including the assumption of debt. The transaction is expected to close in H2 2023 and will include a minority equity investment from a subsidiary of the Abu Dhabi Investment Authority (ADIA).

“As a private company and with Apollo’s support, we expect to have even more flexibility to explore new opportunities and make additional investments to accelerate Univar Solutions’ growth,” said David Jukes, president and CEO of Univar Solutions.

MARKET CHALLENGES
Meanwhile, distributors are dealing with challenging market conditions globally, as destocking continues in various parts of the supply chain.

“We’ve all heard from customers and suppliers that there’s destocking happening in the supply chain. The question on everybody’s minds is: How long can this last? One supplier said it quite well that it went from just-in-case ordering from customers, back to just-in-time,” said Scheepens.

This is a stark reversal from the order patterns during the height of the supply chain disruptions in 2021 and early 2022 when customers stocked up aggressively amid scarce supply.

“Now that supply has loosened up, it has flipped, and everybody’s very conservative with inventories and working capital. We’re seeing that across the supply chain,” said Scheepens.

“A lot of people are pushing back orders until they absolutely need them,” said Bergonzi.

“In the last couple of years, they wanted to get it before the next price increase. Now it’s completely changed… We keep thinking it’s going to turn around, but the industrial side has been pretty tough this year,” he added.

NORTH AMERICA OPPORTUNITIES
Looking beyond near-term challenges, there’s a growing opportunity for distributors to serve an emerging revival in the manufacturing base in North America.

Industries that disappeared in North America such as electronics and pharmaceuticals are now coming back, Hill pointed out.

“In the 1990s, electronics in the US was a big consumer of chemicals, and it disappeared. Well now it’s all coming back. There are five [semiconductor] fab plants being built in the US. The US transitioned in the early 1990s to the 2000s from a manufacturing to a consumer-based economy. I don’t think we’re going all the way back, but you see that starting to change,” said Hill.

“When you think about the US, Canada and Mexico, we’re very bullish. There’s a lot of manufacturing coming back and a lot of things happening because we have low-cost energy. What we also see is friction between the US and China governments,” he added.

The unreliability of some supply chains exhibited during the pandemic leading to port congestion and other logistics constraints, is also driving the manufacturing reshoring trend, said Scheepens.

In a February interview with ICIS, Univar’s CEO was especially bullish on the re-industrialisation of North America and the implications for chemicals demand.

“We have a real competitive moat with our asset footprint in a re-industrialising North America which means we have great growth opportunities here. No one has a better set of contiguous assets for inorganic and organic chemistries in North America than we do,” said Jukes.

“You can’t readily replace those assets. You can’t go out and quickly build out tank farms, replicate rail sidings and 600-700 railcars for specific products. All these new industries are pouring into the US,” he added, referring to semiconductor manufacturing, as well as manufacturing products for the green energy transition.

The $280bn US CHIPS and Science Act to build local semiconductor manufacturing capabilities, and the $369bn US Inflation Reduction Act (IRA) to incentivise manufacturing of electric vehicle (EV) batteries, solar cells, wind turbines and build out infrastructure for hydrogen and carbon capture and storage (CCS) is set to spur a renaissance in high-tech US manufacturing which will require massive volumes of chemicals.

SUSTAINABILITY AND CARBON FOOTPRINT
A growing area of focus among distributors is helping customers meet their sustainability goals, which will also require greater collaboration with suppliers.

“We do see our customers asking more and more about life cycle analysis (LCA) and carbon footprint. We are an extension of our suppliers’ commercial organisations, so we have a big role to play in our industry in helping suppliers figure out where the pockets of opportunities are, and how we can be more sustainable together,” said Scheepens.

Distributors are also challenging suppliers to give more direction on which sustainable products can replace others, and how that might impact the bottom line, said Bergonzi.

“People will buy sustainable products, as long as they work. [It’s about]… Can we get the functionality of this product in a more sustainable manner?” said Hill, who added that this is where formulation expertise can come into play.

Distributors will also want to work with 3PLs (3rd part logistics providers) that are focused on decarbonising the supply chain. This will ultimately help distributors lower their own carbon footprint, said Scheepens.

Insight article by Joseph Chang

Look for the ICIS Top 100 Chemical Distributors special issue of ICIS Chemical Business to be published on 19 May 2023

Thumbnail shows chemical distribution executive panellists at the Societe de Chimie Industrielle meeting in New York. Photo credit: Joseph Chang