Commodity versus speciality chemicals
Whilst there is no clear definition for speciality or commodity chemicals, the following is generally accepted.
Commodity chemicals are
Due to the high volume, commodity chemicals require a primary focus on supply chain infrastructure and efficiencies of scale. Therefore, commodity chemical distributors are generally more asset-intensive than speciality chemicals distributors and require much less technical know-how and expertise.
Speciality chemicals are
Distribution of speciality chemicals typically requires technical expertise, application know-how as well as marketing and sales competence. Because of the low order volumes it is more common for speciality chemicals distributors to outsource their supply chain infrastructure to selected third parties, paying for the services they require as opposed to investing in fixed assets.
Speciality chemicals distribution
Speciality chemicals are used in almost every aspect of daily life, ranging from cosmetics, food, drinks, cars, detergents, paint and medication. The constant demand for product improvement and higher performance drives the requirement for innovative speciality chemicals.
Chemical suppliers typically service the larger customers directly but utilise the skills and market coverage of a speciality distribution company to serve the small and mid-sized accounts. In effect, the speciality chemical distribution company acts as a cost effective extension of the suppliers’ sales and marketing 'arm'. In some cases, where the supplier is based remotely, the distributor will cover all sales activity to all customer types in the region. In most cases the distributor will have local warehousing and stock-holding to enable 'just-in-time', small lot deliveries.
By working with a speciality distribution company, the supplier benefits from having one loyal business partner as opposed to dealing directly with many small customers, thus simplifying their route-to-market.
In addition, by offering a more comprehensive product portfolio from a variety of suppliers, the distributor is able to significantly enhance and improve the customer coverage and local market intelligence. In addition to offering business simplification, a speciality chemicals distributor can add technical value and expertise to both the supplier and customer. Both can benefit from the technical expertise and application know-how of the distributor and, in some cases, from the distributors’ in-house laboratory support.
Diversity in product, market and geographical coverage can protect against the impact of specific market conditions such as product availability, local economic circumstances or application downturn. Commodity and speciality chemicals distributors therefore tend to be relatively financially resilient owing to the diversity of supplier and product portfolio they have to offer. This resilience is further strengthened when the distributor has a multi-market and geographical coverage.
Speciality chemicals distributors are generally less impacted by price fluctuations of basic raw materials owing to the fact that the products within their portfolios are highly functional, relatively low volume and are not easily replaced. This resilience is further enhanced by the asset light business model adopted by most speciality chemicals distributors as the cost base is very flexible and quickly adjustable to any change in the market environment.
Aside from a small number of regional distributors, the speciality chemicals distribution market is still highly fragmented with a lot of, often family owned, local distributors. In general, there is an increasing demand from major suppliers for pan-regional distributors who are capable of offering both business simplification and long-term growth. Due to these ever increasing supplier demands, it is anticipated that there will be further consolidation within the sector whilst maintaining a continued focus on delivering local excellence and expertise.
The following trends are expected to continue to have an impact on the rationalisation of the global speciality distribution industry.
There is an increasing trend towards outsourcing of sales, marketing and distribution to a more limited number of third party distributors. The greater complexity in the breadth of speciality products, lower order volumes and specific customer requirements in the various end markets are expected to drive outsourcing to a decreasing number of speciality chemicals distributors.
Suppliers in sophisticated markets are generally looking for more structured pan-regional management of sales and distribution. By entering into sole thirdparty rights of distribution relationships with a preferred distribution partner for multiple countries or regions, suppliers are able to significantly simplify and optimise their route-to-market.
In sophisticated markets increasing regulation will require chemical distributors to obtain a certain minimum scale in order for them to be able to fully comply with the requirements at an affordable cost. In order to be compliant, smaller distributors may need to upgrade their facilities or to alter processes. Smaller, locally-oriented distributors that currently do not comply with the additional requirements generally are required to make comparatively large investments to comply, whereas larger distributors can more easily make such investments due to their scale.