Specialty Chemical Distribution in Europe: a Changing Market

November 11, 2014

Europe’s specialty chemical distribution market is changing, and it’s creating opportunities for those distributors offering specialized expertise in lubricants.

The European economy, spurred by the Great Recession and a downturn in the chemical industry in the second half of 2011, has put pressure on companies up and down the supply chain. At the same time, economic growth has shifted to Asia, the Middle East and Latin America. The results have been a contraction in European chemical production that continues today.

According to a Cefic Chemicals Trends report released on July 25, European Union (EU) chemical production decreased 2.1 percent in the first five months of 2013 compared with the same period in 2012. This follows a trend in the European economy over the last six quarters, according to IHS Global Insight. Many chemical manufacturers have consolidated their European operations to reduce costs and create growth on their balance sheets.

As chemical manufacturers are consolidating, so are additives and lubricant companies. High profile examples include Chevron Phillips Chemical, BASF, Fuchs Petrolab and Italmatch, among others.

As Au Gosalia, global head of strategic marketing at Fuchs Petrolub predicted in 2010, the global lubricant market has continued to grow, but is concentrated in fewer hands. (Global Lubricant Market to See Consolidation, ICIS, Oct. 21, 2010).

Specialty Chemicals On The Rise

While EU chemical production has dropped steadily as a percentage of world production for over two decades, Europe still offers a profitable market for specialty chemicals (Market Outlook: Creativity Needed in Specialty Chemical Logistics, ICIS, Mar. 15, 2013). Specialty chemicals account for more than a quarter of all European chemical industry sales (The European Chemical Industry in Worldwide Perspective Facts and Figures 2012, Cefic Chemicals Trends).

In this environment, distribution plays a more important role than ever, especially as the European chemical industry faces relentless global competition with limited access to raw materials and energy at globally competitive prices.

Size Matters, But So Does Expertise

Distribution has undergone significant reorganization in the last few years, with many merging or snapping up smaller competitors. Examples include Brenntag, which has been on a buying spree in Europe, Europe and Asia; and U.S. headquartered Univar, which purchased Benelux-based distributor Quaron, Basic Chemical Solutions and a Turkish chemical distributor (Top 100 Chemical Distributors: Chemical Distribution Mergers & Acquisitions Move Up a Gear, ICIS, July 18, 2011).

Mid-sized distributors have also gotten into the game. In Europe alone, there were 20 mergers or acquisitions among distributors in 2012 and 10 as of June 20, 2013 (Market Outlook: M&A Game Continues, ICIS, July 15, 2013).

The trend toward consolidation provides distributors with greater access to hard-to-find products and greater buying power, a great advantage in a time of shifting demand and specialty chemical shortages.

“Lubricant manufacturers now want suppliers with a larger, multi-country foot print,” said David Brown, Vice President of Chemagility, a firm specializing in chemical distribution intelligence and analysis.

Brown added that lubricant companies also want their suppliers to offer technical and supply management expertise.

“Professional distributors able to provide technical support for the products they supply are well placed to benefit from continued outsourcing trends from manufacturers keen to rationalize their sales and supply chains to save costs as they focus on the production and development of more advanced lubricants,” he said.

Brown continues, saying that suppliers without technical experience can be at a left behind.

“While size matters in the distribution industry, a supplier may be at a competitive disadvantage unless it offers technical expertise,” he said.

So, what kind of support are lubricant manufacturers seeking from their suppliers? The primary competencies are regulatory compliance, formulation expertise and sales and marketing support, which are discussed in the sections below.

Regulatory Compliance

Distributors have an important role in maintaining regulations established under the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH). While REACH compliance is primarily the responsibility of the manufacturer, distributors have a key role in educating lubricant manufacturers regarding regulations and avenues of potential exposure.

“REACH regulations impose duties on all parties, to different degrees, depending on their role,” said Anthony Lyons, HSEQ and Logistics Manager of Melrob, LTD. “As a distributor our prime role is to act as a conduit for the flow of information up and down the supply chain – particularly with respect to Uses: we gather Use information from our customers and feed these back to our suppliers for their consideration when carrying out chemical safety assessments and developing the relevant exposure scenarios as part of the REACH Registration process.”

Distributors also have an important “double-checking” role to ensure that all safety data sheets (SDS) provided to clients are REACH compliant. This is especially true when chemical supplies come from non-EU suppliers.

“By and large we can rely upon the Safety Data Sheets issued by our suppliers but we still have an obligation to ensure that the SDS is compliant with REACH. Not all non-EU suppliers are fully conversant with the European CLP[i] interpretation of GHS[ii] and this requires us to educate some non-EU suppliers, and in many cases to create our own CLP-compliant Safety Data Sheets,” Lyons said.

Formulation Expertise

The trend among many lubricant companies has been to cut back on technical staff and equipment. As a result, they rely on their distributors to recommend or develop alternative formulations to adapt to regulatory or market requirements.

A prime example of this is found in the automotive industry, where the trend is for vehicles that are more compact and that incorporate more electronics. Consequently, lubricants are needed that operate under increased heat and pressure, while also remaining compliant with environmental safety requirements.

“The mature lubes market in Western Europe has shifted more towards technology-advanced, sophisticated lubricants,” Brown said. The key industry for lubricants is the automotive sector which faces increasingly stringent emissions standards, especially in the EU and North America. Fuel economy requirements and improved durability are driving the growth of high specification lubricants.”

Market Knowledge

In addition to technical staff, chemical manufacturers have cut back on sales and marketing personnel. Specialty distributors have stepped in to fill the gap, acting as outsourced sales and marketing support. More than just spokespersons, distributors can create new business opportunities where none existed before.

“As a distributor that focuses solely on lubricants, we are in a position to create value for our suppliers by leveraging opportunities that occur on a local level,” said Robert Stubbs, Business Development Director at Sea-Land Europe.

Stubbs points to the metalworking fluid industry, where the disposal of boric acid and boron containing additives has come under scrutiny in recent years, particularly in countries where soft fruit irrigation is practiced. As a result, products containing these chemicals have required labelling related to reproductive toxicity.

“Customers are looking for alternative corrosion inhibitors and buffering systems that mimic the technology that has been central to many formulations for the last thirty years,” Stubbs said. “This is a complex replacement process and knowledge and experience both in the sourcing, development and formulation of the product technology can be particularly beneficial in assisting formulators with their raw material or additive choice.”

Thus, by finding alternative chemistries Stubbs has been able to generate new business for his suppliers while leveraging a growing market for boron alternatives.

Building a Good Relationship

Distribution will continue to play a vital role in Europe’s re-aligned chemical markets. Those distributors that have specific expertise in lubricant supply and chemistry will be in a strong position to help their customers adapt to take advantage of opportunities in Europe’s volatile economy.

More than just a conduit of product and information, these specialized distributors are a driver of economic activity. As the industry becomes more complex, multi-national and competitive, so distributors will continue to help their suppliers and customers to adapt, even with supply shortages and production shifting overseas.

By Joseph Clayton,                                                                                                                                                         President, Sea-Land Chemical Company