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One of the most important and dangerous tasks in the work of a chemicals trader is deciding what is the right price for a product. Industrial chemical trading is a riddle. Unlike other world commodities, industrial chemicals are both a niche market AND a vast global industry. They are traded by few people, and yet are a vital component of the global economy. The public doesn’t want to buy them, and yet everyone needs them. The trade is global and yet location and logistics are essential.

As a rule, supply rates of products change slowly, as building and closing mines and production plants takes time and planning. Demand changes are also slow, caused by shifting trends for new materials following public demand. Yet despite this, prices can rise and fall rapidly in the space of weeks.

This complexity may be one reason why the issue of pricing has been overlooked by many in the industry. Indeed experts on chemical pricing at global consultants Wipro believe that, “Evaluating the pricing function has largely been ignored and undervalued in chemicals and plastics. Massive over-discounting, inefficiencies due to lack of standardization, and lack of awareness into profit leaks remain prevalent in the industry, preventing organizations from realizing the large margin gains possible with next generation pricing systems.”

These experts further state how badly many industry traders are valuing their products by stating, “Price is the largest lever available to improve organizational profitability. Small improvements in pricing can have significant impact to operating profit, but the pricing function is often under-managed or too widely dispersed to be effective. Organizations must find ways to elevate the pricing function, gain control over their discounting structures and better understand their customer segments.”

Finding the right price for your products is clearly an important, yet delicate and tactical business. Whilst it is important that prices are set to maximize profit, the general rule of business is that the customer must always be placed foremost. How can the competent chemicals trader balance these two tasks?

One expert who may have the answers is Joanne Smith, former Corporate Head of Marketing, Pricing and Customer loyalty at DuPont, she is now president of Price to Profits Consulting and author of The Pricing and Profit Playbook. When asked about the role of pricing in the chemicals industry, Joanne said, “At the core of good pricing is the fair treatment of the customer base and trust with the market. On one hand, passing along price decreases may appear to be the best move for long-term customer loyalty and/or growth with your customers. On the other hand, good pricing also means that you capture your fair share of the value you deliver relative to competitors.”

So it seems that there is a balance to be struck between passing value on to customers whilst being fair to yourself in taking due profits. But beyond the obvious supply and demand formula, your price depends on three main factors:  your costs, your competitors’ prices and your long-term business plan. With the help of chemicals pricing experts, we will look at each of these in turn over the next issues of this blog.

As discussed in previous chapters of this blog, there are a number of new problems facing the sealant, adhesive and resin industries. Regulations are getting stricter, and are changing more frequently as consumer awareness of health and the environment becomes more prominent. Globalization is a new factor affecting countless industries in an ever smaller world, whilst mergers and acquisitions are becoming more frequent, having an effect not only on those directly involved, but across whole markets.

So which of these challenges do industry heads believe will have the biggest impact on business in the coming years?

Patricia C. Souza thinks that regulatory changes may cause the most problems for the industry. As Market Segment Manager at Lanxess Corp. she is well placed to see the affect of these laws, stating, “Regulatory affairs compliance is one of the main challenges of biocide producers serving the adhesives and sealants industry. The effects of globalization directly impact the regulations that apply to our products. For example, if a Lanxess customer is manufacturing an adhesive in the U.S. but exporting its products overseas, additional regulations on the country of destination may apply. As a supplier, we need to ensure that our raw materials are Registration Authority compliant not only in North America (federal and state registrations), but in most cases also in others regions (e.g., Asia, Europe, etc.). It is crucial to work together with our customers to understand their process and channels to market to properly support them from both a logistical and regulatory point of view.”

Julie O. Vaughn, Vice President, Marketing and Business Development at Emerald Performance Materials, agrees, stating that, “The regulatory landscape is a significant challenge faced by the industry. We have seen that agencies such as the U.S. Environmental Protection Agency have taken a different stance with industry, placing more hurdles and restrictions on manufacturers. This could dampen creativity and the development of new materials and put regions with high regulatory hurdles at a disadvantage in this global market.”

JP Kuijpers, Business Unit Director of Adhesives at Eastman Chemical Co. is aware of these challenges, but believes that bigger problems are faced with feedstock supply. He notes the impact recent changes have had on his business, stating, “Raw material supply is a continual challenge for global manufacturers, and Eastman is no exception. The global use of lighter cracker feeds has led to more constrained availability of raw materials for tackifier resins, which in turn has led to a tightening of the hydrocarbons market.”

But he also believes that his company has the right resources and strategy to resolve these problems. He continues by explaining how the advantages are three pronged, stating, “Firstly, in many of our businesses, we are an integrated manufacturer, which gives the company an enviable cost position. Secondly, with the expectation that market prices for commodity products, raw materials, and energy costs will continue to be volatile, feedstock flexibility on what kind of raw material can be used provide mitigation to these changes. Finally, Eastman’s global manufacturing footprint enables efficient delivery of finished products where our customers need them, including in some cases delivering product molten instead of pelletized to reduce conversion costs for our customers.”

Keith Olesen, Field Marketing Manager at Arkema Coating Resins, also sees problems ahead for purchasing managers and supply chains, pointing out that, “Volatility in raw materials has been and likely will remain a key challenge for the foreseeable future. As a downstream consumer of petrochemicals, we must work closely with our customers to manage this volatility in a way that is practical and fair for both parties.”

He notes how his firm is limiting these challenges, by stating that, “For Arkema, acrylic resins are an important product line that we offer to the adhesives and sealants market. Here we have been investing in our upstream integration on acrylic monomers to enhance the cost control and reliability of supply for the products we offer to our customers. Our recent investment in Sunke, an acrylic acid manufacturing JV in partnership with Jurong Chemical in China, is a good example of this commitment.”

Dan Marvin, Director of Technical Services, MAPEI Americas, is also conscious of sourcing challenges, noting that, “As the U.S. economy picks up steam, the availability of certain materials will be spotty and prices high compared to historical levels.”

But he is also convinced that the greatest challenge remains in minimizing costs, particularly the cost of transportation. He writes that, “Increases in transportation costs are looming as the industry struggles to find qualified drivers. MAPEI has a dedicated transportation team that can find the best routes, rates and backhauls. Pulling from a supplier base that circles the world, logistics is a huge part of supply chain management.

Other pricing pressures come from suppliers of packaging, from pallets to buckets to bags. Again, our purchasing department is constantly working with our vendors to ensure a reliable supply. A variety of techniques is used, such as long-term contracts vs. spot market buying, consignment agreements, and constantly qualifying backup sources.”

There certainly are great challenges ahead for the industry, if for no other reason than the sheer diversity and quantity of products being produced. The figures for European production alone are immense, as FEICA, the Association of the European Adhesive & Sealant Industry notes, “More than 2,300,000 tonnes of adhesives and sealants are produced and used in Europe each year and this volume is on the increase. Adhesive manufacturers offer more than 250,000 different products for the most diverse applications – and these products are customized for virtually every purpose.”

Analysts from the consultancy firm, Research and Markets in their report entitled ‘Concise Analysis of the International Adhesives and Sealants Industry – Forecasts to 2018’ agree that the industry is both large and expanding. They write in one recent report that, “The global adhesive and sealants industry is expected to witness moderate growth and reach an estimated $58.14 billion by 2018.”

Evidently, whilst the industries do face many challenges, there is good cause to be positive. In fact there is growing cause to be positive, as the list of usages for these products is growing. As the recent Research and Markets report notes, “The adhesive and sealants market is primarily boosted by the emerging economies, technological advancement, globalization, and increased usage of adhesives and sealants to seal and protect materials in an environmentally friendly manner. Packaging, automotive, construction, and furniture industries are the major drivers of the adhesive and sealant industry. Sealants are mainly driven by the construction, electronics, and automotive industries.”

The report is even more upbeat about the future, noting that, “From the analysis presented, adhesives and sealants’ raw material suppliers as well as producers will recognize that valuable opportunities exist in the industry due to impressive trends in demand quantity and growth.”

The future is always full of challenges, and for sealants, adhesives and resins, they include tightening regulations, globalization, feedstock sourcing, M&A’s and rising costs, but surpassing these hurdles will only make the industry stronger. Ultimately, the future is bright; the future needs sealants, resins and adhesives.

One of the biggest problems in all parts of industrial manufacturing for the past few years has been the increase in legislation. This is affecting the epoxy and sealant industry more than most, as the development of new products is a core part of the business. Added to this is that epoxies, adhesives and sealants have an ever growing range of uses, with increasing demands being made on them. It is no wonder that lawmakers focus so much of their time in ensuring that products meet necessary standards and that production techniques are safe.

However, when an industry is on the receiving end of near constant amendments to current legislation, or is faced with wide reaching overhauls of future legislation, such as REACH, the EU’s 849 page chemical regulation, then the impact on business can be severe. This is a point made by Julie O. Vaughn, Vice President, Marketing and Business Development at Emerald Performance Materials, when she said, “We see two challenges in the regulatory landscape that we increasingly must navigate: a new regulatory/legislative landscape for existing materials and tougher registration requirements for new materials. Like many in the chemical industry, we are impacted by both. Emerald currently offers many products that have little to no VOC’s [volatile organic compounds], but continues to expand the available technologies to drive increased performance and address certain unmet needs. There can be significant additional costs involved in terms of time, money and resources to develop innovative new materials and bring them to market. Because of REACH, TSCA SNUR [the ‘significant new use’ rule], TSCA SNUN [the ‘significant new use’ notification], the EU food packaging migration standards EC 10 (2011) and a myriad of other global registrations, the regulatory landscape adds requirements that must be addressed up front and early on in evaluating opportunities and developing new products.”

She continues by noting that, “One of the challenges is that there is no ‘one size fits all’ registration process. Another challenge is that some of the testing protocols are under development. More than ever, we focus on working closely with key customers to fully understand the intended and potential uses of a product, a critical piece to understanding all their requirements. In some cases, we rely on the expertise of firms such as Keller and Heckman and Huntingdon Life Sciences to interpret regulatory requirements, recommend appropriate testing protocols that will align with the requirements, and assist in the registration process.”

Clearly there is much to consider in the field of legislation. Even before a product is designed, regional laws for use, production and supply will need to be factored in, and Vaughn is not alone in taking the topic of regulation seriously.

John Duffy, the Manager at Easterly Research, notes the changes in business that new laws have caused. He said, “Our contract customers have changed how they address the regulatory/legislative landscape in two ways. First, they are centralizing the knowledge base to an individual or department charged with staying up to date, which can be critical with the increasing complexity of the landscape. As long as the designated department has a reasonable understanding of the company’s product line, its applications and customer needs (some of which, paradoxically, are not known to the customer), and the recognition that regulatory compliance has both legal and customer service components, this can be a very effective process. It does require rapid and continuous information exchange within and outside the company.

Second, they participate in the regulation-establishing process itself. Instead of being innocent but complaining bystanders as in the past, more companies are contributing data and opinions to the regulators. This does not detract in any way what we have seen from the activities of ASC (Accredited Standards Committee) or any of the coatings associations.”

It does seem to be logical that as legislation grows in complexity, that the formulation of laws would need to be assisted by the industry itself. Whilst there does need to be a line between legislators and the industry, any meaningful and effective controls must take into consideration the needs of business.

For many, including Greg Bunker, Global Business Director for Adhesives and Functional Materials at Dow Packaging and Specialty Plastics, this is a positive side to extensive lawmaking. He had this to say on the subject. “We view the regulatory environment as a challenge and as an opportunity. While many companies can provide adhesives and sealants, a company of our size has global reach, technical expertise in a vast number of markets, and state-of-the-art toxicology and analytical capabilities that provide customers and brand owners with clarity and confidence when navigating this difficult landscape.

As consumers grow more concerned with clean labels and want to understand what is in their food packaging, our teams’ deep understanding of our technologies at the molecular level and how the regulatory environment impacts them allows us to tailor specific solutions to meet customer and brand owner needs. Dow is also working closely with regulatory agencies as new standards are developed. This understanding can help customers comply with the ever-changing landscape, in the U.S. and around the world.”

But working to comply with legislation, working with legislators to help formulate rules and working to help customers understand the law, is exactly that: work. And that requires money and manpower, as Dan Marvin, Director of Technical Services at MAPEI Americas makes clear when outlining the new roles that his company has taken on, “MAPEI is fortunate to have a dedicated team of individuals that is active in regulatory circles and is able to foresee and react to new requirements such as the Globally Harmonized System of classification and labeling, which impacts most manufacturers’ labeling and Safety Data Sheets.” But he also points out the importance of sharing this workload with other businesses, stating that “We also maintain an active participation in trade groups that monitor and report on upcoming initiatives and allow the industry to have a larger voice in the discussion than individual companies might have on their own.”

This strategy is supported by Scott Coring, Vice President of Sales & Marketing at STI Polymer, when he said, “To address concerns and to stay abreast on the latest information, we turn to associations like ASC and RCMA to keep us informed. STI Polymer is a firm believer in the value that trade associations bring to our business, especially when it comes to being one voice to regulatory groups. Of course, running a polymerization facility comes with its own set of regulatory/legislative issues, so we also maintain dedicated staff allocated to nothing but EHS responsibilities.”

Evidently there is much to consider with regards to the law in the chemicals industry. Whilst teaming up in trade associations may help, it seems that dedicated legal staff is a must. Given the large number of changes in legislation over the past 20 years and the cost of well-informed staff, it is unclear if smaller companies can survive these added pressures.