Volume 4, Number 4, October 2006
This newsletter is published in cooperation with the ISM Chemical Group.  

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In This Issue ...
  • Chemical Industry News
    • Pursuing China's Energy Market: To strike favorable deals in China, global energy companies should consider broader deals that reach across the entire energy value chain.  Read more.
    • Chinese OTC Market Emerging: Multinational drug makers looking to expand into the rapidly growing Chinese OTC market are facing significant cultural and geographic challenges.  Read more.
    • The Next Energy Hotspot: It is predicted that Southeast Asia is about to undergo an oil boom that could last 40 years.  Read more.
  • Feature Article
    • Viewpoint: The ACC Examines REACH Legislation: The European Union (EU) is currently considering a massive legislative program to implement a new chemical regulatory policy, known as REACH (Registration, Evaluation and Authorization of Chemicals), but is it the right solution?  Read more.
  • Commodity Report: Supply managers and analysts can track 60 percent of global commodity plastics consumption by examining the polyethylene and polypropylene markets.  Read more.
  • Announcements: Join supply management professionals in the pharmaceutical, chemical and related industries to discuss the economic outlook for 2007, business process outsourcing and more as part of the Strategic Sourcing Summit & Showcase '06.  Read more.
  • Additional Resources: Check out these links to additional resources on the ISM Web site.  Read more.
  • Contact Us about ISM eDigest: Chemicals.

Chemical Industry News

Pursuing China's Energy Market

China Looking For Broader Deals to Meet Energy Needs

While foreign participation is critical for China to overcome its energy challenges, the usual project-oriented approach of global energy companies may not be the best method, this according to the report Unlocking China's Energy Potential, published by the Boston Consulting Group (BCG).

The report suggests that energy companies should consider engaging China in a more comprehensive, big-picture way, such as by lending capabilities, resources and knowledge on a scale that helps China solve its biggest issue — energy self-sufficiency.

Brad VanTassel, a vice president and director at BCG and a co-author of the report, says that to continue to grow, China may not only increase imports of crude oil, refined products, petrochemicals, coal and natural gas, and, at the same time, improve production capacity, but it must also improve energy affordability and efficiency and protect the environment.

"Accordingly, the government will be less and less likely to approve project participation by foreign energy companies that doesn't advance solutions to these big challenges," says VanTassel. "But, the government may arrange for superior terms for companies whose participation is comprehensive, reflects their ability to invest in extensive capital projects, helps improve domestic exploration and production, and contributes to the development of unconventional energy resources, such as tar sands and other frontier resources."

For more information about the report Unlocking China's Energy Potential, visit the BCG Web site.

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Chinese OTC Market Emerging

China's OTC Market Expected to Reach $10 Billion by 2010

How can chemical and pharmaceutical companies tap into Chain's booming OTC market? According to Kline & Company, an international business consulting and market research firm, many multinational companies are discovering that their standard market-entry strategies may not work in China.

The firm says multinational companies face stiff competition from traditional Chinese medicine therapies, which now hold more than three-quarters of the market, and they must overcome distribution issues within a highly fragmented retail market. With more than 150,000 OTC retail outlets and 15,000 distributors, choosing the right channels to sell an OTC drug can be an exceptionally complex undertaking. In addition, consumption habits of China's 700 million rural residents are significantly different than those living in urban centers.

Susan Babinsky, senior vice president and head of Kline's consumer products consulting practice, says the cultural and geographic differences alone demand an original approach from multinationals looking to reach the Chinese consumer with their products. "Add to this the fragmented retail situation and it's easy to see why the Chinese market is a whole new ball game for even the most savvy drug makers," says Babinsky.

For more information about China's OTC market, visit the Kline & Company Web site.

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The Next Energy Hotspot

Southeast Asia's Coming 40-Year Oil Boom

In 2003, Southeast Asia accounted for 13.6 percent of world oil production and 21.6 percent of gas production. As a source of energy, the region is a major hotbed. According to Fear & Greed, a free e-letter covering global commodities, stocks and new investment opportunities, Southeast Asia is set to grow 84 percent by 2008 to more than 2 billion barrels per year — matching OPEC's exports to the U.S.

Andrew Snyder, editor of Fear & Greed, says the company is eyeing Southeast Asia as it ramps up its manufacturing capacity. "Governments are being forced to drill for oil in their own backyards — or pay the so-called Asian premium to OPEC's strongmen — to fuel the region's latest manufacturing renaissance," says Snyder.

In 2005, 230 exploration wells were sunk in Southeast Asia, leading to 40 new discoveries of oil and natural gas, according to Fear & Greed. At the same time, new deepwater discoveries in the region opened the door to immense business opportunities. By 2030, Southeast Asia's oil consumption will exceed both the United States and Canada — 26 percent of the world's reserves. This soaring demand is giving rise to what's being referred to as the region's "Thirsty 8."

The top three "Thirsty 8" developments include:

  1. Vietnam is emerging as the fourth-largest oil producer in Southeast Asia. The ambitious government is making a big push to develop the chemical and refinery industries. During 2000-07, the country's GDP of 7 percent made it the world's second fastest-growing economy.

  2. Singapore supplies 60 percent of the world's jack-up offshore rigs. These $180 million structures are in high demand after years of devastating hurricanes, tsunamis and typhoons.

  3. Indonesia is the only Asian member of OPEC. About 80 percent of U.S. investments in the country are in energy.

For more information about Southeast Asia's coming oil boom, visit Fear & Greed's Web site.

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Feature Article

VIEWPOINT: The ACC Examines REACH Legislation

The European Union (EU) is currently considering a massive legislative program to implement a new chemical regulatory policy, known as REACH (Registration, Evaluation and Authorization of Chemicals). The stated goal of the legislation is to improve the protection of human health and the environment while maintaining the competitiveness and enhancing the innovative capability of the EU chemical industry. The American Chemistry Council (ACC), along with a wide range of other industry voices, as well as government representatives from 13 major EU trading partners, have expressed serious doubts whether REACH stands any chance of achieving either of these noble objectives.

The REACH Initiative

Under the proposed legislation, companies that manufacture or import chemicals with total EU volumes of greater than one ton would be required to register those chemicals with a new European Chemicals Agency in a phased process over the next 11 years. Registration requires submission of substantial amounts of information, per chemical, on physical/chemical properties, health and environmental effects data, production volume, use information, hazard classification and use-specific risk assessments. REACH would also require that certain substances with hazardous properties receive agency authorization (licenses) before they can be used. Authorizations could be granted only after a showing that there are no substitutes, and that the socioeconomic benefits outweigh any risk. REACH strongly encourages substitution of chemicals, and the new agency is also granted authority to impose specific use restrictions on chemicals.

Supply Chain Implications

REACH will impose significant challenges for supply chain managers. First, it will require an extensive amount of coordination and communication throughout the supply chain, often in extremely compressed timeframes. Additionally, the information which will need to flow through the supply chain has, until now, often been considered proprietary or confidential. This is no longer the case. With few confidential business information protections, REACH will require the provision of precise information on product content and purity, how products are used and flow through commerce, and in what volumes.

When a chemical is registered, the registrant must declare and agree to be responsible for each and every downstream use — another complication for supply chains. For their part, downstream chemical users must supply information to the registrant on chemical uses and, in some cases, their customers. If registrants decline to support a particular use of their chemical, the downstream user will be obliged to register the chemical if they wish to continue that particular use.

Perhaps the most difficult challenge to effective supply chain management within the chemicals sector will result from the push for substitution of hazardous substances. To date, most developed countries have taken a risk-based approach to product regulation. However, REACH puts significant pressure on chemical producers and users along the supply chain to substitute substances for those which may present reduced hazards. Determining which hazard to reduce and the degree of hazard, let alone risk, that a use presents can be an incredibly complicated task. Given the pressure that consumers and governments are expected to place on companies to substitute chemicals, supply chain managers can expect to experience a significant increase in the number of requests for new materials and will be expected to accomplish those changes in a greatly accelerated time period.

A Noble But Unworkable Solution

ACC strongly supports the objective of protecting human health and the environment. The chemical industry continues to demonstrate its commitment to this objective by investing heavily in research and development and the application of improved technologies. We believe that the REACH proposal seeks considerably more information than required by regulatory authorities to assure that chemicals are produced and used as safely as possible. REACH is unworkable and, due to its unprecedented scope and ambition, is unlikely to achieve the health and environmental benefits envisioned by its creators.

As drafted, REACH would also discriminate against imported chemicals and raises significant questions about how authorization decisions can be applied at the border in a way that does not discriminate against imported products. For example, the authorization section of REACH would require the substitution of some chemical products even if they are safe for use. The proposal also appears to be more trade-restrictive than necessary to achieve the commission's policy objectives, a possible violation of the European Union's World Trade Organization obligations.

ACC is concerned that the REACH structure is not aligned with how the chemical industry operates in today's competitive economy. The burden and cost of the "one-size-fits-all" approach proposed by REACH simply does not afford sufficient flexibility to account for the unique applications and diverse practices of the chemical industry and its customers. ACC believes that REACH could more readily achieve its objectives, at a much lower cost, by incorporating risk-based approaches and recognizing existing assessments and risk management practices.

A more flexible risk approach would allow manufacturers and importers to put the available information into the context of known uses and exposures. Where risks are identified, authorization should be the logical consequence of registration and evaluation, rather than a separate regulatory procedure. Chemicals to be authorized should be identified on the basis of risk, not inherent hazardous properties. This would assure that all relevant information is considered before additional testing is mandated and would further assure that exposure risks are the basis for requiring further information.

By Steve Russell, senior director of health products and science policy for the American Chemistry Council, Arlington, Virginia. To contact the author, please send an e-mail to author@ism.ws.

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Commodity Report

Plastics Are on the Move

In the 1967 movie The Graduate, character Mr. McQuire declares, "just one word ... plastics." Taking a quick look around your office or home reveals just how much plastic is in our lives. In fact, Chemical Market Associates, Inc. (CMAI), a Houston-based global chemicals and plastics consulting firm, estimates that in 2005, nearly 165 million metric tons of commodity plastics were consumed worldwide. Whether it's carpet, appliances, computers, office supplies or household items, plastics are molded and extruded into nearly everything we touch. As a supply manager, knowing what drives the plastics market can reveal the price activity in other commodity sectors, as well.

By examining the two largest plastics markets, polyethylene and polypropylene (see box 1), supply managers can track what accounts for 60 percent of global commodity plastics consumption.

World Major Thermoplastics: 2005 Demand by Major Polymers

Box 1

Polyethylene market. On an everyday basis, nearly everyone comes into contact with polyethylene. When we buy groceries, drink from a bottle or throw away the trash, polyethylene plays a role in those behaviors. Because so many common items are made from polyethylene (see box 2), supply managers must closely monitor the drivers that influence this plastics market — particularly energy prices and inventory swings.

World: 2005 Total PE Consumption by End Use

Box 2

  • Energy prices. What doesn't energy prices affect? In the polyethylene market, crude oil and natural gas have a large influence on cost. Throughout North America, most eyes follow natural gas price levels. Sixty percent to 70 percent of the production of ethylene in the United States, the raw material used to produce polyethylene, uses natural gas as a feedstock. Unfortunately, natural gas experienced a drastic price increase from an average of $2-$2.50 per million Btu in the 1980s and 1990s to $6-$8 per million Btu since the winter of 2000-01. This steady, long-term climb in price created a whole new cost structure for the chemical and plastics industry in the United States.

    When energy prices increase rapidly, it prompts polyethylene producers to announce price increases. If there is a feeling of price momentum behind the increases, supply managers may purchase higher quantity levels. Thus, it creates some demand in the short term, causing more market activity. However, while energy costs may influence resin prices, if the appropriate supply/demand dynamics are not present, the price increases are unable to be passed through to the customer.

  • Inventory swings. From an economic perspective, polyethylene is intimately linked to the production of non-durables and disposables. Many of the applications for polyethylene are single-use and packaging-related. Thus, if there is economic weakness, many of the applications for polyethylene may not be affected directly. However, a slow economy may influence the amount of inventory supply managers are willing to maintain. That decision will depend on the amount of working capital available to the company and the level of consumer confidence. Ultimately, whether the economy is strengthening or weakening, people are still going to consume and dispose of packaging materials; the key is to prevent inventory swings from occurring.

Polypropylene market. While similar factors affecting polyethylene also impact polypropylene, the major difference between the two resins is their origin. Ethylene extracted from natural gas helps create polyethylene. Propylene created during the refinery process aids in the production of polypropylene. Because of where propylene originates as well as the diverse applications of polypropylene, two factors can have a significant effect on the pricing structure and demand of this resin — refinery competition and economic diversity.

  • Refinery competition. As a byproduct of the refinery process, the value of propylene is dictated by the refiner. For example, refineries often use propylene as an octane booster in the gasoline they produce. The chemical industry, therefore, must compete with the fuel industry for those molecules. Ultimately, the refiner will either blend the propylene with the gasoline pool to boost octane levels or charge the chemical industry for its use.

  • Economic diversity. Unlike the strictly non-durable, disposable nature of polyethylene, polypropylene is a more diverse material. In addition to the non-durable, disposable applications, polypropylene is used extensively in durable appliances, electronics, and automotive and medical applications. Thus, products made from polypropylene (see box 3) are more susceptible to economic swings in demand. As crude oil and gasoline prices rise, and environmental regulations change, a ripple effect may ensue that can influence the components used in the production of plastics products.

World: 2005 Total Polypropylene Demand by End Use

Box 3

What market conditions should supply managers be aware of to mitigate potential supply and demand disruptions or significant spikes in price?

Signals in the Market

With a number of factors influencing the polyethylene and polypropylene markets, remaining one step ahead means early recognition of marketplace trends in the near term and long term.

  • Inventory levels. The inventory levels of resin producers is a key indicator of how aggressive a resin seller may be in the marketplace.

  • Export prices. The export prices for resins outside of the United States can impact the price trends domestically. Thus, if resin prices in Asia are on the rise or decline, or if China is purchasing larger volumes of resin or ceases its purchase of resin, this can be a telling sign of changing dynamics in the marketplace.

  • Hopper cars. Within the United States, shipments of plastic pellets are transported in bulk hopper cars. Because there is a finite number of bulk hopper cars available, resin producers may have to slow production once the rail cars reach capacity.

  • Energy trends. The energy markets can have a significant influence on polyethylene and polypropylene. Because ethylene is a raw material that is extracted from natural gas to produce polyethylene, any noticeable price spikes or declines should be closely monitored. The same is true for gasoline prices. With chemical companies and refiners competing for propylene, gasoline prices will be key in determining how each side is faring.

Recognizing these leading indicators will signal that the market may be moving in one direction or another. How will such factors affect the near-term and long-term outlook of the plastics market?

Long-Term Outlook

While the domestic demand for plastics appears relatively stable for the next 12 to 18 months, a significant amount of new capacity is expected to come on-stream over the next few years in the Middle East and Asia. Approaching 2009, 2010 and 2011, the markets will be oversupplied, indicating a downward price trend. When the additional capacity reaches the global market, producers will experience reduced operating rates, increased competition and increased surplus. Thus, the new capacity will soften the global markets going into 2009 and extending through 2011.

John Yuva is a writer for Inside Supply Management®. Howard Rappaport is the global business director — plastics for CMAI, Houston. To contact the authors, please send an e-mail to author@ism.ws.

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Don't Miss Strategic Sourcing Summit & Showcase '06

Supply management professionals in the pharmaceutical, chemical and related industries will gather Nov. 1-2, 2006 for the "Strategic Sourcing Summit & Showcase '06." The event will be held at the Hilton Hotel in East Brunswick, New Jersey.

"Strategic Sourcing Summit & Showcase '06" offers opportunities to experience the latest trends and analysis from senior executives, economists and analysts. Program highlights include a senior sourcing executive roundtable featuring five senior-level executives representing research-based, generic, biotech and supply chain companies. Additional program topics include:

  • The U.S. economy: risks for 2007
  • The outlook for crude oil and petrochemical feedstock prices, ethylene production costs and olefins prices
  • Business process outsourcing
  • Achieving high performance through outsourcing
  • Supplier relationship management
  • Globalization in the fine chemicals industry — challenges and opportunities

The majority of proceeds from the event fund endowments and scholarships for students majoring in supply chain-related studies. Cost for the entire two-day summit program is $299 for ISM or DCAT members and $369 for nonmembers. A one-day summit option is available.

ISM's Pharmaceutical Forum and ISM Chemical Group are teaming with the Supply Management Committee of the Drug, Chemical & Associated Technologies Association (DCAT) in conjunction with ICIS Chemical Business (Americas) to present Showcase '06. Register online through the DCAT Web site or call 800/640-DCAT.

ISM Chemical Group to Hold Its Spring Conference

The ISM Chemical Group will hold its spring conference — "Procurement: Driving the Corporation into the 21st Century," March 1-2, 2007 at the World Golf Village Renaissance Resort in St. Augustine, Florida.

This year's conference features supply management professionals with expertise in the economy and chemical industry who will take a glance into the future of the profession.

The cost for conference attendees is $500.

For more information, contact:
Pat Hurd
Chair, ISM Chemical Group

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Additional Resources

A Wealth of Information at www.ism.ws

Visit ISM's Web site, www.ism.ws, for more supply management resources. The site provides published articles, conference presentations and reference materials that pertain to supply managers in all industries. Here are some items that might be of interest:

  • Supply management organizations are constantly busy conducting supplier measurements and evaluating results. However, these same organizations should be aware that they are also being measured by their suppliers. In their article Do You Measure Up?, Jill Schildhouse and Robert M. Monczka, Ph.D., C.P.M., distinguished research and ISM professor of supply chain management — W.P. Carey School of Business at Arizona State University and director — strategic sourcing and supply chain strategy research for CAPS Research, discuss three critical measurement areas: (1) why it is important to find out how supply managers measure up in their suppliers' eyes, (2) the key critical factors organizations'' suppliers are using to measure their team and (3) how leading organizations have utilized surveys to elevate their ratings from suppliers.

  • At a time when manufacturing outsourcing is a natural part of many companies' global strategic plan, it remains essential to explore foreign markets to identify the most effective strategies prior to implementation. In his 2006 Conference proceeding Effective Manufacturing Outsourcing In China, James B. Ullum, MBA, C.P.M., managing partner for Source International, Inc., offers an introduction and overview to outsourcing in China with a focus on current trends and issues. In addition to examining China's past, present and future, Ullum discusses the imperatives of a China manufacturing strategy.

  • Would your company be prepared if a catastrophic disruption occurred in your supply chain? While the rapid global expansion over the last 10 years has opened doors to new markets and cost structures, it has also ushered in a host of new supply chain risks. In the article Mitigate Risk, Sustain Supply, there is an evaluation of potential risk areas, leading to a realization of how interconnected supply chain participants really are. However, by examining supply chain interdependencies and identifying areas with potential high-risk exposure, companies can formulate global risk mitigation strategies.

  • To be competitive in today's global marketplace, and to effectively serve global operations, supply chains must also be "world-class." In their 2006 Conference proceeding A Best-Practice Approach for Developing Global Supply Chains, Ralph G. Kauffman, assistant professor at the University of Houston-Downtown; Thomas A. Crimi, learning and development coordinator for Chevron International Exploration and Production; and Gary L. Stading, assistant professor at the University of Houston-Downtown, provide a step-by-step approach to global supply chain development, contrast global to domestic development, and identify challenges, complexities and strategies for building multinational supply chains.

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