|In this issue... |
- Chemical Industry News
- Hydrogen Fuel Cells: The
bio-based product ethanol is opening new areas for research in
hydrogen fuel cell technology. Read
- Energy Consumption: Business'
domination in energy consumption, with everything it implies in
terms of exposure, risk, responsibility and reputation, will
continue as organizations plan for growth and further
globalization. Read more.
- Chemical Industry Overview: As the chemical
industry matures, how will it respond to trends and disruptions?
- Commodity Report: It is imperative that the
chemical industry increase the sophistication of its procurement
processes. Read more.
- Announcements: The ISM Chemical Group
announces its Fall Strategic Sourcing Summit and Showcase. Read more.
- Additional Resources: Check out these links
to additional resources on the ISM Web site. Read more.
- Contact Us about ISM eDigest:
|Chemical Industry News |
Hydrogen Fuel Cells
Ethanol to Power the Future of Hydrogen Fuel Cells
Chemical organizations and supply managers working diligently to
advance hydrogen fuel cell technology may have found an answer in
ethanol. Although availability issues and storage expenses initially
weakened hydrogen's potential, the bio-based product ethanol is
opening new areas for research. With the potential of hydrogen fuel
cells to power automobiles and reduce damaging effects on the
environment, many industries could benefit from this technology.
Hydrogen fuel cells reduce pollution by emitting water vapor
instead of hydrocarbons, nitrogen oxides and carbon monoxide.
However, the prevalent method of producing hydrogen from
hydrocarbons, though economical, creates pollutants at the
manufacturing site. Al Hester, analyst for Technical Insights, says
that biomass material-based fuel cells such as ethanol are a better
solution to power fuel cells because hydrogen is expensive and
dangerous to handle. "More research should be devoted to ethanol
because it is environmentally friendly and based on renewable
resources," he says.
Conversion of biomass materials such as ethanol into hydrogen is
a cost-efficient method to power fuel cells. Researchers believe
that inter-metallic compounds could be used beneficially in fuel
cell electrodes to oxidize ethanol. These materials are not alloys
but have ordered structures in which atoms are very specifically
The need for cheaper and more efficient means to power fuel cells
has resulted in extensive research investment. For instance, the
U.S. Department of Energy (DOE) has awarded Cornell University $2.25
million over three years to devote research efforts to cells based
on fuels other than hydrocarbons, including ethanol. Research must
also resolve technical problems in developing systems that can
handle the explosive gas. While safety is a non-issue when
considering ethanol in fuel cells, the challenge will be to reduce
the cost of producing ethanol from corn and increase tax advantages
so that ethanol can compete with fossil fuels.
For more information about biomass energy, visit the Yahoo Directory Web page for
links on this subject.
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Business Use Accounts for More Than Half of U.S. Energy
U.S. organizations are the largest consumers of energy, according
to a report released in April by the Conference Board. This could
prove to be a Catch-22 during a severe energy crisis — when business
may become both the victim and the scapegoat for rising prices and
Charles J. Bennett, senior research associate and co-author of
the report with Meredith Whiting, senior research fellow for the
Conference Board, says that business' domination in energy
consumption, with everything it implies in terms of exposure, risk,
responsibility and reputation, will continue as organizations plan
for growth and further globalization. "The phrase 'fueling the
nation's economy' is not just a metaphor," says Bennett. "While
rarely acknowledged in the media, manufacturing and commercial
activities use more energy than any other category of energy
consumption, including transportation and residential heating and
The report is based on a survey of 103 large U.S. organizations.
When asked to rate the overall importance of energy to their
business, more than 80 percent rated it either very or extremely
important. Energy is an essential commodity for businesses and, in
some ways, is much like other commodities, although energy has a
higher public profile because of its relationship to key
environmental and geopolitical issues.
Perhaps the most significant unknown aspect of the future of
energy is the evolving public concern for and policies regarding
climate change and environmental quality. Although variations in
energy management depend somewhat on the type of business and its
overall dependence on energy — measured as a percent of operating
costs — they generally are not consistent along those lines, says
the study. A variety of priorities and management approaches occur
The Changing Energy Scene
Despite quite different circumstances in other parts of the
world, energy in the United States has long been a relatively
low-cost and generally abundant business commodity. But now,
especially for U.S. businesses, traditional assumptions of abundant
supplies and low costs are threatened by more frequent and more
varied crises, ranging from prolonged regional blackouts to price
spikes and potential supply shortages. These events are primarily
due to an aging distribution infrastructure or actions by
environmentalists and governments.
The study found:
- Oil is the backbone of the transportation economy and remains
abundant but very unevenly distributed. Bob Ebel, energy director
for the Center for Strategic and International Studies, says that
much of the United States' future petroleum supply will come from
politically unstable regions and countries. Recent unrest and
conflict in key oil-producing countries such as Venezuela, Nigeria
and Iraq have contributed to record high oil prices in the United
States and elsewhere. At the same time, developments in oil
exploration and recovery technology continually push back the date
on which shortages are anticipated. The situation is further
complicated by the rapid increase in demand as developing
countries become more energy-intensive.
- Natural gas prices in the United States have increased
dramatically, with little immediate relief in sight. The decline
in U.S. manufacturing jobs and competitiveness in some industrial
sectors is increasingly attributed to this price rise. Global
supplies are abundant and will become more readily available. Many
of the major consuming nations (e.g., the United States), however,
do not have sufficient supplies to meet demand growth (gas use is
expect to double globally by 2030). Improved liquefied natural gas
(LNG) transportation and storage technology will undoubtedly
ensure availability, but prices are expected to remain high. Many
of the leading sources of LNG are located in the same politically
troubled regions where oil is abundant, and proposed developments
of some LNG facilities in the United States have encountered "not
in my backyard" resistance.
A relatively small number of survey participants (just under 12
percent) categorize energy management as primarily a strategic
business issue, while more than 37 percent consider it to be an
operational one, and 50 percent consider it to be both. "This
perhaps reflects the idea that present use of energy is largely an
operational matter, whereas future energy use may be more of a
strategic matter that will require significant planning and
investment decisions," concludes Whiting. For more information from
this study, visit The Conference Board Web
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|Chemical Industry Overview |
Growing Out of Maturity: The Chemical Industry's Struggle to
The chemical industry is undergoing a long-term fundamental
change in how it does business. Disruptions such as mergers,
acquisitions, globalization, higher operating costs and new
technology and products have become a way of life, and industry
players should plan for them to continue. While the chemical
industry usually can't control all the factors that cause
disruptions, it should learn to plan for them. By building adaptive
business processes that transform the way the industry operates, the
industry can achieve increased performance using current assets and
increased growth through new product introductions.
The Move Toward Mergers and Acquisitions
Chemical companies grew throughout most of the 20th century by
inventing new products and services their customers wanted.
Sometimes these products created entirely new markets, like
plastics. However, when growth slowed as certain segments matured,
companies turned to other growth strategies.
In the 1960s, the largest chemical companies in the United States
were DuPont, Union Carbide, Allied Chemical, Monsanto, Dow and
Hercules. In the 1980s, mergers and acquisitions became a favored
strategy for growth. This trend continued during the 1990s and up to
today. Indeed, only Dow and DuPont survive today as large,
U.S.-based chemical companies. Mergers and acquisitions, shutdowns
and relocations have taken their toll. In addition to Dow and
DuPont, the 15 largest chemical companies include those based in
Europe, the petrochemical divisions of the major integrated oil
companies (ExxonMobil, BP, Shell and TotalFinaElf), three Japanese
companies and Huntsman.
Has the merger and acquisition activity been a successful
strategy? Overall, the results have been disappointing. Business
magazines like Fortune and BusinessWeek have
demonstrated that 70 percent of mergers and acquisitions failed to
meet the stated financial objectives, and 50 percent of them failed
outright. Entering the 21st century, chemical executives face new
growth challenges. With the trends of mergers and acquisitions and
globalization having run their course, many are asking, what's next?
Over the past 50 years, chemical growth rates have fallen
significantly, from nearly double the gross domestic product (GDP).
Over the same period, chemical company stock values dropped from
price-to-earnings ratios (P/Es) of 15 to P/Es of 7 to 8 as investors
asked where innovation was to be found.
The Chemical Industry Reaches Maturation
These developments have not been unexpected. In the early 1980s,
Dow chairman Earle Barnes was giving speeches about how the chemical
industry was maturing much as the railroad industry had, and he
noted the similarities to the Russian economist Nikolai
Kondratieff's Long-Wave Cycle theory. That theory details how
leading industries reach maturity and what usually occurs once they
do. Kondratieff's central thesis predicted capacity rationalization
and industry consolidations. His thesis has proven true in the U.S.
chemical industry, as the commoditized chemical business has moved
overseas to areas where feedstocks and operating costs are cheaper.
In fact, the American Chemistry Council recently announced that last
year, the U.S. chemical industry's eight-decade run as a major
exporter ended in 2003 when a $19 billion trade surplus in 1997
became a $9.6 billion deficit. And as mentioned above, one in every
10 U.S. chemical-related jobs has disappeared over the last five
The Future Lies With Science and Technology
Unfortunately, these developments are not unusual for a maturing
industry. But all is not lost. The foundation for a new
transformation of the chemicals industry is in place, and many see
major changes occurring even today through science and technology.
Sciences. The new chemical industry era will be
based on new technology, focused on the life sciences. In 2001, the
U.S. government reported that the chemical industry spent about
$31.5 billion in research and product development, with the largest
share in life sciences. In fact, job layoffs over the past years
would have been worse if not for jobs gained in the U.S.
pharmaceutical industry. But R&D dollars are competing with
costs for environmental compliance and higher-payoff,
market-oriented projects. Not too long ago, DuPont Chairman Chad
Holliday spoke about DuPont's 200-year history. He described the
three eras of DuPont since 1802 — explosives, chemicals and biology
— confirming the fact that biotechnology has come to the fore as a
viable foundation for the chemical industry. The past distinctions
between chemical companies, pharmaceutical companies, agricultural
chemical companies and life sciences companies are blurring
Technology. Chemical industry players have
pursued two major themes for the past decade — cost reduction and
globalization. Though both themes have been crucial for companies
operating in the slow economic environment of the early 2000s, they
seem to have run their course as central strategy elements. The hope
for the chemical industry continues to be the benefits of
information technology. Transforming business processes and systems
to employ information technology to its fullest extent is the most
challenging — and most promising — development for the industry in
the last 15 years. U.S. government studies of the chemical
industry's increasing dependence on IT and Internet-based e-commerce
report that industry spending on IT reached $9.8 billion in 2001, a
67 percent increase since 1990. Chemical sales on the Internet in
2001 totaled $14.8 billion, more than double the amount from 2000.
The government projects e-commerce sales to reach $150 billion by
As the government figures indicate, technology's potential to
link technology and business processes is offering great hope to the
chemical industry, offering shareholders improved performance,
companies the adaptability to deal with disruptions and chemical
executives the opportunity to return to their historical strength —
internal development of new products. Chemical company CEOs and CFOs
often talk about their companies' "Vitality Index," the percentage
of future revenue that will come from totally new products. In five
years, most executives want 20 percent to 40 percent of their
revenue to be coming from new products. Achieving this goal requires
a much higher batting average than the industry has demonstrated in
Following the Lead of Other Industries
This goal is not unrealistic. It is possible for chemical
companies to engineer real-time, integrated operations with existing
and emerging technology. While this occurs, chemical companies must
follow the lead of other industries, such as the airline and
financial services industries, which have been profiting despite
commoditized prices for basic services. Chemical companies will find
there's no substitute for transforming people, processes and
technology to address competitive business realities. And as in
other industries, chemical companies will come to realize that their
customers are their lifeblood. An extremely important part of the
product development cycle, customers — as well as sales/marketing
people — can contribute as many good ideas on product mixes as
scientists and engineers. Combining the skills and experience of
these groups can result in innovative products.
Thus, the chemical industry has reason to be optimistic, despite
trends and disruptions that are inevitable in maturing industries.
The question is whether the industry is ready to accept the new
By Calvin Cobb, Ph.D., vice president and
general manager for the Global Hydrocarbons Consulting practice for
Invensys, Houston. To contact the author or sources mentioned in
this article, please send an e-mail to firstname.lastname@example.org.
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|Commodity Report |
Price of Natural Gas Requires Sophisticated Procurement
It is bad enough that natural gas — a major feedstock for
polymers and other chemicals — is second only to electricity in
price volatility. But this volatility coupled with recent price
increases (average prices have roughly doubled over the past five
years) can add up to calamity — and arguably it has. For the
chemical industry, the price of natural gas is particularly
critical. Many other industries use natural gas specifically for
heating and process load and often have energy alternatives, but the
chemical industry has few or no viable alternatives to gas as an
ingredient in fertilizers, plastics, resins and more. As a result of
natural gas price volatility and increases, one in 10
chemical-related jobs has been eliminated over the past five
What Is Behind the High Prices?
The heart of the answer to high natural gas prices is a lesson
taught in any Economics 101 course — supply and demand. Consider
this: The average daily consumption of natural gas in the United
States has increased by 12.6 percent from 1976 through 2002, for a
myriad of reasons. One is the economy's growth and its impact on all
consumption. But consumption growth has exceeded that which can be
attributed solely to the economy. A shift toward more
environmentally friendly fuels has added a "green premium" to the
price of natural gas. This is particularly true in the electric
generation industry, where penalties have been placed on excessive
emissions. (Ironically, with gas prices so high, some of the newer
gas-fired plants are less economical than coal-fired units with
emissions "scrubbers" attached.)
And while demand has risen significantly, neither supply nor the
ability to deliver it has kept up. Natural gas production is highly
correlated to the volume of "proven reserves" (i.e., those volumes
of natural gas that are highly likely to be produced), and
proven reserves have net declined from 1976 through 2002.
The simplest explanation for this trend is that most of the "easy to
produce" gas has been discovered, forcing companies to go farther
offshore and to drill deeper. But even if reserves and production
were not a concern, the amount of gas that can be moved through the
network of pipelines (pipeline capacity) would be.
Today approximately 278,000 miles of natural gas transmission
pipeline serve the U.S. market, a number that has not increased
anywhere close to demand because pipelines are very cost intensive
and usually face extraordinary environmental, regulatory and
right-of-way issues. Thus, whether a result of insufficient
production, pipeline capacity or both, many U.S. markets suffer from
an insufficient supply of natural gas to dampen price volatility and
reverse the upward trend.
What Steps Can the Chemical Industry Take?
Where natural gas is being used as a fuel for heating and
equipment, fuel diversification has provided significant relief. For
example, companies with equipment that can switch to burn heating
oil instead of gas may install tanks of oil for use when natural gas
becomes too expensive. This allows a company the option to sell gas
back to their supplier at a profit while switching
to the less expensive alternative fuel.
But, as stated before, chemical companies largely demand natural
gas as a feedstock rather than a fuel, and alternative sources may
not exist. When this is the case, it is imperative that the chemical
industry increase the sophistication of its procurement processes.
Recent downsizing in the energy trading industry has made this
possible. The pool of unemployed natural gas marketers can bring
skill sets that were previously too expensive for chemical companies
to tap. As a result, companies are developing procurement plans that
can stabilize natural gas costs for longer periods of time,
facilitating the management of budgets and working capital
Chemical companies are also aligning product costs more closely
to revenues. For example, some companies' product prices are not
closely linked to the current cost of production, thus a
sudden spike in natural gas prices can reduce or even erase profit
margins. When sales prices track changes in feedstock costs more
closely, risk is transferred to the customer and margins are
preserved. And of course, a savvy marketing department could offer
fixed-price chemicals to any customer who will commit to a
longer-term contract, and the supply manager will "hedge" that fixed
price by locking in the cost of natural gas for the same period.
By Dunham L. Cobb, president of the risk
management consulting firm Dunham Cobb & Associates, Inc.,
Stuart, Florida. To contact the author or sources mentioned in this
article, please send an e-mail to email@example.com.
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2004 Chemcial Group Officers
The Chemical Group for the Institute
for Supply Management™ announces the following officers for
Scott Herrington, Chair, Nufarm Specialty Products
Branson, 1st Vice Chair, BP Chemical
Patrick Hurd, 2nd Vice
Chair, Georgia Pacific
Vaughn McCoy, Secretary, Eastman Chemical
Roland Harris, Treasurer, Texas Molecular
Strategic Sourcing Summit and Showcase
Hotel, East Rutherford, New Jersey
October 6 & 7, 2004
An event presented through a partnership between the
Pharmaceutical Forum and the Chemical Group of the Institute for
Supply Management™, and the Drug, Chemical & Associated
Technologies Association (DCAT).
Looking for an event with in depth analysis from Wall Street on
the chemicals and pharmaceuticals markets, sourcing perspectives
from major chemical producers and market outlooks from chief
purchasing officers? The Strategic Sourcing Summit and Showcase
provides a variety of topics to inform supply managers in the
chemical field about the latest economic and sourcing trends.
This joint ISM/DCAT program is administered through the DCAT
organization. For additional information on these programs,
registration, e-brochure and hotel information, call 1-800-640-DCAT
or visit the DCAT Web site.
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A Wealth of Information on www.ism.ws
Visit ISM's Web site, http://www.ism.ws, for more
supply management resources. Several published articles, conference
presentations and reference materials pertain to supply managers in
all industries. Here are some items that might be of interest:
- Has your organization purchased chemicals through a
consortium? Learn about group buying models, critical success
factors, typical supply categories and an initial strategy for
consortium buying. Find out more in the 2003 Conference
Proceedings (PDF) article Consortia, Buying Groups and Trends in
Demand Aggregation, by Keven Gray.
- Interested in becoming a member of the ISM Chemical Group?
Scott Herrington, the group's national chair, invites you to
browse the Chemical Group's home page for
information about membership and industry resources.
- With forecast data never 100 percent accurate, how can
chemical buyers achieve a balance between the demand and supply
needs of the organization? Learn how in the article Demand Management: Creating Balance
- Recycling can benefit both the environment and the bottomline.
Authors Jan Canterbury and Pamela Mathis describe a free tool that
includes a user's guide, an input sheet, a greenhouse gases (GHG)
output sheet, an energy output sheet and a unit converter. Learn
more about recycling and the ReCon tool in the article The Bottomline on Buying
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