|In this issue... |
- Chemical Industry News
- Pharmaceutical Fine Chemicals Market: A static market and overcapacity will remain a challenge for supply managers in pharmaceutical fine chemicals until 2005. Read more.
- Pharmaceuticals and RFID: Pharmaceuticals possess many characteristics that make RFID an attractive solution for manufacturers. Read more.
- Chemical Supply Chain Security Feature: What significant security measures can chemical companies implement to protect their company and the general public?
- Commodity Report: The stimulus of higher energy prices will speed up megatrends already underway in the global chemical industry. 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
Fine Chemicals Market
No Recovery in Pharmaceutical Fine Chemicals Market Until 2005
Supply management organizations in the pharmaceutical fine chemicals (PFCs) market should prepare for another challenging year. According to a report from Urch Publishing, "Global Pharmaceutical Fine Chemicals — Industry and Market Analysis," the market for pharmaceutical fine chemicals will remain static until 2005 and overcapacity will remain a problem.
Edwin Bailey, managing director for Urch Publishing in London, says the research for the report indicates that 2004 remains another difficult year for PFCs and recovery is not foreseeable until mid-2005. "Although things are looking up, it's unclear how significant the improvement will be," he says. "Our report indicates that companies will be forced to make difficult decisions in the next three years, with industrywide rationalization and consolidation appearing inevitable as companies struggle to deal with overcapacity, competition from emerging markets and regulatory burdens."
Of the major issues cited in the report, overcapacity of 25-40 percent remains a problem, and will remain so in intermediates and active pharmaceutical ingredients due to the substantial new capacity brought on line over the past five years, the excess capacity caused by fewer new drug approvals and the resulting insourcing by big pharmaceuticals, says the report. Fine chemical overcapacity has led to two or more years of declining profitability, resulting in plant closures and goodwill write-offs. However, there is a general consensus that the bottom has finally been reached. Pressure on price will continue, particularly given the increasing acceptance of products from Indian and Chinese suppliers.
While challenges exist, the report also indicates that there is some positive news on new drug approvals, which means more new products coming through and the subsequent outsourcing of fine chemical intermediates and active pharmaceutical ingredients will increase, though the market is unlikely to recover to previous levels. The $10 billion to $12 billion market for pharmaceutical fine chemicals could achieve a growth rate of 5 percent a year or more, creating at least $500 million per year of additional sales.
For more information about Urch publications and the report, "Global Pharmaceutical Fine Chemicals — Industry and Market Analysis," visit the Urch Publishing Web site.
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Pharmaceuticals — The Next RFID Gold Rush
As previously discussed in Inside Supply Management® magazine, the use of passive radio frequency identification (RFID) tags for product tracking is one of the major issues facing today's manufacturing supply chains. Many RFID tag and reader manufacturers are already part of the gold rush surrounding mandates from Wal-Mart and the U.S. Department of Defense, while numerous consumer packaged goods, food, beverage and other manufacturers that supply these customers continue to struggle to justify the use of RFID on their products. However, pharmaceuticals possess many characteristics that make RFID an attractive solution for manufacturers, and ARC Advisory Group believes this segment could represent another potential RFID gold rush after the original mandates take flight.
The RFID Value Proposition for Pharmaceuticals
Tracking and tracing capabilities are vital to pharmaceutical manufacturers for a variety of reasons, many of them regulatory. These increasingly necessary capabilities can be used to track pedigree or facilitate product recalls or other actions that necessitate the ability to track the product through the channel. RFID is particularly well-suited to one of the regulatory issues currently looming — anti-counterfeiting. However, the Federal Drug Administration (FDA) has already recommended that RFID be part of a layered approach to counterfeit prevention that includes tamperproof packaging, bar codes, and other forms of security such as hidden inks.
While the early portions of the FDA timeline stress cases and pallets, by late 2007 it's likely that most item-level pharmaceuticals will be tagged as well. Chantal Polsonetti, ARC vice president and author of the just-issued report, "RFID Systems in the Manufacturing Supply Chain," explains that the RFID market potential in pharmaceuticals is huge, with over 12 billion units as candidates for item-level tagging in the United States alone. "Unlike the experience with retailer-driven mandates whose business value is distributed unequally throughout the supply chain, pharmaceutical manufacturers can easily justify using passive tags all the way down to the item level on the basis of tracking and tracing requirements," she says. "Pharmaceuticals also have a higher price tag and margin relative to retail products that could only accommodate item-level tagging at a tag price of 5 cents or less."
ARC's analysis of the market for RFID systems in manufacturing supply chains recognizes the profound pull inherent in this truly (customer) demand-driven, supply chain phenomenon, plus the counterbalancing effects of passive RFID's technological shortcomings, current lack of interoperability across supplier products and continued struggle by manufacturers to arrive at an internal business case.
For more information about the report, "RFID Systems in the Manufacturing Supply Chain/a>," visit the ARC Web site.
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|Chemical Supply Chain Security Feature|
Improving Chemical Supply Chain Security, Part One
The August announcement by Department of Homeland Security Secretary Tom Ridge of possible terrorist attacks on financial institutions in Washington, D.C., New York and New Jersey prompted federal authorities and state and local officials to create a coordinated and decisive response to the threat. This alert highlighted the possible vulnerabilities and levels of preparedness of not only the financial sector but a range of other industries as well. The chemical industry, for example, continues to come under scrutiny as potentially hazardous chemicals are stored and transported throughout the country.
In Pursuit of Chemical Security Legislation
In 2003, the General Accounting Office recommended that the secretary of Homeland Security and the administrator of the Environmental Protection Agency (EPA) jointly develop a comprehensive national chemical security strategy that is both practical and cost-effective, which includes assessing vulnerabilities and enhancing security preparedness. The departments of Homeland Security, Justice and EPA agreed with the report's findings and conclusions, and were supportive of efforts to pursue chemical security legislation.
The increased threat has prompted concern from industry and legislators alike. President Bush's National Strategy for Homeland Security identifies chemical plants as a critical infrastructure protection priority. The American Chemistry Council (ACC), an industry association representing the largest chemical companies in the United States, has urged Congress to pass legislation that would:
- Establish a national program requiring chemical facilities to conduct vulnerability assessments and to enhance security
- Provide oversight, inspection and strong enforcement authority at the Department of Homeland Security to ensure that facilities are secure against the threat of terrorism
The Responsible Care Security Code
To be proactive, this organization developed strict security standards — the ACC's Responsible Care Security Code is a mandatory, comprehensive security program that the Council's 2,040 member facilities adopted shortly after September 11, 2001. At the same time, two bills designed to broaden initiatives by the industry to address this situation are pending before Congress: Senator Jon S. Corzine's (D-NJ) Chemical Security Act and Senator Jim Inhofe's (R-OK) Chemical Facilities Security Act. The proposed federal legislation is expected to mirror the ACC's code so closely that ACC members who have implemented its Responsible Care Security Code will most likely already be in compliance. Those companies that don't hold membership in the ACC could respond by either adopting the ACC code or simply following the letter of the new law.
State governments are also introducing legislation. For example, in July both houses of the New York State Legislature approved an anti-terrorist bill that mandates increased security at chemical plants and storage facilities, and the bill is expected to be signed into law by Governor George Pataki.
Measures Beyond Regulations
In lieu of waiting for federal and state regulations to wind their way through the system, companies can adopt the ACC standards and take a variety of steps to better secure their facilities.
Already, many companies have instituted regular security assessments at chemical plants housing hazardous materials. This is a crucial first step for any company, particularly those owning plants near highly populated urban areas. A security assessment, with the help of an outside consultant, can help a company better understand the risks facing its facilities. Such an assessment also can help to quantify risks, assist in developing a plan to address them, and assure regulators and the public regarding the organization's safety practices.
In the January eDigest: Chemicals newsletter, part two of this feature will discuss various solutions to minimize security risk at chemical plants and what implications these safety practices have for buyers of chemicals.
By Gary Salmans, practice leader for the Critical Incident Planning practice of the Risk Consulting Practice at Marsh Inc., New York. To contact the authors or sources mentioned in this article, please send an e-mail to firstname.lastname@example.org.
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Chemical Industry Trends More of the Same, Only Faster Due to Energy-Price Impact
During the last year, oil prices have reached new highs as demand and supply disruptions have tightened world markets. This price increase, which translates into higher feedstock prices for chemicals, has stimulated the building of chemical plants that are located near low-cost raw materials. The stimulus is boosted further by the flood of cash into feedstock-rich regions that are searching for investment projects. Bottomline: This will speed up megatrends already underway in the global chemical industry.
Chemical Industry Restructures Itself
The chemical industry in 2004 is finally experiencing profitability improvement after suffering one of the longest down cycles in recent history. During this period, the industry has restructured itself through mergers and acquisitions, which have greatly reduced the number of companies with broad footprints. In developed regions, two types of producers have been successful: the feedstock-centric and the market-centric.
- The feedstock-centric players — such as ExxonMobil, Shell, BP and Atofina — are large-volume producers, have considerable strength in conversion or process technology and are experts at managing the global supply chain.
- The market-centric producers — such as BASF, Dow and Eastman — also are integrated and are global investors focused on developing new products and applications. Due to their typically large product range, integration is a science for them.
Energy Price Impact
Several trends are emerging as a result of higher energy prices and the restructuring of the chemical industry. Whether it's investments, spare capital or overseas projects, the chemical industry is providing additional opportunities for producers and investors alike. The following trends highlight those areas.
- Oil price hikes (hence feedstock price hikes) benefit the feedstock-centric producers because they lower their cost of capital for chemical investment. Large oil companies are searching for areas to reinvest their earnings. Thus far, refining and petrochemicals are providing the most attractive returns. This will enable them to gain market share (as it did after periods of higher oil prices in the first half of the 1980s), and cause a large investment wave in years ahead.
- Price increases have cut loose an enormous amount of spare capital that is now searching for investment opportunities. Due to the Middle East's political instability, local safe havens such as Qatar have seen a large influx. The availability of capital at very attractive rates coupled with the perception that energy prices will not return to their prior low levels has transformed project planning. Investments that were until recently pie-in-the-sky are now all-systems-go. Two examples are the gas-to-liquids (GTL) and liquefied natural gas (LNG) projects that are underway in Qatar.
- The growth in private equity investment is impacting the flow of capital. In chemicals, this accounted for one-fifth of transaction value in 2002. Financial buyers, who are buying assets and combining operations to improve profitability, now account for half of chemical mergers and acquisitions transactions.
- And then there is China. Its importance for the chemical industry cannot be overstated. More than 80 percent of the 50 largest petrochemical companies have established joint ventures or wholly owned projects in China. Proposed plans to slow down rapid expansion of the Chinese economy will have little impact on the rapid growth in China's import requirements. China's growth will make it become one of the largest markets in the world — and be attractive as ever for capital investment.
The Investment Outlook
In the long term, SRI Consulting expects changes in the geographic flows of investment and in the makeup of investing chemical companies. During the chemical industry slump of 1996-2003, about 60 percent of all new investment was in the Middle East (due to low feedstock costs) and China (due to market proximity). It's expected that this majority position will be broken by 2006 as feedstock markets change and government policy evolves.
Moreover, there's a belief that new feedstock-centric producers are likely to appear in the future. Mexico, which at one time failed to privatize Petróleos Mexicanos (PEMEX), one of the world's largest oil companies, due principally to resistance from labor interests, may allow foreign investment in base chemicals to utilize low-cost feedstocks. Depending on political conditions, Algeria, Libya and Iraq also represent low-cost condensate opportunities. Brunei and Bolivia represent significant low-cost gas feedstock opportunities. And some of these are close to major markets.
An alternative to China is India. India's share of world plastics consumption is much less than China's, but it is growing. With 1 billion people, its current consumption per capita is in a similar range to China's, and high growth is expected. India's polymer-consumption growth rates are currently higher than the world average, but future rates will depend heavily on government policy.
These changes will continue to push the chemical industry's center of gravity into Asia, shifting world trade. Capital flows will accelerate capacity growth, but later in this decade capacity will overwhelm the current boom in demand. Thus, the next few years should be good for the industry. But beware, the down cycle will be back, and pity the company it catches unaware.
By Russell Heinen, group director for SRI Consulting, Houston. To contact the author or sources mentioned in this article, please send an e-mail to email@example.com.
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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:
- Creating a purchase plan for commodities in volatile markets is challenging, especially when prices are changing from day to day or hour to hour. George E. Cantrell and William L. Michels, C.P.M., provide the tools to develop a framework for a successful commodity source plan. Find out how in the 2004 Conference Proceedings (PDF) article, "Developing an Effective Sourcing Plan for Volatile Priced Commodities."
- When negotiating, the ideal outcome is when all parties benefit from the negotiation. While this may be supply management's strategy, the other party could be using a win-lose tactic to gain an advantage in the proceedings. In his article, "When Are Negotiations Win-Win and When Are They Not?" Michael A. McGinnis, DBA, C.P.M., A.P.P., describes conditions for win-win negotiations, characteristics of win-lose negotiations and methods of responding to win-lose tactics.
- As the supply management profession has evolved, so too has the number of locales to source everything from raw materials to finished products. Supply managers in the chemical industry are finding that they may have several sourcing options. In their 2004 Conference Proceedings article, "Deciding Where to Source — Local, National, Regional, or Global," Stephen C. Rogers and Lisa L. Cooley explain the drivers behind the various sourcing options as well as the assessment process.
- Will the Sarbanes-Oxley Act (SOA) impact my supply management department? This is a question that supply managers have been asking since the SOA went into effect in July 2003. The answer is an unequivocal "Yes." Three sections of the SOA are of particular importance to supply management. Anthony Tarantino, Ph.D., C.P.M., CPIM, discusses the impact of Sections 401a, 404 and 409 of the SOA in his article, "The Impact of the Sarbanes-Oxley Act on Supply Management."
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