Volume 1, Number 2, November 2003
This newsletter is published in cooperation with the ISM Chemical Group.  
In this issue...
  • Chemical Industry News: Trade group pushes for congressional action. Read more.
  • Commodity Report: Sulfuric acid - relatively mature market sees some shortages. Read more.
  • Global Watch: The EU's REACH legislation has chemical professionals waiting. Read more.
  • Case Study: Pharmaceutical firm reaps the rewards of reverse auctions. 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

ACC: Congress Must Address Ongoing Natural Gas Crisis As Well As Electricity Blackout

As was reported in Inside Supply Management® magazine's September commodity report, the high demand for natural gas is causing simultaneous price increases in the electric utility industry, which is having a negative effect on the economy. This problem was compounded in August when a massive electricity blackout occurred in the Northeast. The Arlington, Virginia-based American Chemistry Council told Congress that the recent electricity blackout, like the ongoing natural gas crisis, is the result of years of neglecting the nation's energy needs, and that both must be addressed immediately.

In a letter to every member of Congress, Greg Lebedev, ACC president and CEO, stresses that Washington can no longer put off decisions that will enable the nation's industries to continue to grow and compete in global markets. "The American Chemistry Council implores Congress to seize this opportunity to enact comprehensive energy legislation that resolves the myriad of contradictory policies and practices and establishes a foundation for affordable and reliable energy for the future," says Lebedev. ACC's letter was sent as the House Committee on Energy and Commerce conducted two days of hearings on the massive electricity blackout.

Lebedev notes that "before we were confronted with passengers trapped in powerless subways and families sitting in darkened homes, we were facing an ongoing natural gas crisis." Even if the problems of the electricity grid are resolved, he says the nation may still face blackouts due to a shortage of natural gas to fuel power plants. "Congress must not lose sight of 'the other energy crisis' that has gripped much of America's manufacturing sector for more than a year and contributed to the current economic downturn."

Supply managers in the manufacturing sector are well aware of the criticality of electric power and its impact on production costs. With the cost of power representing 15 percent of production costs, supply management organizations are just as eager for legislation that will improve the economy and make electric power more affordable.

For more information, visit the American Chemistry Council Web site at www.americanchemistry.com.

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Commodity Report

Supply Shortage in Sulfuric Acid Market

Sulfuric acid is believed to be one of the world's largest-volume industrial chemicals. The production of phosphate fertilizer materials, especially wet-process phosphoric acid, is the major end-use market for sulfuric acid, accounting for nearly 60 percent of total world consumption. The balance is consumed in a wide variety of industrial and technical applications. The United States accounts for about 25 percent of the global sulfuric market, followed by Socialist Asia, which consumes about 17 percent. Africa, Western Europe and Russia are also large users, each accounting for about 10 percent of world consumption.

Sulfuric Acid Production Varies Worldwide

While the United States is a major world producer, consumer and importer of sulfuric acid, it's considered only a minor exporter. Until the past few years, production and consumption have both exhibited moderate upward trends. Most domestic end-use markets are quite mature, with demand mainly fluctuating with variations in the strength of the world phosphate fertilizer industry.

Major production declines have occurred in Russia, Western Europe and Eastern Europe since the late 1980s. A further decline is projected for Western Europe, while a partial recovery is forecast for Russia and Eastern Europe. Major production increases in the last decade have occurred in Socialist Asia, Africa, Southeast Asia, Latin America, Southwest Asia and the Middle East. World sulfuric acid production in 2002 was about 170 million metric tons.

Sulfuric Acid Shortage in North America

Recently, the North American market has experienced a shortage of supply. This has been mainly due to disruptions from smelters that shut down, non-availability of sulfur raw material, and increased operating rates of fertilizer plants. Canadian exports of sulfur to China have also increased the tightening of the sulfuric acid market. All market segments have felt the impact equally, although it's slightly more prominent on the East Coast and in the Midwest region of the United States.

Supply Stability Expected in 2004

There remains uncertainty surrounding some smelter operations that could lead to additional acid supply consolidation. Offshore supply is expected to remain limited. In February, General Chemical announced that it plans to permanently close down its Delaware Valley sulfuric plant later this year, which would cause further tightening in supply. With supply uncertainty of sulfuric acid from the refinery sector, the focus is now shifting to regeneration demand from oil refineries where companies like Rhodia, General Chemical and DuPont are investing significant capital.

DuPont plans to construct and operate a sulfuric acid regeneration plant on Motiva Enterprises' refinery site in Delaware City, Delaware. The new plant will replace Motiva's acid plant that was closed in 2001 due to a leak and explosion. The plant is expected to come onstream by 2004. Consumers of sulfuric acid would be well advised to enter into long-term supply arrangements to deal with future supply disruptions and tightness. The sulfuric acid market is expected to remain tight during the remainder of 2003, and industry sources hope that it will show signs of stability in 2004.

By Bala Suresh, consultant for SRI Chemical & Health Business Services, Menlo Park, California.

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Global Watch

EU Legislation Could Have Costly Impact

In the coming weeks and months, eyes in the chemical industry will be on the European Union Commission. That's when many believe the administrative body of the European Union will release the latest draft of the REACH (Registration, Evaluation, and Authorization of Chemicals) system, its proposed legislation for more stringent chemical regulation. Back in 2001, the Commission released a white paper outlining a future chemicals strategy. Since that time, drafts have been made available and an Internet site, which was established by the Commission to solicit, received approximately 6,400 comments. While environmental groups have applauded the proposed legislation, several industry groups in both Europe and the United States say it will be detrimental to business. One portion of the proposal focuses on a "duty of care" model that requires chemical manufacturers, importers and downstream users to perform safety assessments on all chemicals, submit paperwork and testing documentation, and institute risk mitigation measures. The more hazardous chemicals and those used in the greatest volume would be subject to the greatest scrutiny.

According to a September Wall Street Journal article, the EU Commission estimates the direct costs of screening currently untested chemicals to be between $1.6 billion and $7.8 billion. The latest draft of the REACH system proposal is expected this fall, and the first reading in the European parliament could take place next year. For more information, see the European Union Commission's Web site.

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Case Study

GlaxoSmithKline Finds Value and Cost Savings with Electronic Reverse Auctions

Many organizations and supply managers have some familiarity with electronic reverse auctions, and there's no shortage of system providers that offer software or platforms to conduct them. GlaxoSmithKline (GSK) began experimenting with electronic reverse auctions in 1999 and its experience with the sourcing tool is detailed in a new research report published by CAPS Research, The Role of Reverse Auctions in Strategic Sourcing.

The report says that GSK plans to run about $1 billion in spend through electronic reverse auctions in 2003 and that doing so will contribute significantly to its goal of reducing overall spend by $1.5 billion or 15 percent. However, back in 1999, both senior management and procurement management executives were skeptical. They didn't fully understand the model, questioned its value, and feared supplier reaction. It also raised issues about job security. Three years and nearly 200 electronic auction events later, perceptions had changed. After understanding the operational efficiency potential, reverse auctions are now viewed as a strategic procurement "must-have" tool.

How does GSK decide what goods and services are "auctionable"? In addition to using a classic 2 x 2 risk-versus-spend value matrix, where leverage and acquisition categories favor electronic auctions and strategic and critical categories may, but to a lesser degree, there are three main requirements:

  • Does the category lend itself to negotiation?
  • Are there three or more suppliers who are willing to participate?
  • Can specifications and customer requirements be clearly documented prior to the event?

The case study also details the general rules that are abided by during the auctions events, by both bidders and GSK; what items the company has sourced using these tools; and the role that the request for quote plays in the process. To see the full text of this case study and the report The Role of Reverse Auctions in Strategic Sourcing, visit the CAPS Research Web site and select Research, then Focus Studies from the home page.

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Additional Resources

A Wealth of Information on www.ism.ws

Visit ISM's Web site, 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:

  • With environmental awareness a major national issue, many supply management organizations are moving toward safer and less expensive cleaning products. Learn more about this issue in the article "Cleaning Up the Supply Chain."
  • Is your organization relocating employees to facilities in other parts of the country? What are the costs of relocating employees and should your organization provide this service in-house? Find out the answers to these and many more questions about relocation services in the article, "Trading Spaces with Relocation Services."
  • Interested in reducing costs and creating greater organizational efficiencies? Who isn't? For supply management organizations that consume or handle a large volume of chemicals, a chemical manager may be an effective strategy to accomplish those goals. Representatives from Henkel Chemical Management, Saturn Corporation and Ulrich Chemicals, Inc., discussed this issue in their Conference Proceedings "Total Cost Reduction Impact through Chemical Management: A Sourcing Strategy for the 21st Century" (PDF document) at ISM's 88th Annual International Conference in Nashville.

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Contact Us

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