--- To enhance the value and performance of procurement and SCM practitioners and their organizations worldwide ---

 
Volume 1, Number 3, March 2004
This newsletter is published in cooperation with the ISM Chemical Group.  
 
In this issue...
  • Chemical Industry News
    • Transportation Security: Customs-Trade Partnership Against Terrorism (C-TPAT) created to maintain security and strengthen supply chain. Read more.
    • Manufacturing Economy: U.S. Department of Commerce releases report detailing the current economic environment facing the manufacturing industry. Read more.
    • Industry Trends: Find out the current and future trends in the chemical industry and their impact on supply management activities. Read more.
  • Chemical Disposal Q&A: Answering the dos and don'ts about chemical disposal. Read more.
  • Commodity Report: Several factors are likely to increase ethylene prices. 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

Transportation Security

Strengthening Supply Chains and Border Security

Supply managers in the chemical industry have always been concerned with security issues surrounding the transportation of chemicals. With political unrest and threats of terrorist activity, transportation security has become even more critical.

In a joint government-business effort to maintain security and strengthen supply chain practices, the Customs-Trade Partnership Against Terrorism (C-TPAT) was created. Through this initiative, U.S. Customs "asks businesses to ensure the integrity of their security practices and communicate their security guidelines to their business partners within the supply chain."

Participation in C-TPAT begins when businesses apply to participate. After that, businesses sign an agreement committing them to the following actions:

  • Conduct a comprehensive self-assessment of supply chain security using the C-TPAT security guidelines. Guidelines address the following areas: procedural security, physical security, personnel security, education and training, access controls, manifest procedures, and conveyance security.
  • Submit a supply chain security profile questionnaire to customs.
  • Develop and implement a program to enhance security throughout the supply chain in accordance with C-TPAT guidelines.
  • Communicate C-TPAT guidelines to other companies in the supply chain and work toward building the guidelines into relationships with these companies.

Beyond greater supply chain security, organizations may wonder about other benefits to participating in C-TPAT. Other potential benefits include reduced border times (from a reduced number of inspections), an assigned account manager, access to the C-TPAT membership list, eligibility for account-based processes (bimonthly/monthly payments), and an emphasis on self-policing as opposed to customs verifications.

C-TPAT is currently available to all importers and carriers, with plans to open enrollment to a broader spectrum of the trade community in the near future. For more information about this joint initiative to increase security and safety in the chemical industry, go to the U.S. Department of Homeland Security Web site containing the C-TPAT Fact Sheet and Frequently Asked Questions.

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Manufacturing Economy

The State of Chemical Manufacturing in America

On January 16, 2004, the U.S. Department of Commerce released a report, Manufacturing in America, detailing the current economic environment facing the manufacturing industry. In addition to reporting on the industry's current status, the report also outlines recommendations for the improvement and encouragement of the industry by government agencies.

Among statistics used to detail the current economic environment was the net change in manufacturing employment from fourth quarter 2000 to third quarter 2003. The chemical industry, specifically, experienced a 6.3 percent drop in employment or a loss of 62,000 jobs.

What's behind the decline in manufacturing and chemicals, specifically? One explanation is that as an "energy-intensive" industry, chemicals have been impacted by rising energy costs, particularly the cost of natural gas. At a Commerce Department roundtable, Gene Reinhardt of Dow Chemical Company explained that the chemical industry is doubly hit when natural gas prices are high since it's used for fuel and as raw material.

A significant portion of the report focuses on recommendations to help improve manufacturing, and some will specifically benefit the chemical industry by addressing the energy problem. One of the recommendations is to "enact a comprehensive energy plan that encourages conservation, improves infrastructure, and expands domestic production." It is suggested that the plan particularly address the need for expanded natural gas production and distribution. Recommended components of the plan include:

  • Increasing electricity supply and modernizing the legal framework governing electricity production
  • Facilitating adequate and economical supplies of natural gas
  • Creating a clean and affordable diversity of fuels for electricity production
  • Using new technology

Other recommendations are suggested to improve and encourage the manufacturing industry — some of which will positively impact the chemical industry specifically. To see the full draft of this report, visit the U.S. Department of Commerce Web site.

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Industry Trends

Industry Trends: Looking for Lower Costs and More Efficiencies

Those in the chemical industry, like many others in today's less-than-robust economy, are facing a low-revenue business environment. In December, at the North American Chemical Distributors (NACD) Annual Conference, Lee McMaster, chemicals business group president for Dow Chemical, addressed this issue and highlighted the industry's current and future trends. The challenges of today and the realities of tomorrow have a direct impact on supply management activities.

McMaster said that more and more, products and services that the chemical industry produces are taking on the characteristics of commodities — nothing can stay unique for very long. Due to this increase in market visibility, retailers and consumers are able to demand lower prices, meaning that producing firms end up with lower profit margins. In this scenario, any spike in costs (such as those of hydrocarbons and energy) registers in the final price that's passed along to the customer. "The chemical industry no longer can be the shock absorber," he said.

Some of the factors that have led to this environment are external and uncontrollable, namely the sluggish economy and too many distributors in such a mature market. However, firms and supply professionals can control some of the internal factors, such as duplication of assets and redundancy in the supply chain.

McMaster offered the following predictions of what the industry will look like 10 years from now, from a producer's perspective. All of these factors put tremendous emphasis on supply chain costs.

  • There will be continuous cost reductions and firms will look to a low cost-to-serve model, meaning that customers will only pay for the functionality that they absolutely require.
  • More products will be sold through distributors.
  • There will be an increase in offshore suppliers, especially for upstream petrochemicals from low-cost feedstock areas such as the Middle East.

For the full text of McMaster's address to the NACD, visit the Dow Chemical Web site.

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Chemical Disposal Q&A
Questions and Answers About Chemical Disposal

The chemical industry has an array of regulations related to safety and the environment. One topic of critical importance in both these areas is the disposal of chemical products and waste. It's a topic that concerns not only supply managers but the public. Supply management organizations that purchase chemicals have a responsibility to ensure the public's safety and the safety of the environment when making chemical disposal decisions. However, what types of decisions do these involve and what are the liabilities associated with them?

James Withrow is marketing and business manager for DuPont Secure Environmental Treatment in Wilmington, Delaware. The organization offers waste water treatment services from chemical manufacturing processes and spill remediation. Withrow offers his viewpoint about chemical disposal in the below series of questions.

Q: What liability issues do supply managers need to be aware of with regard to chemical disposal?

A: I consider there to be near-term and long-term liability issues. The near-term issues are from the standpoint of transportation companies that arrive and pick up waste water from the manufacturing plant. Within that scope, there are liability issues associated with product stewardship and transportation of the material, as well as issues regarding the material's treatment and disposal. From a long-term perspective, there's liability associated with the residuals management of the byproduct from any treatment process used by organizations. Thus, while transportation, treatment and disposal are important near-term considerations, equally important is the residuals management and the long-term liability associated with what happened to the material, where its byproduct really ended up and if it was managed appropriately in a cost-effective and secure manner.

Q: If using a third-party supplier to assist in chemical disposal, what questions should be asked when choosing a supplier?

A: While many supply managers consider waste disposal as a cost of doing business and want the lowest price, they may be overlooking the management of the whole system. For example, did the organization hire a risky transporter, which increases the liability because it's not a strong carrier? Is the disposal company managing the residuals well? While there may not appear to be any liabilities in the short term, what happens if in a five- or 10-year period, there is chemical exposure? Thus, a third-party supplier could feel more comfortable and understand the whole system if the discussion and focus moves beyond simply the price component.

If a supply management organization is searching for a third-party disposal supplier, the following questions should be asked:

  1. How do you manage my liabilities?
  2. Do you provide transportation services?
  3. How do you operate your treatment and disposal process?
  4. What are your residual practices?
  5. What type of insurance and indemnities do you provide near-term and long-term?
  6. What's your compliance record?
  7. Do you allow audits?

Another disposal source that can play a critical role but rarely receives as much scrutiny as a third-party supplier is the chemical distributor or broker. The supply management organization may have a relationship with a distributor that is ultimately responsible for doing business with a disposal facility on behalf of the organization. What often occurs is that supply managers will ask many questions about the disposal facility, but not nearly as many questions about the distributor or broker. Organizations must know what role they're asking the intermediary to play. Questions may include: What principles is the distributor or broker operating under? What is its value-add? Is the intermediary actually providing oversight protection and liability reduction or simply an expanded customer service role? For example, a manufacturing facility could seek a distributor that it has known for a long time and trusts. Based on the distributor's connections and network of sources, it may put disposal materials into the marketplace where it's not consistent with the practices of the actual generator (i.e., the manufacturing facility). Thus, supply managers should be just as cautious choosing an intermediary as they are choosing their disposal options.

Q: How do chemical disposal practices affect the initial sourcing process?

A: If organizations have an opportunity to purchase and implement certain raw materials that are easier to dispose of, less risky and more environmentally sound into their semi-finished and finished goods, then they certainly should do that. Chemical disposal is really a regional market rather than a national market. If organizations manufacture a material and generate waste that has to be disposed of in the marketplace, there are only so many options in each region because these markets are driven by freight rates. Supply management organizations could generate waste that has a close regional disposal option, but it may not be suitable because it doesn't fit organizations' principles of where the waste should go. Thus, when organizations design a new product, there should be a built-in review process outlining the raw materials, the waste materials generated and the disposal options. These decisions should be on the front end of the design process to incorporate a systems-thinking mentality.

Q: What are some of the key best-practice strategies to use for monitoring chemical disposal?

A: Supply managers are looking for levels of discipline along the way to ensure that the organizations they're working with and using are meeting their standards. Levels of discipline could include: (1) Are the trucks arriving on time, (2) are they being unloaded properly, and (3) are safety procedures and personal protective equipment (PPE) standards being followed? If issues do exist, are they responded to in a reasonable manner and timeframe and is the quality throughout the supply chain meeting supply managers' expectations?

Certainly with waste disposal, supply management organizations should conduct an audit to ensure that the disposal supplier is meeting their standards. Is the supplier disposing of chemicals in the specified manner? How are residuals disposed of? How is the supplier ensuring that the proper disposal procedures are being done? What is the supplier's compliance history? What is the environmental fate of disposed chemicals? What standards are used to clean chemical containers?

While it's difficult to make a case in waste disposal that you're really adding to the products that organizations manufacture, it's critical that supply management organizations don't create any sort of near-term, intermediate or long-term liabilities. Thus, they have to ensure that chemical disposal is handled in a competent manner, residuals are managed appropriately and supply managers are practicing the principles that organizations hold. It's not surprising then that if you examine the chemical industry on a volume basis, the majority of treatment services and waste disposal is done by the individual manufacturer.

Q: What resources do you use to keep abreast of chemical disposal requirements, regulations, etc.?

A: We have an incredible array of resources because our company is so big. At DuPont, we're a manufacturer that purchases a lot of things and sells a lot of things. Since I'm in the waste disposal business and dispose of materials for DuPont and other commercial companies, we have this incredibly large network of people that follow new regulations, participate in industry groups and advocate certain positions. DuPont has manufacturing facilities in many states and most EPA regions, so we're able to leverage the knowledge base of this incredibly large corporation to the benefit of the manufacturing facilities and other markets from a services supplier standpoint. It's a great advantage because we tend to see regulations when they're in the proposal stage, we're able to comment on them and ensure that they can be implemented, and we try to plan ahead so that our facilities are in compliance before the regulations are instituted.

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Commodity Report
Commodity Up-Cycle: Focus on Ethylene

Chemical commodity prices are rising. One chemical market in particular is ethylene. A vital commodity in the chemical industry, ethylene is the major building-block chemical, accounting for nearly 110 million metric tons per year of consumption worldwide ? roughly 40 percent of all petrochemical consumption.

Ethylene and Its Uses

Ethylene and Its Uses

Ethylene goes into a variety of products. As the chart above indicates, the largest and fastest-growing uses are the polyethylenes. The uses include the following:

  • Low-density polyethylene (LDPE) and linear low-density polyethylene (LLDPE) are used heavily in packaging and other goods.
  • High-density polyethylene (HDPE) accounts for 25 percent of all ethylene use. It goes into packaging, including bottles, but also into durable goods such as automobile and refrigerator parts.
  • Vinyl (VCM/PVC) is the next largest use. It's heavily used in construction for such things as siding and pipe.
  • Ethylene oxide and ethylene glycol (EO/EG) go into polyester fiber, polyester film, polyester bottles, antifreeze formulations and various chemical processes.
  • Styrene is used primarily in plastics, including polystyrene, acrylonitrile-butadiene-styrene (ABS) and styrene acrylonitrile (SAN). These go into a variety of packaging and durable goods.
  • Vinyl acetate is used to make adhesives, coatings and a variety of specialty chemicals.
  • Alpha olefins go into various specialty chemicals, including lubricants.

Ethylene Prices Expected to Rise

The many uses mean that almost everyone should be concerned about the ethylene price increases that are likely to come. Ethylene feedstocks are already increasing for various reasons, not the least of which is that North America's "gas bubble" has finally dissipated and gas is being sold as the premium fuel that it really is. Most ethylene in North America is made from ethane, which is produced in conjunction with natural gas. Prices also are up because the dollar value is low, China is booming and the world economy is growing. If supply managers couple these developments with the fact that chemical margins, including those on ethylene, tend to cycle upwards every seven to nine years ? almost regardless of what happens to energy prices or the economy ? rises in price look very likely. The cycle is caused by the industry's own capital investment behavior, leaving capacity levels tight. Another tight period is anticipated in the next couple of years.

Ethylene Pricing Scenarios

Probe forecasts ethylene prices based on scenarios such as deflation, high energy prices or economic booms. The current set of scenarios can be summarized by a "most likely" case, which is an average of all of them weighted by the probabilities that have been assigned to them. Ethylene prices averaged $0.26 per pound in the fourth quarter of 2003. As the graph below indicates, prices are expected to hit around $0.34 per pound for about a year, before cycling back down again.

This will make the pricing of many ethylene-related products more expensive and should be factored into purchasing decisions over the next couple of years. Buyers should take advantage of longer-term contracts and price protection, where available. They should also consider hedging strategies, such as might be achieved by owning oil and gas futures contracts.

Ethylene Price

Frederick M. Peterson, Ph.D., is president of Probe Economics, Inc., Millwood, New York.

DISCLAIMER
Probe Economics, Inc., makes no warranties with respect to the forecasts described in this report, other than to have prepared them in a diligent and professional manner, and assumes no liability for consequential damages resulting from any use made of the forecasts.

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Additional Resources
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:

  • With many supply management organizations outsourcing their services, supply managers must be aware of the risks involved. Due diligence, contract drafting and liability insurance are three risk mitigation strategies. To learn more, read the recent ISM article, "Managing the Risk in the Outsourcing of Services."
  • Ever used a reverse or forward auction to purchase chemicals? No. By understanding the role of auctions, their benefits and buying strategies, supply managers can gain more efficient results. A recent ISM article, "Buying Strategies for Auctions in a Seller's Market," provides a thorough discussion of this topic.
  • Does the saying "less is more" apply to your organization? With less complexity and more simplicity, an organization can attain less costs, inventory and complex processes. For more information, read "Less is More."
  • Are you a new subscriber of ISM's e-chemical newsletter? Produced in conjunction with the ISM Chemical Group, the newsletter provides valuable information on news and trends occurring in the chemical industry. If you missed the first e-publication, see November's newsletter.

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