6 Facts to Know About How Chemical Distribution Works

The chemical distribution industry comprises of two main categories. These include chemicals used in the synthesis and basic chemicals. The chemicals can be classified into two main classes, which include bulk chemicals, raw materials, basic chemicals, and feedstock. Bulk chemicals are used in the synthesis of other chemical products or goods. On the other hand, raw materials comprise of base materials used in the production of oil and gas. Basic chemicals are used in industrial processes. They include resins and plastics. Finally, feedstock refers to chemicals that are made from the primary raw materials and are subsequently used in processing plants.

A significant proportion of global chemicals are sold directly by producers. They sell more than 85% of chemicals with less than 15% of chemicals being sold indirectly by agents, chemical distributors, or traders. Agents usually receive a pre-determined commission from the producers. In addition, the agents do not assume ownership of the chemicals during the distribution. The agents are usually small firms. The success of the agents depends on their knowledge of the seller and potential buyer and the ability to bring both parties together.

Traders of chemicals are usually active upstream in the value chain of the chemical distribution network. They trade the chemicals in large quantities that are transported using a vessel or barge. The traders may purchase the chemicals on their own volition or on behalf of their customers. In most instances, the traders purchase the chemicals “back-to-back” and do not maintain any stock of the chemicals. The pricing, global logistics skills and capabilities, and knowledge of the supply markets are the major factors that differentiate chemical traders. The traders use an opportunistic business model with the price and availability of chemicals being the major factors that determine their success in the industry.

Chemical distributors are more active downstream in the value chain of the chemical distribution network. They provide a variety of product mix, which ranges from the handling of bulk commodity chemicals to packed specialty chemicals. The chemical distributors usually store their products in their warehouses. They also provide additional services and do not simply focus on commercial sales and logistical supply chain functions. Some of the additional services provided by chemical distributors include blending, mixing, packaging, labeling, waste-handling, financing, and drumming. They set resale prices that ensure the sale of the chemicals generates healthy profit margins. In some instances, the chemical distributors may also act as agents or chemical traders.

Distributors strive to sustain their business and increase their value-addition between the customers and the producers. They endeavor to build and sustain long-term relationships and acquire distribution rights with the major players in the industry. Distributors enhance their reputation through serving the major players in the industry well. They focus on creating a customer base that they care about. The main aim of the distributors is to ensure that they have a good profit margin that enables them to grow their business intrinsically. Therefore, the distributors would not like to lose their pricing power or customer contact. In addition, they would not like to depend on a few principles as this would increase the risks they are exposed to if there are disagreements with the principals or any unforeseen circumstances that would limit their ability to control prices or access chemicals for distribution.

The attractiveness of the product may be different for the distributor and the principal or producer. If the market is characterized by several customers and different producers or principals, the market environment favors the chemical distributor. In such a situation, there are many different products manufactured by different producers. These products have several minor applications. In addition, there are few chemical distributors and a high number of fragmented customers that have high technical solutions and other types of service needs. Such a market is very attractive to the chemical distributors. In such situations, the chemical distributors grow their business at an average rate of 5% per year. In addition, their profitability is more than 10%. Such a market leads to the formation of sustainable midsized chemical distributors that can focus on specific regions or become stronger and develop a second tier chemical distribution market. This will enable the chemical distributors improve their performance and sustainability in the long-term.

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