Planning for the Unexpected
Why the Chemical Distribution Industry Is Becoming an Even More Important Chemical Value Chain Partner
The chemical distribution business is a diverse industry that provides customized solutions for important sectors such as pharmaceuticals, paints & coatings, agriculture, cosmetics, food & feed, and automotive. At the center of the supply chains of these sectors, distributors are critical partners for global corporations as well as for SMEs. This role has become particularly obvious and relevant during the corona crisis. But distributors themselves also face many challenges in the aftermath of the pandemic. CHEManager asked Dorothee Arns, Director General of FECC — the voice of the chemical distribution industry in Europe — about the current challenges, market trends and her vision for the sector’s future.
CHEManager: Mrs. Arns, the Covid-19 pandemic is not yet over, but after two years of operating in a pandemic environment, what impact did the corona crisis have on the industry?
Dorothee Arns: By and large, the distribution sector navigated the pandemic rather well and — overall— succeeded in adapting quickly to the rapidly changing conditions. The picture is, of course, not homogeneous, but depends to a considerable extent on the level of segmental and regional diversification of the respective distributor and the product portfolio. On one hand, we could observe that all applications needed to contain the virus spread, for example disinfectants, pharmaceuticals, chemical building blocks for personal protective equipment, were constantly in extremely high demand. On the other hand, other segments which were significantly impacted by lockdown measures during infection peak times faced suspended demand first and afterwards huge catch-up effects when the closures of service sectors were lifted. In any case, and despite all the challenges chemical distributors proved to be a reliable, trusted partner for all their stakeholders and were able to meet all their commitments at any time. For our sector itself — as well as for the entire chemical industry — it was a good opportunity to showcase in reality how much the chemical distribution business can contribute to solving societal challenges.
What, in your opinion, are the most important lessons learned from the past two years?
D. Arns: In my opinion the most important lesson learned is to constantly “plan for the unexpected”, which means develop plan B options for the case that the traditional solution does not work out anymore. What we have seen starting with the pandemic, followed by a series of unprecedented supply chain disruptions triggered by different causes and now with the Russian war in Ukraine, is that our traditional ways of working and making business do not necessarily apply anymore. For decades, all industries, not only chemicals, have optimized their business models with ever shorter lead times, less inventories and increasing reliance on certain structures and processes without buffers. Relatively stable geopolitical times meant relatively stable supply chains, apart from ad-hoc emerging issues, such as sudden force majeure situations; as a consequence, supply reliability was, by default, taken for granted.
“Our traditional ways of working
and making business
do not necessarily apply anymore.”
What we now see is how vulnerable our business models and processes are and that external shocks in some parts of the world — even if far away — can have massive knock-on effects on entire supply chains. Availability of products — from raw materials, semi-finished products, spare parts up to energy — is more and more becoming THE critical issue, supply chain excellence, flexibility and ample global networks are converting more and more in key factors for success.
How will the experience of global supply chain interruptions change the sourcing or operating model of the chemical distribution industry?
D. Arns: Well, not only in chemical distribution, but for all economic players world-wide the crucial task is to check and challenge their individual business models and company processes to make them as future-proof as possible in rapidly changing geopolitical and other framework conditions.
Distributors are anyhow used to respond flexibly and agile to ever-changing market conditions and to use their extensive networks world-wide to find good solutions for their customers and principals. This is part of their DNA and the value added they bring to the supply chain.
“Inventories – especially for critical substances –
are likely to increase to buffer
Most likely this kind of diversification in terms of sources, segments, applications and products will be further extended, long-distance global supplies will be complemented with more regional or local supplies, and inventories — especially for critical substances — are likely to increase to buffer unexpected shortfalls. Some business models, above all those based on single-suppliers, just-in-time deliveries and a low level of diversification in general are likely to be phased out for the sake of enhancing the resilience against external shocks.
After the pandemic, what will be the most important short- and long-term challenges facing the sector?
D. Arns: Actually, the short- and long-term challenges for our sector are pretty much the same as before Corona. The pandemic has “just” further enhanced the urgency of previously existing topics, such as sustainability, and accelerated the speed of ongoing developments, such as digitalization. Additionally, as explained beforehand, the new challenge of supply chain resilience needs to be dealt with — not only short-term, but also long-term.
And if all this were not enough, the Russian war in Ukraine is now threatening Europe´s energy supplies, apart from its massive impact on global food chains. A potential embargo of Russian gas at this point in time would put the entire chemical industry under massive pressure. It would also have a domino effect on Europe´s entire industrial base, because the chemical industry is the “industry of industries”, that means enabler of many downstream segments.
It goes without saying that this is a minor issue in comparison with the humanitarian situation of the Ukrainian people. However, such a step must be well thought out and prepared, which is not the case yet. Even with more lead time, this change could belong in the range of the biggest challenges ever for Europe´s chemical industry, and sustainable solutions to this issue remain unclear at the moment.
How do chemical distributors support the goal of transforming the feedstock base of as many material value chains as possible?
D. Arns: Indeed, FECC members take their environmental responsibility very seriously and are committed to deliver on the targets of the European Green Deal and the United Nations´ Sustainable Development Goals. Just, reality tells that chemical distribution per se is a relatively small sector in a sandwich position between the downstream user industries and the chemical manufacturers. This means the whole chemical supply chain can only solve the issues together in a cross-sector cooperation, and distributors are fully prepared to play their part.
This is also why the sector welcomes the many initiatives from European petrochemical producers to further diversify and transform raw material streams, for example by applying chemical or mechanical recycling or mass balance approaches. Some of the FECC members have also successfully pioneered a cross-industry pilot project in Denmark to use chemical waste as a resource, which is not only a practical implementation of the circular economy, but could also be a further step to reduce the environmental footprint in general and save emissions in particular. FECC was delighted to showcase the project in a joint webinar with the European Commission during the European Industry Days 2021. There is for sure more to come in this respect.
The circular economy is a crucial factor to reach carbon neutrality. Chemical distributors play an important role in the chemical/plastics value chain. How will the circularity trend, that requires closed-loop collaboration along value chains, change the way the industry operates?
D. Arns: Chemical distributors are closely monitoring the developments, which will affect all operations, as distributors are placed in the midst of all value chains. Some facets of the circular economy, for example resource efficiency, reuse of material or recycling have already been in place in our sector.
What is new in the regulatory concept is the target to fully deviate from linear business concepts towards circularity, wherever possible. Apart from the intensified cross-sector cooperation this approach will require a lot of innovation in all parts of the value chains and significant investments in new solutions and new infrastructure — on top in times of increasing uncertainty.
Where the distribution sector per se can make a big difference is when it comes to our own operations and to advising our customers on circular economy principles and how these could practically be implemented in every-day-operations. This is already happening and will be further intensified.
Do you think that carbon neutrality and circular economy are chances to enhance the role of chemical distributors in the chemical value chain? Or will distributors rather have to fear a declining importance due to these trends?
D. Arns: Based on what we discussed before, there is a growing role for distributors and a lot of opportunities to tap. FECC has informed and instructed our members of the practical implications of the circular economy already at a very early stage, facilitated the best-practice exchange with concrete examples and also compiled ample circular economy guidance material for distributors in close cooperation with our colleagues from the Danish National Distributors´ Association Kemi & Life Sciences.
“I am confident that the role of
chemicals distributors will enhance
rather than decline.”
The underlying target was to give our members as much time as possible to prepare for the new developments. Distributors significantly rely on early scouting and identifying market trends. Then their inherent agility allows them to adapt rather quickly to new conditions and develop new business models. Hence, I am confident that the role of chemical distributors will enhance rather than decline.
Which impact will the reform of REACh authorization and restriction have on chemical distributors?
D. Arns: First of all, as distributors – and downstream users of chemicals – we are fully committed to the safe and environmentally-friendly use of chemicals. So, it goes without saying that we share the targets of the regulation whose precise impact remains to be seen when scope and contents of the final REACh review become fully clear.
The whole chemical industry in Europe has already undertaken a lot of efforts some 15 years ago to make the REACh regulation work. It was certainly one of the most complex regulations ever, especially for small and medium enterprises. Therefore, our hope is that the review is done in a pragmatic way and without further burdening the entire supply chain with heavy bureaucracy, especially in these anyhow very strained times.
And there are good precedents for this: If the pandemic had something good e, then it was certainly the practical demonstration of the European Institutions that regulatory processes can be fast-tracked and produce pragmatic solutions without compromising safety, health and environment. This could be observed in the case of disinfectants´ supplies and certainly contributed significantly to contain the virus spread. Such an approach we would also welcome for the upcoming regulations.
Last but not least, we support the efforts of the EU as regards enforcement of the regulation for imported products. As said beforehand, EU players have invested a lot of money and efforts to implement the regulation inside Europe, but we still observe a certain influx of non-REACh-compliant products at the external EU borders, and this distorts the competition to the detriment of EU companies.
How can the REACh reform help fulfill the aims of the EU’s chemicals strategy?
D. Arns: The REACh review is an essential element of the EU Commission´s Chemical Strategy for Sustainability, which aims at phasing out substances of concern. It goes without saying that we share the same targets, that is the safe and environmentally friendly use of chemicals. At the same time it should be noted that for many substances, which are primary phase-out targets of the REACh review, there is no technically feasible alternative in place for the foreseeable future, despite all industry efforts. One example which comes to my mind spontaneously is NMP, an aprotic solvent, which is an essential chemical building block for the production of batteries, semiconductors, aerospace applications and gas-phase chromatographs. The substance is used exclusively by professional users, not consumers, and under strictly controlled conditions as is the case for many substances of very high concern. Phasing out this kind of substances under a REACh 2.0 regulation without commercially viable alternatives would mean that Europe is simultaneously giving up its targets on e-mobility and high-tech for a sustainable future with an industrial backbone in Europe. In this context the hope is for the EU Commission and the European Chemicals Agency (ECHA) to find a well-balanced approach, considering all aspects of a substance, while at the same time avoiding additional uncertainties for the chemical industry in anyhow very uncertain times.
Another transformation that has been particularly accelerated by the pandemic is digitalization. How digitalized is the chemical distribution industry today, and which are the biggest challenges of the digitalization that still need to be tackled?
D. Arns: The pandemic has certainly accelerated digitalization, which had already been high on the agenda before. Still the level of digitalization differs individually from company to company and largely depends on the overall business strategy. Nevertheless, this development will gain more momentum, especially when more and more young talents come onboard, who are even more used to work with digital tools than their predecessors were.
Since chemical distributors are active in all chemical segments and fulfill all chemical supply chain functions, the sector regards itself as ideally placed in the midst of all value chains to pilot innovative digital solutions, and that is what we are doing, also in the competition-law-sound framework of a European association as FECC. Moreover, at FECC we have the pleasure and the benefit to count a series of well-renowned digital solution providers as our members, and these companies are demonstrating on an every-day basis how much can be achieved via digitalization.
The top challenges — from today´s point of view and not only for small- and medium-sized enterprises — are certainly cybersecurity, the compatibility/standardization of data across sectors and industries, and the protection of confidential business intelligence. The latter is of particular but not exclusive relevance for specialty chemicals´ distributors with own recipes. Last but not least increasing digitalization goes along with the requirements for new digital skills in addition to those which are already in place.
The race for young talent will intensify in the coming years, and not just because of digitization. Will the multifaceted transformation just discussed help to attract more young people to the chemical distribution sector?
D. Arns: Possibly the transformation will play its role, too, but most likely it will be even more important for chemical distributors to showcase the solutions they are actively contributing to solve the societal mega challenges. Here the pandemic can serve as a good example. Existing production and distribution lines were switched at a fast pace to make more of the much-needed products available and FECC members donated them in vast quantities to nursery homes, hospitals, schools and kindergartens in their surroundings.
“These days it is not enough
to offer well-paid and secure jobs
to attract young talents.”
These days it is not enough to offer highly qualified, well-paid and secure jobs to attract young talents. Additionally, young people are looking more and more for a purpose and a job where they can make a meaningful difference for society and the environment. This is definitely what chemical distribution can offer. In this context it was also great to see how many students and young graduates we could host during our “chemical waste as a resource” session with the EU Commission during the EU Industry Days 2021. With that in mind I am sure that the chemical distribution sector has many compelling stories to tell.
FECC’s stated goal is to be, by 2022, the go-to European association for the chemical distribution value chain. How far have you come to achieving this goal? Did the pandemic cause delays?
D. Arns: Indeed, when the FECC Board elaborated the new FECC vision in late 2019 nobody could foresee all the external shocks which came up from early 2020 until now, ranging from the pandemic over ongoing supply chain disruptions up to the Russian war in Ukraine. Evidently, all these developments also influenced our association´s agenda: as a service-minded association FECC dedicated substantial resources to helping our members navigate all the crises via dedicated information and analysis tools, webinars and comprehensive guidance, for example in the form of a so-called “Covid-19 toolbox”. It was a great motivation for the FECC team to receive a lot of internal and external recognition for our material: not only did the European Chemical Agency and the Occupational Health & Safety Agency actively promote it via their social media channels, but we also won an award for trade association excellence on service quality for it.
Additionally, we were very happy to welcome many new members to the FECC family – despite all the crises and related financial constraints – which signals to us that we are on a good way. Some projects like the official launch of our new Young Talents Forum are, indeed, a bit delayed. However, overall we are on track and will soon need to elaborate our vision for the FECC in the coming years.
Weighing the risks and the chances of the topics just discussed, what is your vision of the future of the chemical distribution sector?
D. Arns: The vision of the future is for the chemical distribution sector to continue playing a vital, vibrant role in the chemical supply chain by offering value-adding, sustainable solutions to our business partners and acting as a reliable, trustworthy, constructive dialogue partner for all stakeholders.
The interview with Dorothee Arns was conducted by Ralf Kempf and Michael Reubold.
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