The European economy, spurred by the Great Recession and a downturn in the chemical industry in the second half of 2011, has put pressure on companies up and down the supply chain. At the same time, economic growth has shifted to Asia, the Middle East and Latin America. The result has been a contraction in European chemical production that continues today.

According to a July report from Cefic, the European Chemical Industry Council, European Union chemical production decreased 2.1 percent in the first five months of 2013 compared with the same period in 2012. This continues a trend in the European economy over the last six quarters, according to IHS Global Insight. Many chemical manufacturers have consolidated their European operations to reduce costs or acquired competitors to expand their territories.

As chemical manufacturers are consolidating, so are additive and lubricant companies. High-profile examples include BASF, which purchased specialty chemical supplier Cognis, a deal worth 3.1 billion, and Chevron Phillips Chemical, which acquired a polyalphaolefin business from Neste Oil. The deal enabled Chevron Phillips to increase its production of PAOs for the lubricants market.

The list of other companies making recent acquisitions includes Fuchs Petrolub, which purchased OPET, and Italian specialty chemical firm Italmatch Chemicals, which acquired the phosphonates and phosphorus chlorides business units of Thermphos International.

Specialty Chemicals on the Rise

While EU chemical production has dropped steadily as a percentage of world production for over two decades, Europe still offers a profitable market for specialty chemicals, according to a March report in ICIS Market Outlook chemicals newsletter. The decline has largely involved production of commodity chemicals, and there is still a fair amount of specialty chemical formulation and production. In fact, specialty chemicals account for more than a quarter of all European chemical industry sales, Cefic reported in 2012.

In this environment, market-focused distribution plays a more important role than ever. Manufacturers are looking to reduce pressure on margins, and distributors can help through practices such as just-in-time delivery and by keeping a safety supply for their customers. Market-focused distributors tend to be more willing to provide these services and to maintain inventory and technical resources that can provide a competitive advantage.

Chemical distribution has undergone significant reorganization in the last few years, with many distributors merging or snapping up smaller competitors. Examples include Brenntag, which went on a buying spree in Asia – particularly China – North America and Europe; and Univar, a U.S. company that purchased Basic Chemical Solutions, the Netherlands, in December 2011 and the Belgian operations of distributor Quaron in January 2012.

Many mid-sized distributors have also gotten into the expansion game. In Europe alone, there were 20 mergers or acquisitions among chemical distributors in 2012 and 10 as of June 20, 2013, again according to ICIS. Consolidation has provided distributors with more control over existing supply chains, thus giving them more margin stability due to increased volume and buying power. It has also provided greater access to hard-to-find products, a competitive advantage. Ultimately, increased size and access has become essential to those wanting to do business in the new global economy.

Lubricant manufacturers now want suppliers with a larger, multi-country footprint, said David Brown, vice president of Chemagility, a firm specializing in chemical distribution intelligence and analysis.

However, size and pricing are not the sole determinants of success in the new Europe. Suppliers must also offer technical and supply management expertise to help their customers adapt.

Professional distributors able to provide technical support are well placed to benefit from continued outsourcing trends from manufacturers keen to rationalize their sales and supply chains, Brown continued. This enables customers to save costs as they focus on the production and development of more advanced lubricants.

Brown added that suppliers without technical experience can be left behind.

While size matters in the distribution industry, a supplier may be at a competitive disadvantage unless it offers technical expertise, he said.

So, what kind of support are lubricant manufacturers seeking from their suppliers? The primary competencies are regulatory compliance and formulation expertise.

Regulatory Compliance

Lubricant manufacturers seem most interested in chemical distributors having regulatory compliance expertise. Distributors have an important role in helping lubricant manufacturers comply with Registration, Evaluation, Authorization and Restriction of Chemicals, the EUs massive chemical safety regulation. While REACH compliance is primarily the responsibility of the most interested in chemical distributors having regulatory compliance expertise. Distributors have an important role in helping lubricant manufacturers comply with Registration, Evaluation, Authorization and Restriction of Chemicals, the EUs massive chemical safety regulation. While REACH compliance is primarily the responsibility of the manufacturer, some look to distributors to help educate them about regulatory obligations and avenues of potential exposure.

REACH regulations impose duties on all parties, to different degrees, depending on their role, said Anthony Lyons, health, safety, environmental quality and logistics manager at specialty chemical distributor Melrob, LTD. As a distributor, our prime role is to act as a conduit for the flow of information up and down the supply chain – particularly with respect to uses [of registered chemicals]. We gather use information from our customers and feed it back to our suppliers for their consideration when carrying out chemical safety assessments and developing the relevant exposure scenarios as part of the REACH registration process.

Distributors can serve a double-checking role to ensure that all safety data sheets provided to clients are REACH-compliant. This is especially true when chemical supplies come from non-EU suppliers.

By and large, we can rely upon the safety data sheets issued by our suppliers, but we still have an obligation to ensure that the SDS is compliant with REACH. Not all non-EU suppliers are fully conversant with the European CLP interpretation of GHS, and this requires us to educate some non-EU suppliers, and in many cases to create our own CLP-compliant safety data sheets, Lyons said.

CLP is the EUs regulation for classifying, labeling and packaging of substances and mixtures, which aligns previous EU legislation with the United Nations Globally Harmonized System of Classification and Labeling of Chemicals. The main objectives of these regulations are to facilitate international trade in chemicals and to maintain the existing level of protection of human health and the environment.

Formulation Expertise

As lubricant companies have become more centralized and eliminated technical staff, they have come to rely more on their suppliers for support.

Manufacturers have fewer resources and time to work on development, said Sandrine Lebensztein, business group manager at IMCD Group BV, of Rotterdam. Distributors are there to help them by following the trends of the market and by supplying the right raw materials.

More than just supplying the right additives, distributors are called on for laboratory support and formulation expertise, according to Brown.

There has been a trend for chemical producers, including lubricant companies, to cut back on technical staff and facilities and outsource to distributors, particularly those that have their own laboratory facilities, Brown said. Distributors able to assist customers in developing and testing formulations and who can help adapt products to meet local market requirements will continue to benefit from outsourcing trends.

A prime example of this is found in the automotive industry, where cars are becoming more compact and incorporating more electronics. Consequently, lubricants are needed that operate under increased heat and pressure, while also remaining compliant with environmental safety requirements.

The mature lubes market in Western Europe has shifted toward technologically advanced, sophisticated lubricants, Brown said. The key industry for lubricants is the automotive sector, which faces increasingly stringent emissions standards, especially in the EU and North America. Fuel economy requirements and improved durability are driving increased demand for high-performance-quality lubricants.

Specialty distributors can create new business opportunities by developing new chemistries based on market needs.

As a distributor that focuses solely on lubricants, we are in a position to create value for our suppliers by leveraging opportunities that occur on a local level, said Robert Stubbs, business development director at Sea-Land Chemical Europe.

Stubbs points to the metalworking fluid industry, where the disposal of boric acid and boron-containing additives has come under scrutiny in recent years, particularly in countries that practice soft fruit irrigation. This is because wastewater from the manufacturing and use of metalworking fluids can contaminate water supplies and soil. Boron and substances containing it are then absorbed in the fruit and can accumulate in toxic levels in human tissues. As a result, products containing these chemicals have required labeling related to reproductive toxicity.

Customers are looking for alternative corrosion inhibitors and buffering systems that mimic the technology that has been central to many formulations for the last thirty years, Stubbs said. This is a complex replacement process, and experience in the sourcing, development and formulation of the product technology can be particularly beneficial in assisting formulators with their raw material or additive choice.

Thus, by finding alternative chemistries Stubbs has been able to generate new business for his suppliers and improved performance for customers by leveraging a growing market for boron alternatives.

In many cases, the solution is not a single raw material or component but a combination of chemistries to give the desired result, he said. In certain cases, the alternative options have given improved performance, not just comparable results.

Distribution will continue to play a vital role in Europes realigned chemical markets. Sea-Land believes that distributors that have specific expertise in lubricant supply and chemistry will be in a strong position to help their customers adapt to take ad-vantage of opportunities in Europes volatile economy.

More than just a conduit of product and information, these specialized distributors are an essential partner to manufacturers. As the industry becomes more consolidated and competitive, so distributors will continue to help their suppliers and customers adapt, even as regulations become more complex, supply shortages continue and production shifts overseas.