Test HM - 3

Market Definition
High volume and low product differentiation chemicals being used across most
industries
Chemical Industry Classification
By Type By Market
Market Definition
Speciality Chemicals Organic Chemicals
 Commodity or bulk chemicals refer to a group of
chemicals manufactured in high volume with
minimum product differentiation (composition Diversified Chemicals Inorganic Chemicals
variation)
 These chemicals function as an intermediate for the
production of end products, making it the largest Commodity Chemicals1 Focus of the Study
sub-segment in the overall chemical industry
 Key end products include pharma intermediates
(such as APIs, intermediates, excipients,
formulations and drug delivery devices), and other  Olefins (such as ethylene, propylene and butadiene)
Bulk Petrochemicals
goods such as adhesives, polymers, plastics, apparels  Aromatics (such as benzene, toluene and xylene)
and tires
 These chemicals are used in almost all types of  Polymers (such as polyethylene, polypropylene and polystyrene)
manufacturing industries either directly or
Petrochemical Derivatives  Ethylene Oxide
indirectly
 For example, silicones – which are made by  Methylene Chloride
polymerisation of siloxane (a commodity chemical) –
is also used in producing a wide range of pharma  Chlor-Alkalis (such as caustic soda and chlorine)
products Inorganic Chemicals
 Acids (such as sulfuric acid, phosphoric acid and hydrochloric acid)
1) List is not exhaustive

Source: Expert Interviews; Industry Associations; Government Bodies; Supplier Website; Press Search; TSC Analysis 2018 © The Smart Cube. All Rights Reserved
1
Market Definition – Pharma Applications
Used as solvents, preservatives, antioxidants and reagents in manufacturing
processes of drugs, APIs, pharma intermediates and excipients, etc.
 Used directly or indirectly in API manufacturing; examples are as
follows:
 Silicones are used as APIs for antacid and ant flatulent formulations
 Organic solvents are used during several stages of API production
APIs
Commodity Chemicals in Pharma  Utilised in the production of pharma intermediates;
Manufacturing examples are as follows:
Commodity chemicals are used as solvents,  P-substituted aromatic compounds are used as
pharmaceutical intermediates in several drugs
Pharma
preservatives, antioxidants and reagents in
manufacturing of many pharma products
Intermediates
Commodity
Chemical Based –
Key examples are as follows: Pharma
 Used in manufacturing pharma derivatives or Utilisation
excipients; examples are as follows: Pharma
Solvents Reagents
 Several polymers made from commodity chemicals are Excipients
 Methanol  Titanium Dioxide (coloration) used as binding materials
 Chlorobenzene  Glycerin (humectant)  Silicone-based compounds are frequently used in topical
 Cyclohexane  Sorbitol (humectant) formulations Drug
 Acetone Delivery
Devices
 Utilised in manufacturing of microspheres used in making
Preservatives and Antioxidants
targeted drug delivery; examples are as follows:
 Phenol
 Cyclic olefins are used to manufacture prefillable syringes
 Propylene glycol (especially for large molecule drugs)
2
Market Size and Growth
Market anticipated to grow at 7.9% by 2019, driven by economic growth in
developing countries
Global Commodity Chemicals Market – Overview
Global Commodity Chemicals Market – by Value

($ billion, 2015–2019F)
CAGR: +7.9%
3,096.0
2,869.3
2,659.2
2,464.5
2,284.0
2015 2016E 2017E 2018F 2019F Source: MarketLine
 In 2015, the global commodity chemicals market was worth $2,284 billion and is forecast to grow at 7.9% CAGR to $3,096 billion by 2019
 Between 2015 and 2019, growth is likely to be driven by the increase in demand from the pharma segment; production of generic drugs is also expected to increase on
account of patent cliff1 during the period
 Small molecule formulations worth $121 million will lose patent protection in developed countries between 2014 and 2018
‒ During 2014–2018, the global pharma industry is likely to grow at a CAGR of 4–7%; generic drugs will account for 52% share of this growth
1) Patent cliff is the potential sharp decline in revenues upon patent expiry of one or more leading products of a firm
3
APAC – expected to hold largest share until 2019
Global Commodity Chemicals Market – Regional Overview (1/2)
Global Commodity Chemicals Market – by Region

(% share, 2015–2019F)
 In 2015, APAC held ~61% share of the global commodity chemicals market
Total
(100%) 2,284 2,464 3,096 and will continue to hold the largest share until 2019; the key markets
were China and India
7.5 7.4 6.8
 Higher growth is expected from China, India and Indonesia due to easy
14.2 13.7 12.3 availability of imported crude oil and natural gas
14.3 ‒ During 2015–2019, China is likely to witness growth at 11.6% CAGR to reach
17.8 16.9 $1,672 billion; however, China’s forecast demand growth is expected to be
lower than that witnessed during 2012–2016
‒ This is due to recent economic slowdown, mounting protests by Chinese
people to control chemical pollution and recent denial to issue new
permits to manufacturing entrepreneurs
60.5 62.0 66.6 ‒ In 2015, APAC accounted for ~60% of Saudi’s crude oil exports; it
indicates the level of demand generated by APAC
‒ As per IBEF – an Indian market research agency – the Indian manufacturing
sector was worth $ 0.7 trillion in 2015, and is likely to be worth $1 trillion by
2025 due to government’s ‘Make in India’ initiative
2015 2016E 2019F

APAC Europe North America RoW 1
1) Includes the Middle East, Latin America and Africa

4
Economic slowdown and stringent environment regulations hurting European
commodity chemicals market
Global Commodity Chemicals Market – Regional Overview (2/2)
 In 2015, Europe accounted for ~18% of the global commodity chemicals market;
the region is now facing challenges due to the following factors:
 Economic slowdown in many countries is impacting the demand for various end
products
 Increasing dependency of European end users of commodity chemicals on imports
from APAC markets such as China and India “The decline in commodity chemicals prices in Europe is due to the
‒ Competitive prices and acceptable quality are the primary reasons availability of cheaper products from other regions and implementation
 In 2015, North America had a ~14% share of the global commodity chemicals of regulatory compliance, resulting in less margins for manufacturers.” –
market; it is likely to grow slightly higher (i.e., 3.9%) than Europe (i.e., 2.1%) by Industry Expert, EU Regulatory Authority (March 2014)
2019
 The North American industries in 2015 were facing weak growth; however, large M&A “We do not see good signs for European markets; however, the US is
transactions and increased production of shale gas in the US may bode well in the
future expected to make a come back. Meanwhile, Asia will continue to be the
 In rest of the world (ROW), the Middle East was leading among other sub regions, market leader and Africa will emerge as the next big commodity chemical
i.e., Africa and Latin America during 2012–2015, and is forecast to drive the manufacturing hub in the next 10 years.” – Industry Expert, Middle East-
demand by 2019 based Distributor of Chemical Raw Materials (July 2016)
 It is attributed to the adoption of economical shale gas imported from North America,
replacing the less economical naphtha
5
Drivers and Inhibitors
Rising healthcare spend and threat of chronic diseases driving growth in overall
pharmaceutical industry, including commodity chemicals
Growth Drivers
Indicators
 Increase in chronic lifestyle diseases such as diabetes, hypertension and cardiac disease will likely
Driver fuel the demand for preventive drugs Impact
Rising Threat of Chronic  As per the International Diabetes Federation – a Belgian consortium of worldwide diabetes – 415
Diseases million people were diagnosed with diabetes between 1980 and 2015; the number is expected to
reach 642 million by 2040
 During the same period, 5 million diabetes-related deaths were reported
Low High
‒ With the increase in diabetes, related diseases such as blindness, kidney failure, heart attacks, strokes
and lower limb amputation are also likely to rise
 Lifestyle or chronic non-communicable diseases (NCDs) are among the most prevalent and costly to
treat
 According to the All Indian Origin Chemists and Distributors (AIOCD), an industry body, the Indian
pharma market grew at a CAGR of 3.3% (by volume) between 2010 and 2015; however, the
demand for medicines to treat diabetes, urological and dermatological ailments increased at a
double rate
6
Ageing population and rise in number of chronic disease cases to drive
pharmaceutical spend
Growth Drivers
Indicators
 In 2014, UK-based Economist Intelligence Unit (EIU) reported that healthcare spend in 60 countries
Driver rose 2.6% in nominal USD terms; however, it was expected to dip in 2015 due to weak currency Impact
position in many countries against the dollar
Increased Healthcare Spend
Across Key Markets  Aging populations, rise in chronic diseases, informed consumers and growing wealth are primary
drivers of the increased global healthcare spend
 High growth was witnessed in developing markets such as Asia and the Middle East
Low High
 The healthcare spend (as a % of the GDP) grew across several countries such as the US, Canada and
India
 According to Centres for Medicare and Medicaid Services – a US-based agency administering Medicare
programme – in 2014, US healthcare spend grew at 5.3% compared with 2.9% in 2013; the spend is
expected to further grow at 5.8% CAGR during 2014–2022
‒ Growth can be attributed to enhanced health coverage under the Affordable Care Act, which led to
the highest rise in healthcare spend after the 2008 recession
7
Surge in global drug production and rising population to drive growth
Growth Drivers
Indicators
Driver Impact
 The global drug spend is likely to increase by 30% to $1.4 trillion by 2020
Rising Global Drug  Between 2015 and 2020, the global drug production is expected to increase, along with commodity
Production chemicals production (raw materials for making drugs)
Low High
 In 2015, the total spend on medicines in the US reached $310 billion (up 8.5% Y-o-Y), fuelled by
introduction of new expensive drugs and price hikes of older drugs
“During the next 5 years, we expect to see a surge of innovative medicines emerging from R&D
pipelines, as well as technology-enabled advances that will deliver measurable improvements to health
outcomes.” – Industry Expert, US-Based Healthcare Technology Company (November 2015)
Indicators
Driver  The two primary reasons for increase in health spending across developing markets, specifically in Impact
Asia and the Middle East, are rising population and wealth
Increasing Population and  By 2019, the global high-income household1 population will reach 540 million; Asia will account for >50%
Standard of Living in of this population Low High
Emerging Markets
 Rise in income will likely drive private spending on health, and positively impact the pharmaceutical
market and increase the demand for commodity chemicals
1) Include those earning >$25,000 a year

8
Wide price difference – key driver for rise in generics sales
Growth Drivers
Indicators
Driver  The commodity chemicals market is likely to surge due to an increase in the global demand for Impact
generics
Growing Generics Market  In 2014, the global generic drug market is forecast to grow at 11.5% CAGR to $518 billion by 2018
 Between 2013 and 2018, the global pharma market is likely to grow at a CAGR of 10.6%; generic
drugs account for 52% of this growth
 Primary reasons for this growth include rising patent cliff, increasing adoption of generics by various
Low High
governments and growing industry consolidation
‒ Global pharma companies are acquiring API manufacturers specific to their demand; for instance, 1) in
September 2015, India-based Sun Pharma acquired the Australian business of UK-based GSK to enter
into the opiates and analgesics segment and 2) in July 2015, India-based Lupin Pharmaceuticals
acquired US-based Novel Laboratories to enter the US API contract manufacturing market
9
Unstable economies impacting demand for commodity chemicals
Growth Inhibitors
Indicators
Inhibitor  In 2014, McKinsey cut the expected growth rate for Brazilian pharma industry from 15% to 7%; this Impact
was primarily driven by factors such as turbulent economic conditions, imposition of high taxes,
Continuing Economic increasing drug development cost in the country and poor infrastructure
Low High
Slowdown in Many  In 2014, members of the Organisation for Economic Co-operation and Development (OECD) spent
Countries ~1% of the GDP on public healthcare, down from 3.4% in 2013
Indicators
Inhibitor  In May 2016, the US Congress passed a bill to overhaul the existing law – the Toxic Substances Impact
Control Act (TSCA), 1976 – governing usage and trade of chemicals
Evolving Stringent  This amended law will enable the Environment Protection Agency (EPA) – the US environment regulation
Regulatory Measures enforcement agency – to seek more information and additional studies to ensure compliance with the Low High
TSCA
 Also, this will restrict companies from withholding any information on chemicals
1) Raw material producers that manufacture only a small number of products

10
Supply Chain
Three modes of delivery for end user – direct, distributor and e-commerce
Global Players Regional Players
Global
manufacturing, Operate in
supplies and regional market
Manufacturers customer base
Offer global Local/regional network

Distributors/ sales network and supply capabilities
Importers
Direct Supplies
Distributor Supplies
Managed by Managed by independent

E-commerce commodity sellers that work as
Suppliers chemical intermediates between
manufacturers distributors and end users
E-commerce Supplies End Food & Beverages Pharmaceutical Construction

Users
Automotive Textiles
Provide assistance in identification, selection, and regular co-ordination with vendors

Procurement
Consultants
11
Supply Chain
Distributors offer various services including mixing, blending, formulating, filling,
packing, labelling and bundled transportation
Manufacturers Procurement Consultants

 Deliver commodity chemicals of desired quality  Evaluate and suggest a commodity chemical
and specifications to large end users, manufacturer which is able to fulfil demand in
distributors and e-commerce suppliers the best possible way
 Meet regulatory norms established by local  Provide end-to-end supply chain management
and regional regulatory agencies solution to end users
 This includes partnering with selected suppliers
for specific commodity chemical and for limited
duration, enabling reduction in end user’s
Key supervisory manpower requirement
Distributors/Importers Roles
 Distribute commodity chemicals from large E-commerce Suppliers
manufacturers to small and midsized end users  Provide opportunity to end users to compare
 Provide specialised import documentation real-time prices of commodity chemicals and
assistance and ensure regulatory compliance to hence, realise more savings
arrange supplies from overseas commodity  Offer multiple options of supplies, enabling
chemical manufacturers purchase planning for end users
 Offer value-added services such as mixing,
 Create a single business account that can be
blending, formulating, filling, packing, labelling accessed by multiple users within the company
and bundled transportation to keep track of purchases and occasionally
End-users
share stocks
 Generate demand for commodity chemical manufacturers that
can be fulfilled by the direct or indirect supply route
 Maintain communication with other stakeholders of commodity
chemicals supplies such as distributors and e-commerce suppliers
12
Market Trends
M&As expected to continue in 2016
Trend Impact
Drivers and Indicators
 Extensive M&A activities are expected in the commodity chemicals segment The recent shale gas boom has
Robust M&A Activity
 With 372 global deals in 2015, M&As have surged ~23% over 2009; however, number of M&A financially strengthened
activity carried out in 2015 was lower than that in 2014 chemical companies, leading
to M&A frenzy in the industry
 Since 2014, M&A activity in Japan – a major chemical market in APAC – has been growing; the
growth is expected to continue in 2016 due to favourable business conditions Further, market consolidation
will increase the bargaining
 According to a 2015 JETRO1 survey, >40% companies in Japan are expecting growth in operating profit in
2016
power of suppliers
Some of the major M&A deals in the global commodity chemicals market are as follows:
Merged Companies Description
In 2018, SABIC and ExxonMobil entered into a JV near the US Gulf coast to establish a steam cracker and derivative unit to manufacture
petroleum-based commodity chemicals
In 2016, US-based Westlake Chemical acquired another chlor-alkali manufacturer Axiall to become the third-largest chlor-alkali
manufacturer in North America
In 2015, Tosoh Chemicals acquired a majority stake in Philippines-based Mahubay Vinyl (a key manufacturer of chlor-alkali in the country)
In 2015, US-based Olin Corporation bought the US chlor-alkali business of Dow Chemical to widen its product portfolio
In 2014, Japan-based Nippon Polyurethane acquired another Japanese chemical company Tosoh Corporation’s polyurethane material
manufacturing business
1) Japan External Trade Organization (JATR) is a government-related organization that works to promote mutual trade and investment between Japan and the rest of the world
13
Market Trends
Shifting focus from low-margin commodities to high-margin specialties
Trend Impact
Strategic Shift in  Globally, many companies are shifting focus from commodity to speciality chemicals in pursuit of
Focus of Large Enhanced bargaining power of
higher incomes and/or better margins consumers, as large
Companies companies are spinning off
 Commodity chemicals are traded in high volumes at low margins; additionally, margins have been
fluctuating since 2010, encouraging manufacturers to expand their specialised product portfolios to their commodity chemicals
safeguard revenue businesses and small
companies are taking over;
 This trend is more prevalent in developed geographies, such as the US and Europe, wherein emphasis is
on selling products at premium prices the latter offers competitive
prices
 In many developing countries, such as India – wherein manufacturing plants are typically small and raw
materials are mostly imported – the focus is shifting toward speciality chemicals to sustain margins
 However, in China, the commodity chemicals market has remained strong due to huge investments
and presence of large manufacturing plants that enjoy economies of scale
Companies that have divested commodity chemicals business are as follows:
Divested Company Description
 In 2016, Belgium-based Umicore sold its Zinc Chemicals business to OpenGate Capital – a US-based private equity firm – to enhance focus on
high-quality industrial chemicals
 In 2015, US-based Dow Chemical spun off its chlorine business to Olin Corporation – another US-based chemical manufacturer – as a part of
its strategy to include high-margin products in its portfolio
“Moving much of the chlor-alkali business out of its portfolio will help Dow move up the value chain.” – Industry Expert, US-based
Chemical Company (June 2016)
14
Market Trends
Bio-based bulk chemicals segment forecast to double (by volume) by 2017
Trend Impact
Growing Usage for
Bio-based  Green chemistry is gaining acceptance in the chemicals industry due to benefits including the Adopting bio-based chemicals
following: lead to lower spending on
Intermediates feedstock and higher margins
 Reduced production waste
 Less toxic or renewable residue By adopting bio-based
chemicals, pharma customers
 Until 2025, bulk chemicals made from bio-based materials and chemicals (BBMC) will grow at a can improve bargaining power
higher rate than other chemicals as their suppliers save on
 Key feedstock – such as sugar, cellulose, glycerin, bio oil, waste gas and other plant-based products feedstock costs
– are emerging as cost-efficient materials to produce commodity chemicals
 In 2015, 2 US-based companies Genomatica (a bioengineering technology chemical producer) and
Cargill (a conglomerate) collaborated to develop renewable chemicals
15
Market Trends
Growing end-user market, and low raw material and labour cost in developing
countries motivating manufacturers to establish new production plants
Trend Impact
Growing Number of
Production Plants in  Key countries in APAC and Latin America such as China and Brazil have become attractive locations With manufacturers saving
for large commodity chemical manufacturers to establish production plants more on cost, end users such
Developing Countries as pharma companies can
 Many countries in developing countries have imposed antidumping duties to preserve the survival expect superior-quality
of domestic producer products at competitive prices
 For instance, India has imposed this duty on supplies from China and the US
 Labour and raw materials costs in China are 25–50% lower than that in many European countries
making it one of the most attractive destination for commodity chemical manufacturers
 The CDMO/CMO market is growing in developing countries such as India, China, the Philippines and
Brazil
 The CMO industry in developing markets grew 6% Y-o-Y in 2014; this was more than twice (i.e., 2.5%) the
rate witnessed in developed markets such as the US, the UK and Germany
 Growth of the CDMO/CMO market is spurring the demand for commodity chemicals as large-
scale manufacturing plants are being established to fulfil orders
New manufacturing plants

New Plants Description
 In 2016, BASF inaugurated its new amine manufacturing plant in Nanjing, China in order to meet the growing demand and ensure
stable supply in APAC
 In 2015, BASF inaugurated its first-ever plant in Brazil to manufacture acrylic acid, butyl acrylate and super absorbent polymer
 In 2016, Evonik, a Germany-based chemicals company inaugurated its silica production plant in Brazil to consolidate its global
market position; in 2015, it had also opened an oil additives plant in Jurong Island, Singapore
16
Supplier Classification
Pharma industry – key end user of commodity chemicals
Pure Play Diversified
Level of Competition Level of Competition
Pharma Focused
Low High Low High
Companies manufacturing Manufacturers with diverse

Commodity Chemicals chemicals (including product offerings (including
Player Classification – commodity chemicals) and commodity chemicals) and
by Type catering only to the pharma catering only to the pharma
industry industry
 The global commodity
chemicals market is highly
competitive, with presence
of many large players
offering similar products
 Almost all manufacturers Level of Competition Level of Competition
of commodity chemicals Low Low
High High
cater to the pharma and
General
biopharma industries
Type of Industry
Companies manufacturing Manufacturers with diverse

 Large companies generally chemicals (including product offerings (including
have diversified product commodity chemicals) and commodity chemicals) and
portfolios that aid business catering to multiple industries catering only to the pharma
growth; this also helps including pharma industry
companies gain a
competitive edge while
vying for large global
Type of Business
contracts
17
Supplier Classification
Extensive industry experience and operational scale help global players cater to
wider end-user base
Commodity Chemicals Player Classification – by Geography
 Regional players have operational capacity and end-
 Most large commodity chemical manufacturers have global presence; in addition, user customer base within a particular country or
these players exhibit the following characteristics: region; these players display the following
 Large companies typically cater to multiple industries and have diversified product Regional characteristics:
offerings (including commodity chemicals) Players  These players are relatively strong in developing
‒ Besides traditional sales network, they also sell through e-commerce portals; for countries such as China, India and Indonesia
instance, BASF – a German global commodity chemicals manufacturer – offers e-  They cater to multiple end-user industries, such as
commerce services through extranet solutions and electronic data interchange F&B, pharma/biotech, FMCG, chemicals/polymers and
 They have well-established distribution network comprising their own/subsidiary technology
offices, distributors and importers in each region Global  These players compete fiercely with global players
 Usually, they ink large contracts on the back of wide product portfolios and established due to their superior know-how, well-established local
Players footprint, superior brand recognition because of
customer contacts
frequent sales and marketing activities, and frequent
 They have strong presence in developed markets such as the US and Japan interaction with purchase teams of end users
 End users tend to prefer to engage with these players on account of better technical,
regulatory and end-user management capabilities
High Geographic Reach Low
“Regional players give tough competition to global players; however, they will not be able to outpace them due to their low resource availability, lack of
global experience and ability to understand the market dynamics.” – Industry Expert, Middle East-based Distributor of Chemical Raw Materials (July 2016)
18
Market Characteristic
Regional vendors in APAC and Middle East giving stiff competition to global
players
North America Europe APAC + ROW
Regional Global Regional Global Regional Global
Low High Low High Low High
Regional Global Regional Global Regional Global
“While the current situation Europe is not looking good – lack of cheap feedstock and increasing number of plant closures – in the US and the Middle
East, feedstocks cost is better and they have made investments worth $71 billion on petrochemical expansions on back of shale gas flowing into
chemicals, and that is predicted to grow to over $100 billion.” – Industry Expert, UK-based Chemical Company (March 2014)
19
Key Vendor Selection Criteria
Price – key selection criteria of commodity chemical suppliers
Price
Commodity chemicals are characterised by low product
differentiation, encouraging price-based competition
High level of competition further leads to price being the
1 most important parameter for vendor selection
Additional Services
End users prefer buying from suppliers Location
offering additional services such as filling,
packing, labelling, mixing, blending, 5 2 Proximity of supplier to the
delivery location is a
formulating, inventory management and
bundling transportation prerequisite
Key Service
Offerings
Range of Product Offering

End users prefer vendors with a wide 4 3
Delivery Speed
End users prefer vendors offering
range of product offerings, as engaging shorter lead times
with a single vendor allows companies to Local distributors or e-commerce
reduce their administrative overheads suppliers score high on delivery speed
and achieve price efficiencies
20
Supplier Selection
Key end-user practices ensure supply chain transparency by constant vigilance and
avoid frequent vendor switch
Industry Best Practices for Supplier Selection
 Risk Management: Work in tandem with vendors to develop know-how of their production capacity and focus
Practices Renounced by End Users on quality; this helps them build a completely transparent relationship
 For this purpose, end users usually utilise commodity planning software such as InSight CM and Ekaplus
‒ For instance, Abbott uses commodity planning and control for its supply chain management
 Supplier Switching: Prefer not to switch  Commodity Profiling: Invest more time and effort to profile current vendors and procurement dynamics of
suppliers too often as establishing procurement each commodity chemical
process is time-consuming and involves
 This helps them understand vendor characteristics, assess market situation and identify competitive moves of peer
identification, contract placement, purchase companies
and delivery management
 Cost Analysis: Adopt measures to gain visibility on various cost components of the required commodities (such
 Multiple Supplier Partnerships: Refrain from
as spend analysis); this practice helps them in being aware of the reasons behind any unexpected price
engaging with multiple vendors for procuring a changes
single commodity chemical as it puts the
unnecessary administrative strain  Quality Check: Conduct regular product quality assessment activities to ensure that quality expectations are
met by the current vendors, especially in cross-country transactions
 Typically, end users prefer to partner with 2–3
vendors for a single commodity chemical  In 2015, Roche conducted 772 supplier quality audits and discontinued 10 supplier services due to noncompliance
with the company’s product standards
Practices Adopted by End Users
21
Engagement Model
Tactical vendor agreement preferred for purchasing commodity chemicals to meet ad
hoc/low-volume requirements
Sourcing Practices
Engagement model adopted by end users depends
on the end objective and type of commodity
chemicals being sourced; the buyers enter into
Strategic Partnership Arrangement
either tactical/preferred vendor arrangement or
strategic partnership arrangement  Used for critical or high-volume commodity
chemical requirements
 Objective is to secure long-term engagements for
regular supplies and consistent quality
 May require sharing of resources and technology
Tactical/Preferred Vendor Arrangement  Greater emphasis on vendor’s manufacturing
 Preferred for noncritical or low-volume Engagement capacity exclusively available to the buyer and its
commodity chemicals requirement Model ability to meet specified quality requirements
consistently
 Emphasis is on short-term goals and cost
savings
 Used in cases where a pharma company has
no prior experience in a specific
manufacturing process and is dependent on
a particular vendor for specific technical
know-how (such as a new API or formulation
manufacturing)
22
Engagement Model
Contract type adopted based on required volume and order frequency
Sourcing Practices
 End users enter into a contract-based agreement for each

individual commodity chemical
 This is typically done if the commodity chemical is critical,  When the demand by end users is low or less frequent,
and is required frequently or in high volume they usually utilise the service of channel partners, i.e.,
 For instance, McNeil Consumer Healthcare, a J&J company, distributors or e-commerce vendors
purchases chemicals through contract and blanket purchase Ad Hoc  The purchase is done in an ad hoc manner, in which the
orders that are negotiated and finalised by a supply chain
manager in the company Agreement distributor quotes a price, which is discussed and
Contract-based agreed by both stakeholders
 However, such agreement may or may not have price
Agreement  Generally, orders are booked in a pro forma invoice
consideration; price, if under consideration, is usually format (in which spot prices are quoted)
reviewed every quarter
 In this type of an agreement, price discounts are low and
 This is due to the volatile nature of commodity chemical dependent on volume requirements and competitive
prices intensity in that region
 Usually, vendors offer price discounts of 10–15%
 Contract duration is usually from 6 months to 2 years
23
Engagement Model
Short-term contracts or requirement-based purchases preferred for purchasing
commodity chemicals witnessing price volatility
Sourcing Practices
Supplies Type (Direct vs. Indirect)
Direct (via manufacturer)

 Pharma companies, consuming large volumes of commodity chemicals, have an in-house sourcing and procurement team to manage the
commodity chemicals supply chain
 This team is responsible for identifying, shortlisting, maintaining, managing and monitoring vendors to ensure sustainable supplies
 Typically, two vendors are shortlisted for each commodity chemical to ensure uninterrupted supplies
Indirect (via supply chain partner)

 End users utilising commodity chemicals in lesser volumes prefer to engage procurement consultants to manage these ad hoc requirements
 These consultants identify, communicate and shortlist vendors; they also offer additional services such as product quality inspections, vendor
manufacturing facility inspection, audits and logistical support
24
Engagement Model
Regular spend analysis and review meetings to ensure uninterrupted supply
of chemicals
Sourcing Practices
Overview
Key steps undertaken by end users (typically, pharma
companies) to ensure uninterrupted supply of commodity
chemicals are as follows: Supply
 Typically, procurement department of pharma companies
shortlists vendors and manages procurement of commodity
chemicals
 Trained in-house personnel are deployed to manage the
procurement process end-to-end
Risk  This team helps in building relationships with vendors and ensures
seamless delivery process and acceptable product quality
 End users conduct regular review meetings with vendors
to improve the level of engagement and discuss broad-
level goals and objectives
 These meetings provide a platform to exchange ideas and
bridge any existing relationship gaps Price
 Regular meetings are also important to gain transparency  End users regularly monitor chemical prices and keep
in supply chain and manage price risks effectively themselves aware of any fluctuations
 This is done through an analysis of factors that influence
chemicals cost, such as feedstock or other raw materials, labour
rates, electricity charges and packaging cost
 Spend analysis is conducted every quarter and the outcome is
discussed with vendors
25
26
Cost Structure
Raw materials purchases account for 50–70% share of chemical manufacturing
cost
Chemical Manufacturing
01 Purchases  Comprises cost of feedstock such as aliphatic hydrocarbons, aromatic

Organic Chemical Cost Structure – US petrochemicals, hydrogen gas, catalyst, additives, intermediates and
(2015) gases
 Holds the largest share in cost structure – 69%
Purchases
18.3% 02 Wages  Includes salary paid to permanent or temporary staff of the company
3.2% Wages  Percentage share has declined from 5.7% in 2010 to 5% in 2015
 This was driven by investments made by companies to learn new
4.7% Rent and Utilities manufacturing and productivity enhancing automation technologies
5.3% 03
Depreciation
68.5% 03 Rent and Utilities  Comprise high-energy machinery and technology-related cost
Others 1
04 Depreciation  Consists of cost of equipment, machineries, facilities, vehicles and

other capital investments to facilitate production process
1) Others includes cost of marketing, transportation, interest and bank, capital expenditures, repair and maintenance works, warehouse expenses, business and consulting services, and marketing and administrative fees
27
Cost Structure
Share of utilities increased in recent years due to high energy-consuming machinery
requirements
Chemical Manufacturing
01 Purchases  Includes cost associated with purchasing mineral ore or refined,

Inorganic Chemical Cost Structure – US packaging, fuels, solvents, reagents, catalysts, process intermediates
(2015) and other natural resources
 Holds the largest share in cost structure – ~50%
Purchases
02 Rent and Utilities  Has increased during 2010–2015 on account of high-energy
29%
Rent and Utilities machinery and technology-related requirement
Wages
50%
03 Wages  Average annual wages were high (>$78,000 per employee in 2015) on
account of requirements of high-skilled chemists, engineers and
4% Depreciation
technicians
8%
9% Others 1
04 Depreciation  Represents the cost of equipment, machinery, facilities, vehicles and
other capital investments
 Larger investments in automation and government regulations on
hazardous material disposal are mandating use of advanced
technologies
1) Others include marketing, maintenance, R&D, administrative, communication and distribution costs

Test HM - 3

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Test HM - 3

Hochgeladen von

Copyright:

Verfügbare Formate

Market Definition

Chemical Industry Classification

1) List is not exhaustive

Global Commodity Chemicals Market – by Value

2015 2016E 2017E 2018F 2019F Source: MarketLine

Global Commodity Chemicals Market – Regional Overview (1/2)

Global Commodity Chemicals Market – by Region

2015 2016E 2019F

1) Includes the Middle East, Latin America and Africa

1) Include those earning >$25,000 a year

1) Raw material producers that manufacture only a small number of products

Global Players Regional Players

Offer global Local/regional network

Managed by Managed by independent

E-commerce Supplies End Food & Beverages Pharmaceutical Construction

Provide assistance in identification, selection, and regular co-ordination with vendors

Manufacturers Procurement Consultants

New manufacturing plants

Pure Play Diversified

Level of Competition Level of Competition

Companies manufacturing Manufacturers with diverse

Companies manufacturing Manufacturers with diverse

High Geographic Reach Low

North America Europe APAC + ROW

Regional Global Regional Global Regional Global

Low High Low High Low High

Low High Low High Low High

Low High Low High Low High

Low High Low High Low High

Regional Global Regional Global Regional Global

1 most important parameter for vendor selection

Range of Product Offering

Practices Adopted by End Users

 End users enter into a contract-based agreement for each

Supplies Type (Direct vs. Indirect)

Direct (via manufacturer)

Indirect (via supply chain partner)

01 Purchases  Comprises cost of feedstock such as aliphatic hydrocarbons, aromatic

04 Depreciation  Consists of cost of equipment, machineries, facilities, vehicles and

01 Purchases  Includes cost associated with purchasing mineral ore or refined,

Das könnte Ihnen auch gefallen