Chemical Industry Distribution at a Pivotal Moment

The chemical industry supply chain is at a pivotal moment. Or so says Madjar Navah, Managing Director and Partner at the BCG chemical industry consultancy.

His views are based on analysis of the chemical sector which found that the future of the chemical distribution sector was based on five core factors:

1. A predicted short-term softening of the market before growth resumes at a rate of about 2.5% CAGR.

2. Multinational chemical companies’ growing reliance on outsourcing.

3. Chemical supplier portfolio diversification.

4. The growing significance of performance delivery.

5. The growing focus on value-added services within the chemical sector.

As a result of these trends, industrial chemical suppliers, according to Navah, will have to “… grapple with a landscape shaped by shifting global trade routes, demand constraints, and digital disruption, [with] their roles evolving far beyond traditional bulk breaking.” In place of the standard supply of conventional chemical products in bulk form, he foresees chemical distributors as needing to “… [position] themselves as critical value-added partners, vital to the success of the global supply chain.”

It is a change that has been brought about by the extraordinary upheaval and volatility witnessed in the global economy and manufacturing sector in recent years. Prior to Covid-19, the chemical industry had stable demand, globally intact supply chains, and predictable expansion. However, a combination of extended destocking, unsustainable high margins, re-shoring of both manufacturing and chemical product sourcing, and the supply chain logjam all caused by the pandemic have radically changed how the chemical sector operates.

European chemical producers have been the worst affected, with many businesses being forced to reconsider their sourcing methods as a result of regulatory scrutiny, geopolitical issues, high energy costs, and inflationary factors that have reduced margins and destroyed competitive advantages.

“As a result,” explains Navah, “principals have increasingly turned to distributors, not only for the long-tail, but more and more also the mid-tail and application-specific services to ease their P&Ls.”

Meanwhile, the incoming Trump presidency is likely to further upset the flow of international business with tariffs and a possible trade war looming between America and all of its major partners. China’s economy is also looking increasingly fragile as its construction boom remains mired in debt, while the Russia-Ukraine war continues to disrupt both their economies and their vital exports of raw materials.

“As global trade routes shift,” Navah believes, “distributors must rethink their supply chain strategies and their role, leveraging new opportunities and new principals in these (emerging) markets to maintain their competitive edge.”

To do so will require flexibility of chemical supply operations and strategic deep-thinking over two key factors:

Portfolio Adjustment to Meet Future Market Demand

Chemical suppliers must re-evaluate their portfolios, concentrating on establishing connections with manufacturers who meet the needs of future markets, all while analysing their own value-added services and competencies. In this sense, distributors should carefully consider which components to do not serve as a significant differentiation for them.

At the same time, they will also need to keep in mind that mergers and acquisitions (M&A) will continue to be essential for securing the future of their chemical businesses.

As Navah explains, “… strategic partnerships are becoming a critical enabler of growth, particularly in areas like AI, sustainability, and customer experience—especially for those companies who cannot or do not want to host specific capabilities in-house through targeted M&A. In fact, over the past 18 months, there has been an increase in announced alliances of >20%.” Adding that, “By leveraging these strategic partnerships, distributors further differentiate their portfolios.”

Artificial Intelligence and Digitalisation

As the landscape of industrial chemical supply and production evolves, AI and big data is emerging as a pivotal force for enhancing operational efficiency and innovation.

AI enables suppliers to analyse vast datasets, predicting market trends, and customer demands with remarkable accuracy. At the same time, by automating processes such as inventory management and quality control, companies can reduce waste and minimize operational costs while ensuring consistent product standards.

Moreover, AI-powered predictive maintenance tools allow industrial equipment and logistics management to operate at peak performance levels by anticipating failures and bottlenecks before they occur.

BCG analysis on the issue finding that, “Distributors who have invested early in building digital capabilities are now reaping measurable benefits, with leading companies reporting gains of 2–5 percentage points in gross profit margins and 1.5–3 percentage points in EBITDA margins vs. laggards.”

The result is that AI is increasingly becoming a necessary requirement for both chemical suppliers and producers alike, with BCG data finding that more than 70% of companies in the industrial chemical sector have now “started to experiment with GenAI, both in front-end and back-end applications.”

As the landscape of industrial chemical supply evolves at an unprecedented pace, it is clear that adapting to these changes is no longer optional but essential for survival and growth. The integration of AI technologies presents a transformative opportunity for businesses seeking to optimize their operations. Moreover, strategic portfolio adjustment—particularly in shifting toward sustainable methods—can position chemical distributors as leaders in this rapidly changing arena.

Embracing these advances not only fosters resilience in fluctuating markets but also aligns with the increasing regulatory pressures pushing for greener solutions. As ultimately, the journey toward modernization will enable industrial chemical suppliers to thrive in an era defined by agility and innovation.

Photo credit: Hannes Egler on Unsplash, Guillaume Boldoc, Shaah Shahidh, Sam LaRusa, & Marcin Jozwiak