E-Rosion?

The efficiencies of e-commerce are expected to cut costs and increase transaction speed in the chemical industry. But they also may threaten the profitability of individual companies as these savings are passed on to customers. Long term, the savings will evaporate, says Sergey Vasnetsov, senior vice president and U.S. chemicals analyst, Lehman Brothers, New York. "It's pretty clear that with e-business you have more to lose on sales price compared to how much you save on raw materials, simply because you are selling more specialty products and buying more commodity products -- where markets are very efficient already -- to manufacture them." Lehman Brothers' data show a net-profit-margin reduction of 4% is for a supplier of commodity or intermediate chemicals in an e-commerce scenario. The decline would be even more pronounced in the specialty-chemicals segment, says the investment banking firm. These losses most likely will be experienced in the peaks of the chemical industry economic cycle. "In a downturn competition is brutal," says Vasnetsov. "You have fairly low prices and margins to begin with, so the impact of e-commerce will not be so huge." In peak cycles, however, the perception of material shortage drives prices up, making them "vulnerable" to the reductions that online transactions can provide. Erosion of these spikes is seen as especially detrimental, for much of the industry's profit over the long haul is generated during these upswings. "E-commerce will have a flattening effect, and thus represents a threatening long-term trend, particularly for those companies that supply more downstream, diversified chemicals," warns Vasnetsov. Commenting on this conundrum, Andrew Liveris, group president, performance chemicals, Dow Chemical Co., Midland, Mich., notes, "Products that are not pure commodities, yet whose prices swing on supply/demand imbalances, or hydrocarbon cost increases, or GDP vagaries, could get further commoditized by the introduction of e-commerce. Dow's strategy is to be the low-cost producer and not over-resource products like that. For us, then, e-commerce is an enabler of that strategy. Companies that don't approach it in that way may lose share."