Chemical Industry Overview

This is dependent on the nature of the product and markets served, and the acumen of the company doing the price setting.   These are the industry pricing strategies:

• Cost-plus and inventory-based (spot) – a pricing strategy based on adding margin targets on top of cost to produce. This strategy is typical for commodity products.

• Market-based - pricing strategy based on a goal of achieving a certain price position vis a vis a defined customer set. This strategy is often used for both commodity and specialty products. The more highly branded products, the more likely to use a market-based strategy.

• Inventory-based - pricing may change based on current or future inventory levels in order to clear volumes or hold volumes for the highest-value customers. This is common for products that come directly from a plant and where storage space is limited, or spoilage potential is high.

• Value-based – more typical for sellers of specialty products who have a strong command of end-use applications in downstream markets and can accurately estimate value in use that corresponds to differing customer willingness to pay.

The general transaction mechanics used in this industry are:

• List prices – they exist but are not usually valid indicators of market pricing.  Most chemical companies set customer pricing individually; not based on discounts from the list. 

• Price change mechanisms: 

  • Mass price changes - applied to all customers in a product, market, customer industry, and/or geography.   

  • Formula and index-based price changes – most often on a monthly or quarterly basis are driven by changes in publicly available information on raw material or finished product price levels and trends.  Formula pricing is most often used in commodity product areas.  Formulas are typically defined as part of a sales agreement of at least one year in duration. 

  • Market price changes are agreed between suppliers and buyers.  Changes can be part of a long-term (1 year or longer) sales agreement or simply done on a routine transactional basis. 

  • Spot or inventory-based pricing (pricing NOT based on a contract), changing as needed to move excess quantities of product out of inventory. 

  • Price changes are frequently announced to the public with 30-90 day advance notice before becoming effective.  This can serve to create an orderly competitive marketplace.   

The following are the common models used in this industry:

• Direct sales – typically handled by field sales personnel with buyers.  In some cases, inside sales personnel will cover smaller accounts that are judged to be too large to give to distributors.  Rebates are commonplace and generally are focused on the direct customer.   

• Distribution sales – through an assortment of multinational, national, and regional distributors. Annual rebates, usually on a volume basis, are typical for producers to drive sales through distribution.  Manufacturing companies will frequently utilize distributors to manage their “long-tail” customers who are too small to serve directly.  

• Tolling – this is a specialized arrangement where one manufacturer utilizes the capability or favorable location of another firm to process their goods. One company provides raw materials or semi-finished goods to a 3^rd party provider who completes the manufacturing process on their behalf. This is typically used when a company wants to sell in another geographic region but does not want to or is unable to ship products in a cost-effective manner to that region. 

In this industry, companies with more specialized products may have sufficient insight on downstream markets and buying processes to establish pull-through rebates with 3^rd party customers.  

This varies by product area, normally through barriers to entry like control of technology and capital intensity required to invest in capacity.  Products made with technology that is readily licensed or beyond patent life tend to have more suppliers and be more commoditized in nature. Those products with technology protection, no licensors of technology, and high capital barriers to entry are more likely to have a very small number of suppliers, or alternatives that are unlike products. 

This is atypical for the industry. There are some instances where products are used by customers for extended periods of time (e.g., catalysts and heat transfer fluids) where opportunities exist for aftermarket (refill) sales or selling a service (e.g., enabling production rates or certain levels of heat transfer) that would allow for alternative pricing approaches.