I've divided the Q&A into segments. First, we'll discuss the business model of specialty chemicals. Then we'll do a deep dive into the Chinese competition from the principals, followed by business fundamentals, financials, and finally M&A.

The first question is, how often specialty chemical distributors like IMCD and Azelis have exclusivity agreement with principals for specific regions. Does it change depending on the region and type of product? Like it's more commodity or less commodity chemical?

Yes, there are three types of agreements. First, there are contracts with true exclusivity, where 100% of what the producer does is only distributed by one distributor. This is a very small percentage, maybe even in the single digits.

Then there are non-exclusive agreements with sole distributorships. This means the principal has maybe 20 multinational direct accounts that they serve, which are protected and on a customer reserved list. However, in that specific region or country, distributors like Univar, Brenntag, or Azelis are the only ones for all small and mid-sized customers. This accounts for about a third of the agreements.

Over the past decade, regulations, especially in Europe with the Vertical Block Exemption Regulation (VBER), have led many principals to prefer non-exclusive distribution arrangements. They don't want a fully transparent relationship and prefer not to know who the end users are. They just say, "Sell where you can," while they handle their direct base.

There's a fourth type, particularly common in China, which is a customer protection model. There's no formal agreement, but if you disclose to whom you sell, the producer will protect you at that specific account. For semi-commodities like titanium dioxide, used in all segments, they have five or six preferred distributors across Europe, like Brenntag and Omya. You're allowed to buy, and if you tell them to whom you sell, they will give you customer protection.

Long story short, true exclusive sole distribution rights, in whatever kind of formal legal agreement, account for about one-third of the agreements with IMCD, Brenntag, and Azelis, who have Western principals. There's a real distinction between North America and Europe in how these principals work with channels, agents, traders, and distributors compared to Asia. Does that answer your question?

Yes. Has this evolved over the last 10 years, or has it not?

It has moved away from exclusivity because many principals felt restricted. There were agreements and contracts, and if they wanted to cancel these, they would have to pay a penalty or a fine, which they disliked. There has been a real evolution where all kinds of principals, whether Western premium, non-premium, commodity, or specialties, had an agent or distributor for 50 years and stuck with them. Over the past 20 years, producers have made changes. They don't want vast geographies. Sometimes they want to reduce complexity and assign only a few, depending on the market, leading to consolidation.

On the other hand, they also see that if they work with a local champion, for example, in Spain, and that champion gets acquired, it complicates things. They want to step away from such situations. Every couple of years, they reassess performance. Are you growing the market? If not, they will move to someone else. From a very conservative, unchanging approach, they have shifted towards a more dynamic agent channel model. They often assign distribution managers who oversee the entire network they work with. Together with the business, whether it's personal care, pharma, food, or industrial, they decide to reassess and make changes every two to three years.

How feasible is it to implement this strategy of changing distributors periodically?

I would say that the vast majority of contracts are typically between three and five years, with five years being the maximum. Due to EU law, they usually opt for a three-year agreement followed by an evergreen clause, allowing for extensions of a year up to a maximum of five. In many cases, especially when the market is unstable, they notice certain distributors underperforming and cancel some contracts. A few principals, and this is public information, use this as a business model. They sell distribution rights, where typically 15% to 20% of the cost of goods must be paid by the distributor to acquire the mandate, the right to distribute these products.

From an industry practice perspective, not just contractually, what share of the revenue do you think offers some stability from a principal's perspective?

I would say really less than 10%.

And what would this figure have been 10 years ago?

Well, 10 years ago, it had already started evolving. But if you go back 15 to 20 years, it was about half.

What is the share of specialty chemical distributors' revenue related to value-added services, like laboratory blending, rather than just purchasing bulk?

You have three or four kinds of distributors. There are companies that only deal with commodities. They typically have tank trucks, storage facilities, and tanks. They buy a full truckload of liquid, store it in a tank, and subdivide it into smaller containers, like five or 10-liter jerry cans. This logistical service is essential, as it involves testing and labeling before selling to various users. This is one of the few real added value services they provide. A common service they all offer is extended payment terms. For example, a principal might sell to a distributor with 30-day terms, but a typical Italian customer might get 75 days on an open account. Cash flow management is crucial.

Some companies also provide laboratory and technical services, but for most it's primarily marketing. Some have 70 application labs, others have 20, 10, or even just one or two. However, these services are limited and rudimentary due to a lack of equipment and in-depth knowledge. They can assemble formulations, but the end users often have more experience and knowledge about their products. So, it's largely marketing. The business that involves innovation and R&D capabilities is minimal, at best low single digits.

Logistical services like repackaging and relabeling create a lot of added value, especially for distributors handling commodities or both commodities and specialties. For instance, Univar and Brenntag have both specialty and commodity divisions and offer more of these services. Companies like Safic, Omya, Azelis, and IMCD focus 80% on differentiated or specialty chemicals. They acquire these from premium Western brands and simply store and distribute them without altering them. This is due to legal reasons; once a distributor alters a product, they assume liability for warranty and shelf life. If a customer complains, the distributor is responsible, as the producer guarantees a two-year shelf life only if the product remains in its original packaging.

There are also costs associated with repackaging, especially given the thousands of different grades in commodities. Specialty chemicals involve more grades and smaller volumes. I've worked for two large distributors, Azelis and Univar, and we never engaged in value-added distribution. The added value services are mostly logistical.

What kind of logistical services are provided, at the end of the day?

Can you provide consignment stock in different pack sizes? For instance, it's quite common to receive something in small bags and then repack it into a big bag because the customer requires it. Their production is only equipped to handle big bags for unloading. These kinds of packaging and logistical capabilities are the added value services for customers.

I understand, but then you lose the warranty from the principal.

Yes, you do.

How is pricing defined when a product goes through this logistical value-added service? Is it a fee, like a commission plus a service charge for handling the product?

Typically.

What's the buildup of the revenue?

There are a couple of factors in how pricing is decided. In a real agency business, you process the order but don't touch or distribute it. The commission is between 2% and 4%. In a typical distribution business, when you buy a container of a product, store it in your warehouse, and distribute it, the average gross margin for distributors is around 25%, depending on geography and market segment. When there are added value services, the margin can exceed that. It very much depends on the costs added. Typically, you are in a defensible position because not many companies offer this tailored service for specific customers. In many cases, you could even make a 30% to 40% margin on such businesses.

What differentiates a specialty chemical distributor from the perspective of the principals?

From the perspective of the principals, they are very much attracted to innovation. When they open up a tender to change distributors, they invite several distributors to pitch their services. What they appreciate is a local sales team—someone in Spain who speaks Spanish, knows the market, and so forth. They want to meet the team and understand their market knowledge, including familiarity with customers.

They also value companies that provide digital capabilities, such as customer portals and e-commerce solutions. Sustainability is another focus; they look at EcoVadis and Sustainalytics to see what you are doing in that area. However, the key priority is technical support. They always ask if you have labs, a technical manager, and if you provide technical support for customers. Companies involve their technical team in pitches to demonstrate their understanding of the products and market.

In performance reviews, there are two main expectations; they want you to grow the business faster than the market CAGR. Typically, in specialty chemicals, it's about 4% to 5% CAGR, depending a bit market and geography. And then key to working capital and so forth is, do you pay your invoices on time? So whenever they have reviews, there's two things that are red flags. If your business is flat or declining, wow, they're really, really upset. And secondly, you need to pay their invoices on time in full? Everybody, particularly the public distributors who did an IPO and so forth, they try to stretch when they pay the invoices and, and to reduce the stocks. But principals really don't like that.

Another major issue is when a customer calls to say the distributor doesn't have a product in stock and asks to buy directly from the principal. This is a primary complaint because working capital is a concern for distributors. Not keeping enough stock is a critical issue. During the selection process, principals want to see if you have enough salespeople and basic setups like labs.

And what about from the perspective of the customers?

Price, price, price, price. In the specialty chemical space, customers used to focus heavily on key brands. There were one, two, or three Western players known for their reliability in quality, consistency, service, and security of supply, with products always in stock. However, over the past 10 years, various factors have led these long-term Western suppliers to face issues with supply security, production, and logistics. This has sometimes forced customers to seek alternative sources, such as those from China.

When the market was under pressure, customers noticed their suppliers often increased prices opportunistically, especially when products were scarce. This was particularly evident in 2021 and 2022, just after Covid, when the market was volatile. Many suppliers optimized their margins during this time. Consequently, when the market declined, buyers reconsidered their reliance on single sources, realizing their suppliers were neither reliable in supply nor fair in pricing. Now, for key products, they often have two, three, four or even five different suppliers to ensure they get the product at a competitive cost. The split is usually between low-cost Asia Pacific suppliers and premium Western suppliers.

Customers are willing to pay for real added value, such as extended payment terms or the ability to purchase small volumes in specific sizes. However, they are not interested in paying for technical services, especially when they have more personnel in their labs than some distributors do. They also don't want to pay for digital or sustainability features unless there's a competitive price or added value services like nearby stock or operational distribution. Buyers often use the public financial data of distributors, such as EBIT and gross profit, to push back against price increases, especially when distributors earn more than producers.

Regarding the dynamics we've discussed since the start of the call, would you say they apply to chemical industrial-related products as well as personal care, life sciences, and food? Is the same dynamic present across all categories?

There are specific segments that distributors focus on, with some having more specialties than others. I would say that the pharma and personal care segments are more protected, with less competition and higher requirements such as pH, GMP, and various regulations being factors there.

Food, on the other hand, is extremely commoditized and competitive, with many players involved. On the industrial side, segments like agro, coatings, and construction are also more commoditized, while others have different dynamics.

Not many public distributors report on individual market segments and their margins, but I would state that the margin profile for personal care and pharma is significantly higher compared to commodity segments like plastics, coatings, and food. There are substantial differences.

Adding another layer of differentiation, there are significant differences in margins geographically. The UK and the Nordics are premium markets, whereas Turkey, Spain, and Italy are much more competitive. This geographic component affects the added value and specialty and how they are rewarded compared to others.

Moving on to Chinese competition, what have been the triggers for the increasing competition from Chinese principals in the market where publicly listed specialty chemical distributors are active?

There have been waves on and off. In certain cases, the Chinese have added so much overcapacity in their products that, despite their market growing in normal years by 6%, 7%, 8%, 10% or more, they had an export department dumping products across the Western world. Sometimes they pushed it, and sometimes the Western world needed products. In many cases, they were subsidized by the government or had different margin expectations, which allowed them to push away a lot of Western producers who could not compete.

Twenty years ago, there was a huge quality difference, but now they are on par, and in some cases, even above. Particularly in the past three or four years, when their domestic market and the Asia Pacific market are down, they use their export business in the Western world more as an overflow to create additional contribution margin. There's a demand because everyone in the Western world wants to reduce costs, so they turn to Asia. However, there's so much overcapacity there, and they are actively looking to export as they cannot fill their plants with domestic demand.

We see Western brands disappearing, with various bankruptcies. Sometimes companies can no longer compete and remove their mobile assets or factories because the margins they can make no longer justify continuing. In many cases, China has the capacity and takes over the market. Many large multinationals can't justify moving back. There are advantages to having Western producers, but in many cases, the Chinese are on par in service and payment terms. In certain product groups and markets, they continue to invest, whereas Western producers no longer invest, allowing them to compete with the Asians.

One of the winners in the market is Wanhua. Twenty years ago, they had a marginal market share in polyurethanes, MDI, TDI, and so forth. Now, they are a global market leader, pushing out BASF and Covestro, premium brands in high-quality end markets like automotive and aerospace. They dominate the polyurethane market, and their competitors are suffering, with some even facing bankruptcies. For instance, Vencorex recently went bankrupt, a French producer of isocyanates, and Wanhua is taking over that market.

They keep investing in sustainability, innovative products, new products, and various services. They have local stocks and provide similar, if not superior, terms. We even see them being named Supplier of the Year by Henkel and other renowned Western large multinational customers. More and more, we see this trend continuing. However, they are reluctant to establish production bases in the Western world due to feedstock dynamics, high energy prices, and the challenges of buying merchant local feedstocks.

They keep producing in Asia and sometimes announce plans to build a plant in the U.S. or Europe, but very few of these materialize. They continue producing in Asia and exporting. In certain product groups, they are already dominant, and their market share has massively grown over the past decade. You've probably read concerns from Jim Ratcliffe of Ineos and Markus Kamieth from BASF. People are, and I think rightly so, very worried about these dynamics going forward.

Which regions and sectors do you think are more exposed to Chinese competition? By sector, I mean commodities, semi-commodities like chemicals, industrial, food, personal care, and life sciences. So, which regions and sectors are more exposed?

I would say that today Europe is much more exposed, largely depending on tariffs and other factors. Europe does a poor job protecting its market, whereas the U.S. is much more aggressive in this respect. However, even the EU has been more open to providing anti-dumping charges, but these are just delays. For instance, with epoxy resins, the EU recently announced high import duties to protect the European market. But structurally, in terms of feedstocks and production costs, they're not fixing anything. For the time being, they're increasing the hurdles, and most of this is industrial-focused. In agro and food, they get involved as well. I think the least affected are pharma, personal care, and more specialty markets.

How do these Chinese players approach international markets in terms of product differentiation, pricing, and the use or non-use of intermediaries?

It's very strange. We see the typical Chinese producer with someone who speaks limited English, based in Shanghai in an office building with 50 others doing the same thing. They quote prices, usually FOB Qingdao or another port, and they want payment in advance. Then there are Chinese producers with maybe one office or headquarters. They establish an entity in Germany, send a couple of people from China, and sell from there. Finally, there are companies that establish a genuine Western presence with local salespeople and business directors who have autonomy. Their pricing profile is similar because those offering aggressive export prices look at export statistics and competitors, offering within that range. It's really about creating a contribution margin from excess capacity they want to dump outside their domestic market.

When we look at more sophisticated models, I think Wanhua is one of the best examples. They've hired Western colleagues, business leaders, and sales managers, and created a distribution network. They try to optimize and align with market prices, observing Western competitors. There's more discipline in this respect. Although not allowed, they participate in signaling, announcing price increases, hoping competitors follow to elevate the price basis. Generally, the margin expectations from Chinese suppliers are much more modest than those from the Western world. I've never understood how they arrive at certain pricing models. It's a bit like how we see China as one entity without recognizing the differences. When determining pricing, they might do it from an office in Shanghai, viewing Europe as a whole without differentiating between the UK, Turkey, Spain, or the Nordics. They just quote FOB port in U.S. dollars, and that's it.

How do they approach the market? Do they reach customers directly or through local distributors?

It's complete mayhem. They offer products to anyone who asks. They give multiple mandates to people in the same segment and markets. I've encountered this before. I visited China, got a mandate, and then discovered they already had three agents, two traders, and another distributor doing the same thing in the same market. Sometimes they provide customer protection, as I mentioned earlier. We see a trend where they're following their Western peers and competitors by organizing distribution and making agreements. Companies like Lomon Billions and Wanhua are examples. I think companies from Korea, Japan, and Taiwan are more sophisticated in this regard. Huge Korean companies like Kolon manage domestically and conservatively, but they have a real sales policy, local salespeople, and a distribution approach. China is catching up rapidly, but most companies still use it as an excess overflow.

Do you envision Chinese principals increasing competition in more specialized, higher value-added chemicals that may require a higher level of customer service and value addition?

Yes, we see that they're being actively educated by large multinationals. I have customers who awarded their supplier of the year to Chinese suppliers, citing the services provided. They do this to signal to competitors. It's impressive what they're doing, and they're catching up. Customers want more products, so distributors are seeking more Western principals. This is also evident in investor day presentations of public companies like IMCD and Azelis, which actively want to move towards more Asia Pacific supply. End market distributors and Chinese Asian producers aim to expand into the Western world.

What was the perception and competitive positioning of specialty chemical players like IMCD and Azelis towards Chinese competition in the past? How do you think this has changed moving forward?

It's a bit strange how it started. I would say that 10 years ago, 90% of the suppliers for these kinds of distributors were Western premium companies. These were market leaders like Covestro, BASF, Momentive, and so forth. At that time, these companies were already actively opening up Asia Pacific as a production market. Instead of building new factories in Europe or North America, they began producing in China first. The initial intent was to produce for the domestic market. However, when they saw the variable costs, they decided to increase capacity in China and export to Europe, which was easier. So, although it was branded as BASF, it was already coming from China, which marked a shift.

The next step was that various principals in the Western world were acquired by Chinese partners and vice versa. For instance, Allnex, formerly Nuplex SciTech and part of AkzoNobel, was acquired by a Thai group, PTTGC. Asian suppliers or large multinationals started acquiring these companies, and the same happened with Covestro, which was acquired by ADNOC. Middle Eastern and Asian companies began acquiring these firms. Another point is that some principals are disappearing. One of my principals, Venator, formerly Huntsman, recently announced their bankruptcy. So, who replaces them? Naturally, you look to Asia Pacific. However, many current suppliers are unable to compete, causing everyone, including the principal and distributor, to lose market share.

IMCD and Safic Alcan are actively visiting and trying to decide who to pick for distribution. It's a mutual desire. Many new Asian suppliers want a distributor for their products, and distributors need competitive suppliers for specific product groups. They actively look towards Asia for this. If you look at the investor day presentations, particularly those of IMCD and Azelis, they publicly announce on their websites that they are actively trying to replace existing suppliers with Asia Pacific suppliers for various reasons.

Is there resistance from these Asia Pacific suppliers to grant exclusivity rights?

Yes, there is resistance, and they are not very successful, to be honest. I think it was mentioned in the transcript of the first quarter when Valerie left. In Q1, around April, IMCD was trying to address this. There was a follow-up question about how much they had already replaced, and the response was that it's still in development. It's a wish, but not a very active one. Developing these kinds of businesses isn't like selling a brand. Some brands are market references with trademarks. When you sell a regular Chinese product, you need to add value through service or price to differentiate yourself.

For example, iron oxide used in many segments is dominated by Bayferrox from Lanxess, which is the market standard. The same goes for Byk's products; their brands are well-known in the market. It's like selling Nikes versus an unknown brand from China. While you can be cheaper, people sometimes prefer to pay more for a brand like Nike. This situation requires a different sales approach, transitioning from farmers to hunters, which management wants to achieve.

What do you think European companies, particularly specialty chemical distributors, need to do in terms of their business model to adapt to current market dynamics? How can they fend off competition, or should they embrace it?

That's been a struggle, and I have a personal opinion on that, which I will share. Over the past two to four years, it's evident from publications and results that these distributors find it very difficult to grow organically. They often resort to mergers and acquisitions, adding debt and paying high multiples, around eight to 10, for distributors. When large global distributors do this, they experience significant value deterioration. They might acquire businesses that are great and complementary, but often they already have a supplier for these, which they need to sacrifice for the new acquisition.

They add debt and acquire many companies, but if they invested in digital capabilities and organic growth instead of inorganic options, they would find real value. This requires a cultural change, moving from just having a great store with 20 brands to truly transitioning the company. Companies like Brenntag, with around 18,000 people, and Univar, with 9,000, are different. However, the majority are mid-sized companies with 1,000 to 5,000 employees, three-quarters of whom are commercially oriented. They need to transition from focusing on brands to adding real value.

Currently, they're in contingency planning mode, cutting costs and reducing headcount from one quarter to the next. Splitting companies and focusing more isn't what they want to do, but I think they should. Brenntag recently announced they gave up on this, but you see board shareholders are not happy. Key management has changed, and they are reconsidering their strategy. However, it's only a short-term optimization strategy, not a long-term one. They're not truly investing in transitioning their portfolio, as it would mean short-term sacrifice for long-term gain, but that's not what they're doing.

It's interesting because when the founder of IMCD retired, he sold all his shares of the company, which was quite a dramatic move, and he exited completely. This happened about two to three years ago. Do you think it was clear that the market was going to get tougher over time, or was that the case?

Pete was very similar to Jochen in the Azelis case and many others, like Holland. In many cases, there's been significant churn in management, and we hear about new changes every day. All the CEOs have recently changed, except for David Jukes, sometimes even rapidly. After Pete, Valerie was there for only one year, and now it's Jordan, Marcus, and Jordan taking over. They're all struggling. Why? Because the model they had was like a hamster wheel. When the market was growing, they could keep buying, but once they stopped because their debt skyrocketed to multiples of three or four, the net financing cost became huge. If you look at the published numbers, you see the debt and the ratio, but also the cost of interest.

Right now, M&A is slowing down, and inorganic growth is stalling. People are unhappy. The real fundamentals are surfacing today. If you look at the share prices of Azelis, IMCD, and Brenntag, they're not doing well at all. They always claimed they were outperforming the market because of their model, but today, their true colors are showing. They're trying to reduce costs, but there are very few costs to cut. The real costs are goods, salaries, and headcount because most of these companies, except for Univar and Brenntag, are asset-light. They have no warehouses or trucks; it's all variable costs with outsourcing. They have few things, but if you make a few poor acquisitions and are always challenged to grow, you need to keep buying. Today, companies like Azelis pay 140 to 150 million per year in net finance costs due to poor debt and M&A. Even if there were a great fit to buy, they don't have the cash to do it anymore.

But the end consumer is still buying, right? People are still going to the supermarket and cleaning their homes. So there is demand and a shift in market share.

They lost market share, yes.

So what's going on? The end customer demand is still there. What's happening with the specialty chemical distributors that they are not able to grow organically?

They are losing market share.

They are losing market share to whom?

Typically, the large ones have 50,000 customers. It might surprise you, but around 15% to 20% of the distributors' business is actually not with distribution customers but with global multinationals. Those companies are actively moving towards buying directly. Also, many typical distribution customers are looking for lower costs. They see the premium prices from IMCD, Azelis, Safic, Omya, Covestro, and BASF and are not happy. They will go to a trader in Dubai who can offer 30% cheaper prices. The payment terms might not be ideal, and there may be longer lead times, but they can buy cheaper.

People are actively looking to reduce their purchasing spend, and that's what many customers do, sometimes out of necessity. I was always buying Venator material, but now they're bankrupt. Where do I go? Buyers and procurement departments are actively searching. In 2021 and 2022, it was about needing the product regardless of cost. Today, with 100 suppliers, it's all about the lowest cost.

Would you say the issue is more from the distributor layer perspective?

No, it's a change in behavior among customers.

Or is it from the principal perspective? Are the Asian principals taking share from the traditional ones?

Definitely. If you look at the import statistics, you might think the market is growing based on what Europe is importing from Asia. However, the market is roughly aligned with GDP, maybe half a percent growth, but this doesn't explain the declines seen in Q2, Q1, and last year's reports. The decline at distributors is due to share loss. They're losing share because the majority of their business is with Western principals and premium brands, while people are increasingly buying imported Asian materials from traders, agents, and sometimes directly. There's a significant shift from Western materials to Asian materials.

What share of those specialty chemical companies' revenue is truly exposed to Chinese principal competition? Would you say it's around 50%, or does it depend?

For instance, in titanium dioxide, used in many products, there are five Western producers like Tronox, Kronos, and Chemours. Twenty years ago, they held 95% of the market. Chemours had 19%, and Tronox and Cristal together had 15%. Today, globally, Lomon Billions alone probably holds around 40% market share. There have been huge shifts. Venator exited the market, and others stepped in. It depends on the product. Fifteen years ago, in polyurethanes, Covestro, BASF, and Vencorex dominated 85% to 90% of the market. Today, Covestro, the former Bayer company, has lost about 15% market share, with some of it moving to Wanhua, which now holds a significant share.

The shift varies by product and geography. In chemicals, you start with feedstocks and go downstream. Some have an industry Verbund model, like the Germans, making base chemicals, intermediates, and downstream products. The Chinese have adopted this model in many cases. In certain product groups, they dominate, like titanium dioxide, where 90% of the global capacity is in China. For epoxy resins, they are extremely dominant, but in other groups, they have little presence. There's massive variation depending on the product. For pigments, their market presence is modest, with more competition from Indian and Western companies. In resins, like coating resins and binders for paint, their presence is modest. In some markets, they are mature in development and capacity, while in others, they have a low presence. I can't provide a specific ballpark figure for their overall market share.

Do you see an increasing presence of Chinese principals in more value-added specialty chemical products? Are these derived from existing principals that used to be in the more commoditized side, evolving their portfolio, or are new companies emerging to enter this market?

It's both. Sometimes it's stolen technology. I worked for Eastman Chemical, and we were in hydrocarbon resins for adhesives. We built a plant, and within two years, there was an identical plant 24 miles away producing the same chemistry with the same process. They acquire companies, form joint ventures, and sometimes use stolen technology. Some companies heavily invest in R&D and innovation. They have a lot of capital and are willing to invest to further evolve, especially in sustainability. In some cases, the Chinese are leading, while in others, there are completely new entrants. For instance, in the polyurethanes market, two new major producers, NHU and Miracle, have emerged. These companies did not exist before, and within the past two years, they started entering a very mature market with even more capacity.

Where are these companies from?

They are both from China. They copied the model that Western producers had and together created a 150 kiloton capacity, which is about one-third of the global demand today. It makes no sense because it commoditizes and erodes margins and pricing, but they keep adding capacity.

One last question. You did not mention tariffs at any point in our conversation. Are tariffs playing any role in Chinese principals diverting demand?

General duties are modest, in the single-digit percentage range, so they're not a major factor. What is a factor is the anti-dumping tariffs. In Europe, the EU, ECHA, and Cefic have imposed tariffs on products like epoxy resins, sometimes as steep as 60%, 70%, or even 100%. This is really a factor. When people have capacity and options in the Western world, it helps. In the U.S., it's definitely a factor. Europe is suffering more today because Chinese companies prefer to export to Europe rather than the U.S., so we have a double whammy in Europe today.

So, it's not that once we see these tariff discussions calming down, the market dynamics will improve.

Olin is one of the leading epoxy resin producers. Recently, they have opportunistically raised their prices due to tariff discussions. However, this is more of a short-term and mid-term strategy to optimize their margins and profits. These companies have never been able to compete effectively, even at full capacity. In tight supply situations, they can make money, but otherwise, they cannot. Companies like Hexion and Momentive have been sold repeatedly. Today, Westlake has a German asset in epoxy resins. Olin has been in Chapter 11 for a long time, which is just delaying the inevitable.

This is why Jim Ratcliffe's statement from Ineos doesn't make sense to me. You can't project your market forever without structurally fixing it. Producers blame energy costs, which is a factor, but a minor one. The real issue is the expectation of profits and current investment strategies. These companies started cutting costs two decades ago, which is now backfiring. We're not innovating or moving towards sustainability. We're not investing in protecting our market for the future; we're just cutting costs.

Currently, there's a lot of competition from Asia, but companies aren't investing in capacity, differentiation, or discovery. Innovation requires spending hundreds of millions without guaranteed returns, so it's easier to cut costs now. This leaves the next CEO with an empty pipeline and a harder time. They're just cutting costs and can't compete short term. They go to the EU, complain about competitiveness, and seek protection under the Treaty of Antwerp, but this only delays the inevitable. Structurally, their assets aren't backward integrated. They have to buy feedstocks, face expensive labor, and high energy costs, making their total costs unsustainable.

Current capacity utilization at producers is around 70%, which is extremely low. No one makes money below 80%, or even 75% to 77%, which is typically the break-even point. If it's below that, you're in trouble. Relying on duties, even if steep, cannot be a sustainable model.

There is some uncertainty in local markets, causing customers to be more cautious. From what I've read, there's been a change in purchasing behavior, with smaller quantities and shorter lead times. I assume this is due to uncertainties.

What people are saying is that everyone is focusing on their working capital and maintaining lower stock levels. Today, everyone feels comfortable with product availability. In 2022, 2021, and 2020, there was a lot of concern about product availability, so people kept a lot of stock. Now, nobody wants excess stock because they are confident in the supply chain and there are many options to buy at low cost.

As a result, people are purchasing more frequently in smaller quantities with lower order values. Additionally, there is a lack of long-term planning. Previously, there was a trajectory and forecast with customers placing orders for the next year. Now, people are nervous and unsure about what to expect in the coming months, let alone next year.

Even if it means paying a bit more per kilogram in euros for a product, they do so because of the uncertainty and the risk of holding stocks that may not be needed. The predictability of the market has vanished. In early 2020, during the pandemic, there was massive destocking in the first and early second quarters. People expected a market dip, but by the end of the second quarter, the market rebounded and went wild.

Buyers purchased more material than needed, not based on real demand, leading to a bullwhip effect. When the market declined, it completely collapsed because people had excess stock to consume for a long time. Now, the situation is reversed. People don't want stock and don't see strong demand. They have regular demand, and when they place an order, they need it immediately, but they are comfortable with the current situation.