Toxic Chemicals Can Keep Products Off the Shelves
In July 2005, the Wall Street Journal began a four part series of front-page articles, "Toxic Traces: New Questions About Old Chemicals," highlighting potential hazards to human health from relatively small amounts of chemicals in every day products. USA Today published a related story, "Are Our Products Our Enemy?" These reflect growing scientific and public concern that has led to a series of chemical phase-outs in various sectors from electronics and semiconductors to household durables and personal care products.
Over time producers will be forced to innovate. However the economics and logistics of re-design, reformulation and mobilization for compliance may be costly and, in some cases, the failure to adapt leaves room for liability or, in some instances, loss of market share.
The European Union last December enacted REACH (Registration, Evaluation and Authorization of Chemicals), a far-reaching law that regulates chemicals made in or imported to the E.U. As shown below, this new legislative framework is already affecting how companies will do business in Europe.
Later this year, Wal-Mart will fundamentally alter the marketplace when it announces a chemicals screening policy for all its suppliers. The policy emphasizes persistent bioaccumulative toxicants (PBTs), carcinogens, mutagens and reproductive toxicants, identifies a top-three list of chemicals for action and promises an additional 17 to be listed over the next two years.
In many ways, this initiative could have a greater impact than any government driven regulation. Because Wal-Mart is doing this, we expect that economies of scale will be created causing a reduction in the price of alternative products. This may have particular implications for the food and beverage, durable goods and personal care sectors.
There is no avoiding the fact that most modern conveniences are attributable in some way to the use of chemicals in production. That stated, investor groups have become interested in how this matter will create winners and losers in various sectors. The Investor Environmental Health Network currently represents $22 billion in assets under management but may grow over time. Its older cousin, the Carbon Disclosure Project CDP (now in its fourth year) has reached $31 trillion.
Loss of access to major markets could pose material risks for companies that face "toxic lockouts." Below are a few of the notable examples from recent years.
A weakening of the conventional pesticide market may impact sales for several companies in the chemicals sector. Markets are shifting from synthetic to bio-pesticides, driven by biotech advancements that reduce the need for extensive spraying. Citigroup cites a $2 billion reduction in pesticide demand since 1995, a reduction mainly attributed to bioscience.
The bio-pesticide industry is projected to increase by 20 percent per year in the U.S.. Conversely, the synthetic pesticide market is expected to decrease by 3.14 percent, with bio-pesticides replacing 4.25 percent of that. Companies potentially affected may include: Potash, Agrium, Chemtura, Syngenta. Additionally we project that the agrosciences division of Dow will also face growing pressure amidst this trend.
Apple Computer works diligently to comply with European chemical phaseout directives. However apparently even some Apple products did not meet the standard in 2006. There was a brief interruption in export for various products including the iSight, AirPort Base Station With Modem, AirPort Base Station Power Over Ethernet & Antenna, iPod shuffle External Battery Pack and all versions of the eMac all-in-one desktop computer. The issue was short-lived but demonstrates the potential risks even for proactive firms.
In 2001, Dutch officials blocked a shipment of 1.3 million Sony PlayStation game consoles because their cables contained levels of cadmium higher than those permitted by local law. Sony estimated that the blockage cost the company $100 million in sales.
Intel states that the cost to move from lead to no-lead solder cost $100 million last year.
A surge of interest in brominated flame retardants used in a wide range of consumer products such as computers, mattresses, foam or textiles has forced companies to reformulate or exit the 457 million person marketplace of the European Union as well as lose access to the world's 6th largest economy in California.
Personal Care Products/Multi-Line Retail
Chemicals screening policies are the latest challenge for suppliers to the multi-line retail sector. Large UK retailers such as Marks & Spencer have already begun this process and now Wal-Mart is joining them with an aggressive new policy.
The company will begin implementing its "Preferred Chemical Principles" to establish a clear set of preferred chemical characteristics for product ingredients. The purpose is to drive the development of more sustainable products for mother, child and the environment. Sales related to health and beauty aids and soft goods/domestics reached approximately 23 percent of Wal-Mart's sales in 2006, or approximately $18.3 billion.
More than 90 percent of the hospital and healthcare market has committed to phase out phthalates from items such as blood bags. The size of the U.S. sterile medical packaging industry: $1.6 billion.
The green building movement has extended to the household durables sector. Three major manufacturers in the space--Herman Miller, Steelcase, and Interface--are implementing chemicals screening policies for their suppliers. The sum of 2005 sales for this small group of firms reached $5.6 billion.
In 2004, the non-residential green building market was estimated at about $3.3 billion (which is 2 percent of the $165 billion spent on non-residential construction). The United States Green Building Council estimates the current market for green building products and services at $7 billion. By 2010, the market is projected to grow to between $10.2 billion and $20.5 billion.
The chemicals phase-out issue connects with the wider trend in consumer facing sectors toward the use of labels such as "natural", "sustainable," “organic” and so called “green” products. As such, investors may note that the use of these labels may temporarily afford producers the ability to place a premium on these goods from lumber to shampoo. Moreover, there appears to be a growth trend for certain product segments. However investors may note the evolution of economies of scale. Over time, differentiated products will not bring a premium.
European regulation is highly focused on chemicals and hazardous substances issues. New legislation may result in higher costs for suppliers and may over time fundamentally alter how chemical intensive products are produced.
REACH (Registration, Evaluation and Authorization of Chemicals) mandates the registration of chemicals manufactured in or imported into the European Union. While there are tangible and imminent implications for chemicals manufacturers, this may also have far reaching secondary effects throughout the consumer and durable goods value chain.
One aspect of the new legislation enacted in December 2006 may be of particular relevance for downstream producers of consumer goods. About 1400 chemicals may become subject to the legislation's Authorization provisions. The substances of very greatest concern-those those are very persistent and bioaccumulative (vPvB), and those that are persistent, bioaccumulative and toxic (PBT)-can only be authorized if no suitable substitute is available and if it is demonstrated that the socioeconomic benefits from the particular use of the substance outweigh the risks to human health and the environment.
As for substances that are carcinogenic, mutagenic or toxic to the reproductive system (CMR substances), authorization will be granted if the producer or importer can show that risks from the particular use can be adequately controlled. Where adequate control is not possible, authorization will only be granted if no safer alternative exists and if the socioeconomic benefits of the use outweigh the risks.
Substitution of the most toxic substances may only narrowly affect production of most consumer facing product segments, as those products are not likely to contain first priority substances as per REACH. However, we anticipate more direct implications for packaging, automotive, agriculture, furniture, electronics and durables. The following charts provide a reference for how relevant chemicals are to a range of product segments. Theoretically, REACH would then be pertinent to each of these industries to varying degrees.
The remainder of the report, "Cross Cutting Effects of Chemical Liability from Products," offers greater detail about the risks and opportunities from toxics in industry, and uses several companies' strategies to illustrate risks and opportunities. The full report is available here, and more information is online at InnovestGroup.com.
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