Consolidation and blurred lines.
Image: Courtesy of Porto de Santos
The chemical distribution sector in Latin America is undergoing a renaissance – or a reckoning – of sorts. The shift is observable through the reorganization of the market, as well as a trend towards adding more value for clients through an improved capacity to provide logistical support in a region where infrastructure challenges are often acute.
“Selling a product is part of what we do, but this is really a service for the producers to reach a market that they cannot serve and for the customers who would otherwise not have access to the producer,” explained José M. Berges, CEO of GTM Holdings, the second largest Latin American distributor.
In 2012, the top 10 chemical distribution companies in Latin America had a market share of just 21%, according to The Boston Consulting Group, illustrating the severe fragmentation within the region’s chemical market. However, a wave of M&A activity is helping to consolidate the industry, which in turn will help to introduce better practices and raise standards while streamlining the development of distribution channels.
Between September 2016 an April 2017, GTM tripled its size through three acquisitions: High Chem, quantiQ and Peruquímicos. The company will continue to seek new M&A opportunities, according to Berges, who elaborated on how the most recent acquisitions had improved GTM’s capacity and expanded their offering: “Before acquiring High Chem, our position in specialties was very limited. We had a good position in industrial chemicals and in what we call customer solutions, which is basically to elaborate tailor-made blends and formulations for the clients,” he said. “Through High Chem and then quantiQ, which had a very significant specialty chemicals operation as well, we became a full line supplier, with both industrials and specialties, and now we are transferring that knowledge from Mexico and Brazil to the other markets.”
Multinational conglomerates such as Amazon and Alibaba have disrupted the traditional market further, leveraging their success in e-commerce to access small and medium sized clients. For distribution companies, this translates to a need to introduce practices that add value, and lessening the burden of logistics is a key area identified to create that value. “In countries like Brazil and Argentina, the logistics processes are usually complex, so the flexibility we are able to provide, having both domestic stocks and a flexible access to external sources, is a good add-on,” commented Matthias Vorbeck, general manager of Anastacio Overseas, the international arm of Brazil’s Química Anastacio.
Learning to better utilize the tools afforded by digitalization is also key to embracing the transformation occurring in the distribution sector. “All going well, we will transition into becoming more of an information provider, where intelligent use of statistics and algorithms can have a very positive impact on monitoring inventories and prices,” said Peter Staartjes, CEO of Andino Holdings, which offers distribution services through its Andikem arm. Ultimately, Andino wishes to purse a business model that allows it to “serve the needs of chemical producers, and allow them to reach the final mid to small size customer directly without needing the assistance of a distributor,” Staartjes elaborated.
Martin Sack, managing director of Leschaco Mexicana, a freight-forwarding company focused predominantly on chemicals that also offers tank storage services, commented: “In Latin America, we are still a bit behind when it comes to technological development. I still believe that major organizations will procure their logistics services the traditional way, but definitely we are already preparing ourselves for future trends. As a company we are investing heavily in new technologies, offering digital services for customers who require these.”
The push towards digitalization will contribute to the increasingly blurry line between distributors and logistics providers. “Even though there are good distributors in Latin America, the region needs more dedicated infrastructure,” said Eugenio Manzano, executive director of Pochteca, a large Mexican player with a footprint in Central America and Brazil. Taking advantage of its network of assets dedicated to chemical distribution, Pochteca began to offer broader services to suppliers and clients with specialized assets, including storage, blending, dilution, packaging, labeling, inventory management, and product delivery.
According to Manzano, several industrial verticals are driving growth in the chemicals industry throughout the region, including water treatment, food, animal feed, and agrochemicals. In Argentina in particular, the development of the massive Vaca Muerta shale formation promises to spark a revolution in the country – if numerous developmental bottlenecks can be overcome. Spanning 7.5 million acres across four provinces, the area is expected to help double Argentina’s total oil and gas production to 1 million barrels per day (b/d) and 260 million cubic meters per day (cm/d), respectively by 2030, according to official estimations.
This presents an opportunity for the distribution of chemicals aimed at enhancing hydrocarbon production. Martín Cini, director of Petrolera Copsa, an Argentinean distributor, gave more details: “In terms of chemicals, Petrolera Copsa started as a distributor focused on the paints and adhesives business, but now we are dedicating a lot of effort to the oil and gas industry, which offers enormous potential. The oil and gas industry has seen significant growth in the Neuquén area, where Vaca Muerta still requires a lot of investment and infrastructure to reach the potential a formation like this should have.”
Despite a tumultuous 2018, Argentina’s economy, the second largest in South America and third largest in Latin America, offers enormous upside. If this trend continues, the chemicals industry, which already contributes around 12% of the nation’s GDP, has great potential to grow further. Anastacio Overseas recently opened an office in Argentina to begin its distribution business in the country, following requests from regional clients to serve their subsidiaries in other countries of Latin America. “We opened the Argentina office with two goals: to offer products from producers located out of the region (mainly in Asia), but also to start the distribution business in the country,” said Alejandro Gabrielli, regional manager of Anastacio Overseas.
Nonetheless, from a geographic perspective, Brazil and Mexico remain core markets for distributors as the dominant economies in Latin America, while growth opportunities throughout the rest of Latin America are also promising with total regional economic growth expected to increase from 1.6% in 2018 to 2.1% in 2019. Countries such as Chile, Peru and Colombia do not offer the same scale for distributors as their larger peers, but boast attractive investment frameworks.
Logistics: The Missing Link
For Latin America to fully recognize the potential of its chemicals industry, achieving a competitive logistics sector will be critical. The region currently lacks comparative cost advantage; poor infrastructure continues to be a politically frustrating obstacle to efficient transportation, and the import-export dynamic across the region has created both challenges and opportunities. An example of this is the liquid storage business.
In this context, chemical distributors often need to invest in several facilities country-wide, to make sure they have a strong network to efficiently serve clients. Martín Cini of Petrolera Copsa said: “Logistics in a country like Argentina are essential. If you do not understand logistics well, costs go up and make many businesses unviable.”
Petrolera Copsa has three locations in Argentina: one in Neuquén run by a sister company dedicated to chemicals, petrochemicals and blending for the oil and gas industry; and two in the Buenos Aires province, one for chemicals and one for fuels and lubricants. “We are not only a chemicals distributor, but have our own formulating capacity and our own logistics capabilities, with different types of facilities and trucks. This gives us a competitive edge, because in Argentina there are chemical distributors on one side, or fuels distributors on the other, but not a distributor that operates in both areas,” affirmed Gastón Cini, director of Petrolera Copsa.
In Brazil, which relies heavily on its trucking sector as the primary channel for transport due to a deficiency in rail and waterways, the export economy was expected to experience a boom that was not recognized – largely as a consequence of chaotic conditions in the country’s logistics sector. In the context of a slow recovery from the worst recession in its history and following a 10-day driver’s strike in May 2018 that produced ongoing disquiet in the trucking sector, exporters have experienced difficulties securing trucks to deliver goods to port, according to a report by the Financial Times.
Consequently, a situation has arisen whereby exporters have been less able to take advantage of the depreciated Brazilian currency and the United States’ pivot towards Latin America amid a trade war with China. In addition to the ripple effect on the transport sector months later, the strike also brought the country to a standstill and cost the chemicals industry alone an estimated 2.5 billion Brazilian real (R$), highlighting the continued impact of political dysfunction on the industry’s ability to achieve progress.
Another politically challenging issue in the logistics discussion is the lack of capital investments to support the construction of better infrastructure, and specifically who should fund these projects. Talks of public-private partnerships to facilitate trade between countries have stagnated over perennial disagreements between states and the industry as to where to source the heavy capital requirements for such projects.
Meanwhile, the region’s ports and weak transport corridors continue to be overburdened. “Latin America is one of the most inefficient regions due to the infrastructure deficit and the congestion at the terminals,” said Fernando Reinecke, president of the 20th APLA Latin American Logistic Meeting held in 2018, and regional manager Logistics and Customer Service for Methanex Corporation. “This generates demurrages, and beyond that there is a shortage of storage capacity for liquids. In Brazil, with all the problems that Petrobras suffered, the country had to import great volumes of product, and the industry has been affected by very high costs, both due to the demurrages and the high port rates.”
Despite challenges with infrastructure and disappointing performance on the exports side, imports continue to remain a strong business proposition throughout the region; Mexico and Brazil both fall among the top 10 importers of chemicals worldwide, with a combined value of US$81 billion, or almost 4% of total global value, according to the World Trade Statistical Review 2018.
In Mexico, energy reforms have allowed for the import of oil and gas, creating consternation as well as opportunity in the management of Mexico’s refined fuel deficit for the logistics sector. “Unit trains with gasoline and diesel have become the norm and marine terminals on the east coast of Mexico, currently storing chemicals, are being constantly pressured by gasoline and diesel importers to assist in handling the discharge and much needed storage,” said Peter Staartjes, CEO of Andino Holdings. “Our small marine liquid bulk chemical in Tuxpan has suddenly become an attractive option for chemical producers who are frustrated with bad, or sometimes non-existent, railcar service; or have been displaced by a terminal operator who would rather fill tanks with high volume and sometimes higher paying gasoline or diesel.”
In this context, the tank leasing and liquid storage markets have an important role to play. However, taking advantage of the low price of oil in recent years, many companies have invested in liquid storage assets of their own, resulting in a surplus of capacity in the market. Ricardo Diogo, director of business development at Oiltanking, commented, “At Oiltanking we take a long-term view of the industry, so we manage to navigate the ups and downs, but we cannot ignore that there is some extra capacity in certain hubs, and that an extra effort is needed to rent and fill up our tanks. Because of this, I expect to see some consolidation and optimization in the industry over the next five years.”
Marcelo Scayola, manager for Latin American at Eurotainer, elaborated on the competition in this sector and his company’s efforts to differentiate themselves: “There are several tank leasing companies in Latin America. We are the largest one, but the market is becoming more competitive, especially in Brazil,” he said. “Through our partnership with Maersk, an advantage we offer is that we nationalize the tanks in each country where they are needed, so that there are no issues in terms of admission permits.”
Latin America’s competiveness as a chemicals hub will pivot on building capacity to facilitate the storage and, more broadly, the infrastructure to support the efficient movement of materials. There is ample reason to make these adjustments sooner rather than later as sustained economic growth and geopolitical shifts generate more interest in Latin America’s rapidly developing markets. Martin Sack, managing director of Leschaco Mexicana, highlighted how freight forwarding companies like Leschaco view the changing relationship between Mexico and its powerful neighbor to the north as a positive signal: “We still see a huge opportunity to grow the business out of the United States, as the current U.S. government is pushing to increase manufacturing capacity. The already signed USCMA agreement shall stabilize and further strengthen the bilateral business between the United States and Mexico.”