INSIGHT: Does Europe want a better supply chain?

27 September 2006 17:21  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Does the European petrochemical industry want a better and more effective supply chain or would producers rather continue to play one logistics provider off against another?

As they search for ever lower costs, the partnership approach hardly seems to feature on the industry’s horizon. There are reasons for this but is it sufficient simply to wait for further consolidation in the complex and highly fragmented European distribution network?

The logistics event at this year’s European Petrochemical Association (EPCA) meeting demonstrated that trying to make across the board progress in the region's distribution is like trying to walk through treacle. It has taken 15 or so years and the industry has come this far.

It may be too easy to compare the chemicals supply chain with retail but lower delivery complexity and costs, and a smaller environmental footprint, should be incentives for more action.

The petrochemicals and chemicals business is different. Assets are not easily moved and clever distribution hubs created.

The challenge though is to do something different and help alleviate the burden of distribution on Europe’s transport networks and environment as much as on producers’ and customers’ pockets.

EPCA 2006 speakers suggested that  €35m ($44m) could be saved by swapping product but that amount is a drop in the European distribution ocean and hardly an incentive in itself.

That the European chemicals logistics picture looks messy is an understatement. Road transport is a nightmare and it hardly makes sense to transport product hundreds of kilometres one way and goods made from those chemicals thousands of kilometres the other.

In this chaotic world the sort of sustainability talked about at EPCA by Patrick Dixon of Global Challenge UK presents a stark challenge. But chemicals distribution in Europe involves 40m tonnes of product and 10% of producer revenues of about €60bn so somewhere, savings can be made.

Some companies, industry giant BASF among them, are pushing harder to drive chemicals transport onto Europe’s railways and off its roads. Door-to-door tracking ability will help the sector – in some way.

The real challenge is to get chemical companies and logistics providers to work together. It hardly helps when customers tell suppliers they want to see “blood on the floor” before they are prepared to do business.

Greater transparency across the sector would be welcome, but the European Union’s regulatory authorities make it difficult if not nigh on impossible for logistics providers and their customers to plan ahead together.

However, producers could help by understanding better just where their products go and moving away from dealing with logistics providers on a cost per unit basis.

There is little incentive to enter into 20 year agreements with logistics suppliers but arguably that is where the solutions to Europe’s chemicals logistics nightmare lie.

The point is that if Europe does not make progress its cost base will continue to rise and it will lose more of its competitive edge to producers in North America and particularly in Asia. Indeed as Asia moves to next generation logistics solutions, Europe’s highly complex logistic picture looks even less sustainable.

The short term view is appropriate in one sense but better supply chain management will not be achieved in petrochemicals until producers and logistics providers begin to look further ahead. Major restructuring in the supply chain will at some stage become a necessity.

By: Nigel Davis
+44 20 8652 3214

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