Chemical logistics firms are growing fast in Mexico

Roaring ahead

02 November 2009 00:00  [Source: ICB]

Business is brisk for chemical shippers and sellers in Brazil and Mexico

Chemical logistics providers and distributors are growing quickly in Latin America, taking advantage of improving road and rail links to serve a burgeoning chemical and downstream industrial base, especially in Brazil and Mexico.

Rex Features/Chris Eyles

The two countries are strongly positioned to return to good growth as they emerge from the economic downturn. Both have large populations that are becoming increasingly affluent. The chemical distribution industry is also relatively undeveloped and has huge growth potential.

According to Peter Staartjes, president and CEO of Brenntag Latin America, distribution should have a bright future across Latin America. "We think there is a lot more room for distributors to serve the needs of our principals and suppliers. Too much is still being sold by chemical manufacturers, which don't necessarily have the complete portfolio. Producers still have lot of scope to shed customers to distributors."

Booming Brazil
With a large and growing local market, Brazil has weathered the recession well. Growth in domestic demand has helped shore up falling exports in sectors such as automotive.

The Germany-headquartered chemical distribution group is looking for acquisitions in Brazil to increase geographical spread and fill niche product areas. Staartjes says: "We are keen on acquisitions in Brazil. These will either give us better regional coverage or be a niche player. Something we're keen on right now is food. We're interested in food ingredients and maybe some blending as well."

Staartjes says Brenntag is aiming for smaller niche distributors with sales of $15m-30m (€10m-20m). "These are niche players you want to use to prop up your portfolio."

He adds: "But regional players will have sales upwards of $100m-150m. You want immediate coverage of every industry in every corner of a region. The company wants to grow in the most important markets in Latin America: Brazil and Mexico. In Argentina we've already made an acquisition and we've done what we needed to do."

Brenntag did look at bidding for Brazilian major Braskem's own distributor, Ipiranga Quimica, which was renamed Quantiq in February.

According to Staartjes, Braskem started a spin-off process six months ago. Brenntag examined the business, but decided not to bid: "We suspect strongly that Petrobras will be the winner. We looked at Quantiq, but we got insufficient data. It's also complicated because Ipiranga was part of a big gas station retail chain. As a distributor, you want to stay away from retail and marketing of retail products. It's a bit of a hybrid."

News of a potential mega-merger between Brazilian domestic producers Braskem and Quattor could create opportunities for Brenntag, claims Staartjes. "Not every customer wants to dance with just one player. It could create opportunities for other chemical producers and distributors alike."

There is an important distinction to be drawn between Brazil and Mexico. The former imports only around 20% of its chemicals, so is much more self sufficient than Mexico, which imports around 75%.

According to Staartjes, this means that in Brazil, most distributors are selling locally produced products, "hence the development of ports has not been so good, leading to the congestion that people are always complaining about" (see box).

Railways are not used heavily for chemical transport in Brazil. But there is a well-developed and growing road system that serves the country well, especially as most economic activity takes place in the Southeast and South of the country.

According to Staartjes, local chemical producers such as Braskem and Oxiteno, plus multinationals with local production like Rhodia and Dow Chemical, dominate local markets, making it more difficult to sell imported goods. For this reason, around 90% of Brenntag's sales in Brazil are domestically manufactured.

"We import around 10% of our total needs. We used to do more, but then we realized it was hopeless to try and fight these local producers. In Brazil, we are Oxiteno's largest distributor. We are also an important distributor for Dow and Rhodia."

Marvelous Mexico
Mexico has reasonable road connections and excellent railways to connect the country to its trading neighbor, the US. It has a growing network of toll roads and well-established rail connections.

For Brenntag, the area north of Mexico City is a key focus for economic development and demand for its products. Here, US automaker General Motors has a facility and aerospace group Bombardier is planning to build a plant.

It has skilled workers and is a better environment than the congested capital.

"There are good rail connections to that region. Mexico already had a good rail system. It was privatized and then faced some years of troubles. Now there are two solid rail companies there and I hear no complaints. If you order product, it is there in 10 to 12 days from Houston."

Brenntag's main hub is north of Mexico City in Queretaro. For Staartjes, having good connectivity to the rail system is vital. "We just made a big investment in Queretaro, where we took over BASF's warehousing and rail operation. This is two hours north of Mexico city, where in June we inaugurated a 15,000m2 [161,250ft2]warehouse where we can receive 80 rail cars and a tank farm for around 4,000m3 of bulk chemicals."

He says rail moves most chemicals in the US, so it makes sense to import and export using that method. The competition, he claims, is far behind. "In Mexico, few of our competitors, if any, have serious railcar connections. The largest has around 30 facilities, but only one of them has a very small rail connection. Some have none at all. It means they see no need for rail connection, whereas at Brenntag, we believe it is the future.

In Mexico, chemical production dwindled after the state-owned energy giant PEMEX reoriented toward oil and reduced investment in chemicals. At the same time, demand for chemicals grew exponentially. Now Mexico imports 75% of its chemicals.

With so much product now being imported, logistics and distribution companies that relied on PEMEX have been forced to reexamine and expand their facilities.

Staartjes says: "Distributors that had enjoyed an easy ride with Pemex are now being forced to look at their infrastructure. This was built around a hand-to-mouth existence, where you didn't need a big tank because you could go every other day to pick up a load from the PEMEX facility."

STOLT SUFFERS SANTOS CONGESTION
Severe congestion around the Brazilian port of Santos is the main headache for global chemical tanker operator Stolt-Nielsen's Stolthavan Terminal division, which uses this port as its key Latin American operation.

According to Walter Wattenberg, Stolthaven's managing director: "We have a state-of-the-art facility, but the only problem is port congestion. That needs to be addressed, but every player is aware that it is very difficult to get the port authorities and the government onside. They are listening, but they're not doing anything. This needs to be addressed very soon because it is hampering the growth of the Brazilian market."

Wattenberg reveals that ships waiting to dock suffer delays, on average, of four to five days. Customers have to factor in this issue when they're planning to do business in Brazil. Ships cost on average around $1,000/hour (€665/hour) to operate, which adds $24,000/day in costs for customers.

Brazil's blossoming, export-oriented ethanol industry means that use of its ports is growing, adding to the pressure. "It's got worse this year, and we understand that more ethanol is being produced and more factories and refineries are coming on stream, which will only make the problem bigger," says Wattenberg.

This growth has allowed Stolt to boost investment at its Santos facility. It increased capacity by 41% in 2008 and 21% in 2009, taking it up to 125,000m3. Wattenberg is considering plans to add another 20% in 2010 or early 2011.

Read Will Beacham's Looking East for Chemicals blog 

By: Will Beacham
+44 20 8652 3214

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