The ICIS Top 100 Chemical Companies: Petrochemical companies can turn logistics into a competitive advantage

20 September 2010 00:00  [Source: ICB]



Petrochemical industry players must rethink the role of logistics amid dynamic structural changes to shape the future supply chain

Over the course of the past two years, petrochemical industry profitability has fluctuated from peaks in the first half of 2008 to record lows as it entered a cyclical downturn, the impact of which was exacerbated by extraordinary global macroeconomic conditions.

Although the industry is now recovering, the upturn in the second quarter (Q2) of 2010 was attributed to temporary supply shortages. Prices again collapsed throughout Q2 as fears of a fundamental weakness in petrochemical markets and moribund economic conditions prevailed. The dampened demand in Asian markets was particularly concerning.

However, in the long term, world polymer consumption for polyethylene (PE), polypropylene (PP) and polystyrene (PS) is expected to grow at a rate of 4.3%/year over the course of the next 10 years, led by increased demand in Asia, the Middle East, Africa and Latin America.

The varied short- and long-term indicators imply that petrochemical producers are attempting to formulate strategies to capture future market growth while maintaining short- and medium-term flexibility to adjust to market fluctuations.

The situation for producers is further complicated by deep-rooted structural changes in the industry. Today, fossil energy represents approximately 81% of usable energy.

Despite predictions of continued growth in global energy consumption, by 2030 it is anticipated that energy from fossil fuels will decrease to around 75% of usable energy, with advances in areas such as bio, nuclear and hydro energy sources and the decline in the use of oil and gas.

This change is likely to lead to increasing value extraction by oil and gas firms, particularly as most of the substitute energy sources cannot provide additional value chain products. Governments too are becoming involved in further diversification around these fossil fuels to maximize value and plan long-term sustainable growth of the local economy, examples being those of Canada and Abu Dhabi.

In the Middle East, this is particularly evident in the expansion of polymer production. The region is expected to account for 18% of world polymer output by 2015 from 5% in 2000.

On the demand side, Asia is expected to account for 45% of global polymer consumption by 2015 from 34% in 2000, thus leading to a significant shift in polymer trade patterns.

The resulting globalization of the petrochemical sector is likely to produce further consolidation in areas such as compliance, corporate social responsibility and health and safety as they become key considerations across an increasingly demanding customer base.

The combination of market uncertainties and deep-rooted structural changes in the industry has caused petrochemical producers to review short- and long-term business strategies.

Conventional wisdom in the chemical industry has been that specialties are better than commodities. Performance indicators, ­however, show that despite current economic challenges and changes that have severely affected the industry, top quartile companies outperform competitors independent of the specific chemical vertical within which they operate.

Key differentiating factors appear to be operational excellence, flexibility and responsiveness to changing market and client requirements.

We consider logistics and supply chain excellence a key component in addressing the uncertainties and opportunities of future petrochemical market requirements.

Existing realities and future developments will provoke a fundamental change in petrochemical industry logistics and market-leading producers will move away from seeing logistics as a functional necessity to a source of strategic marketing, competitive advantage, cost optimization and revenue maximization.

To deliver value for customers and shareholders, petrochemical manufacturers will have to adapt by integrating end-to-end business processes, allowing them to become more dynamic to customer demands and flexible to new market opportunities.

Value creation and differentiation will no longer depend solely on product but will encapsulate a broader level of customer intimacy previously not seen in the market.

Achieving this across extended geographies and volatile demand patterns will require a focused approach. Producers will increasingly seek the expertise of external service providers and choose to concentrate internal resources on core competencies, using integrated strategic partners to remain lean and responsive.

The firms that assume this role will execute activities that are core and that affect customers directly. Other activities, such as logistics, will be outsourced to achieve best-in-class performance, superior customer service and flexibility to respond to changing market requirements.

This approach will also benefit manufacturers by enabling them to reduce working capital and lower fixed costs, freeing up funds to invest and return superior shareholder value.

The key areas where an external partner's expertise can be leveraged are in people, processes and information technology. Customer-centric producers of the future will enter into a dialogue that is no longer about commodity pricing but more detailed in stewardship, collaborative planning, forecasting and execution. They will be looking to optimize the route to market to meet exacting service level requirements, lower variable costs and mitigate demand variability.

To deliver the right product at the right time, they will be working in collaboration with their customers to understand their requirements and use the expertise of external service providers to enable alignment of processes and facilitate information-sharing to maximize value for both parties to ensure longer-term success.

Although this notion may sound abstract in the petrochemical sector, it is very real in other industries and has, for decades, placed some particularly customer-focused companies in the top quartile of their relative segments.

With customer insight and market data, the producer will be able to optimize product placement, route to market strategy and maximize revenue through opportunistic sales. The producers will be able to grow market share or enter new markets profitably.

Cost-to-serve evaluation will be an ongoing metric, helping both parties (producer and customer) and their respective business units. Value generation will be extracted by detailed end-to-end management of processes through information architecture linked to all parties involved through the product cycle.

Following this route will support a clear and transparent relationship between pricing and customers' perceived value. With this capability in place, real value offerings can be put together, allowing each party to make informed decisions at the right time.

Additionally, through this greater understanding of customers' wants and needs, producers should be able to predict changing demand and product patterns, and thus exceed customer expectations.

This will be shaped by closer connectivity between all parties, allowing access to relevant information in real time, creating a new dynamic of managing supply and demand, and improving control of inventory across the producer and converter supply chain. This will deliver operational and financial improvements for all stakeholders.

Knowledge transfer from producer to client and vice versa will enable petrochemical producers and their customers to share owned and outsourced assets, capabilities and risks. This will improve results for all relevant parties (producer, customer and additional service providers) by generating increased value with reduced risk for all parties.

Improved visibility is directly linked to improved performance across all areas of the business, which in turn leads to an improved balance sheet, which can be achieved in the optimization of inventory.

Within the supply chain, an organization should concentrate on core differentiating activities, outsourcing all other activities to best-in-class specialists. Partnerships with global supply chain organizations allow growth into new markets and geographies and improve the flow of information through seamlessly aligned processes and procedures.

These partnerships add much-needed flexibility to both the producer and their customers, managing scale while optimizing the flow of products around each of their businesses, creating immediate value operationally and reducing capital investments that would have been made by either one or both parties.

Anthony Elwine is the global head of chemicals for Damco. He has more than 20 years of experience in both operational and commercial roles in the chemical sector, focusing on intermodal transportation of dry bulk, liquids and gases within regional markets and across global markets

Visit our ICIS Top 100 Chemical Companies sponsor Damco for more on global logistics and supply chain solutions

Author: Anthony Elwine

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