NACD: The changing demands of distribution

29 November 2012 18:47  [Source: ICB]


Santacruz remains optimistic


"The environment for doing business in North America is more positive"

Paul Bjacek, global lead researcher, Accenture

Shale gas is boosting opportunities for distributors to expand their business over the next decade. Eyes are focused on Mexico too, which has emerged as a key growth area

Shale gas has transformed North America and has also invigorated chemical distribution because of the significant increase in demand for chemicals used in the oil and gas business.

Distributors are major suppliers to the sector and those that have products such as oilfield or water treatment chemicals are well placed to reap the considerable benefits.

Tom Corcoran, commercial vice president of Brenntag North America, says it will continue to strategically invest in the sector to ensure the company is well positioned to take advantage of the substantial growth.

The purchase of Texas-based oil and gas distribution firm Treat-Em-Rite Corporation (TER) in July this year underlines this strategy. TER, which has been supplying production (well treating) chemicals and specialised services to customers in south Texas for the past 25 years, is located in the Eagle Ford Shale, one of the fastest-growing natural gas shale areas in the US.

Other major distributor Univar is also investing to support Canada's oil sands and energy sector. It is building a new rail and storage terminal in Fort Saskatchewan, north of Edmonton, which is planned to go into partial operation in quarter four 2012, and to be fully operational by the first quarter of 2013.

The facility, which will have direct access to Canada's oil sands, spans 45 acres (18ha) adjacent to Alberta's industrial heartland. It will have 186 railcars and 44 loading bays, and Univar will operate its own rail car mover and container handling equipment.


Investments include a new rail and storage terminal that is currently under construction in Fort Saskatchewan, Canada

Copyright: Martin Cathrae

Erik Olson, managing director and North America lead for management consulting, chemicals and natural resources at Accenture says that there are many opportunities in oil and gas for those distributors who are seeking to grow their business over the next decade. "We will see over the next two years an increase in expenditure on assets and infrastructure to take advantage of the growth in oil and gas," he says.

Huge growth opportunities have spurred increased competition among the top three or four distribution groups in North America, he says.

"Energy companies are investing in geographies not served in the past, such as North Dakota, leaving an open field for distributors to supply their services," says Olson, adding that demand for oilfield chemicals used in exploration and production has seen the biggest surge in the last three years.

Distributors are also being asked to play a more active role in well field development, which requires new skills, capabilities and assets. This is providing distributors with the opportunity to develop different blends and packaging, and to provide technical support, as companies further refine their needs and chemistry to retrieve the shale gas from the wells, says Dan Matheny, vice president, product line management, chemicals, for Nexeo Solutions.

Paul Bjacek, global lead researcher, chemicals and natural resources with Accenture, says shale gas will drive the re-emergence of other manufacturing industries that are set to benefit from the huge expansion of onshore assets such as in ethylene. "The environment for doing business in North America is more positive," he says.


Shale gas discoveries are a gamechanger

Courtesy of Chesapeake Energy Corporation

But it is not just North America that is benefitting from the boom in oil and gas. The energy sector is driving growth in South America too, says Terry Hill, Univar's executive vice president. He notes that as South American economies develop, demand for energy will continue to expand as they tap into the large resources available. "Brazil will be the fifth-largest energy producer in the world at some point in the future," says Hill.

He believes acquisition opportunities will continue in South America because of its fragmented distribution markets and trend for consolidation. "Some of the distributors there are really just logistics partners and do not offer much technical support or other value-added services," Hill comments.

Mexico and Brazil are regarded as the anchors of the Latin American economies and manufacturing companies as well as distributors are investing there.

Univar's first step was via the purchase of Brazilian firm Arinos in September 2011, which it says it will use as a gateway to build a substantial presence in the region. Hill points out that markets in Colombia, Chile and Peru are growing well and may offer future opportunities.

Last month, Brenntag signed a preliminary agreement to acquire specialty chemical distributor Delanta Group which has operations in Argentina, Uruguay and Chile. Corcoran hopes the deal will be closed by the end of the year.

Latin America, as well as Asia-Pacific, are key regions for Nexeo Solutions to expand its geographic footprint. It has established a warehouse in Monterey and a sales office in Mexico City where it is building up its sales force.

Research by Accenture shows that both Mexico and Brazil's increase in annual output from 2011 to 2021 will amount to $17bn (€13.3bn) each, followed by Argentina at $10bn, and Canada at $9bn. These are far outpaced by the US, however, where the increase will reach $53bn. Although US chemicals output is mature, it still represents the largest new source of chemicals for the western hemisphere, says Accenture.

Investment elsewhere in the world remains high on the agenda, particularly as the trend for globalisation picks up pace. Distributors see a developing trend at customers and suppliers for global representation as companies seek to expand their brands' presence around the world.

"There is an expectation from our customers to be where they are, to look the same everywhere and to have the same capabilities and services," remarks Matheny. "We are uniquely positioned to be able to meet these expectations on a global scale with our centralised business model."

Both Univar and Nexeo have invested in China. Univar opened five new offices last year in Chongqing, Chengdu, Wuhan and Beijing. The fifth was in Zibo with its onsite blending partner. Nexeo completed the formation of a joint venture with Beijing Plaschem adding 30 locations in China and more than 120 staff.

Brenntag, meanwhile, purchased specialty chemical distributor ISM/Salkat last July, expanding its network into Australia and New Zealand. This follows the acquisition of US-based GS Robins in May last year. It also expects to announce the dedication of a new food and nutrition application lab in Bethlehem, Pennsylvania, by the end of the year.

Distributors still more requests for value-added services and technical support with expenditure concentrated on new labs and development facilities as well as qualified staff. Corcoran says suppliers are finding it more difficult to provide access to technical resources for their smaller customers, leaving a gap that distributors can fill by expanding their own abilities.

Edward Polen, president of EMCO Chemical Distributors, says customer companies who have outgrown their own capability and facilities are finding it more cost effective to approach full service distributors than investing in a new and expensive site.

Growing demand for its services has prompted the company to invest in a new state-of-the-art distribution facility in Pleasant Prairie, Wisconsin, to open next spring. Polen says all distribution activities at its other warehouse in North Chicago, Illinois, will move to Pleasant Prairie allowing North Chicago to focus on packing services which will be expanded.

EMCO Chemical Distributors is also opening a new business and facility in Canada - EMCO Chemical Distributors Canada - which will be its first foray there. The move is a result of a contract with Germany's Bayer which Polen says was attracted by its packing expertise and abilities as a distributor. The deal marks the first time that Bayer will use a distributor for its line of isocyanates and dispersions in the country. EMCO will have a sales office and warehouse in Toronto and be ready to operate on 1 December.

There is also a push from customers for additional services such as market insights, forecasting and pricing trends, as customers want to move into, and keep pace with, ongoing trends.

A bid to differentiate itself and get closer to end-markets is transforming Nexeo Solutions' business model. Matheny says: "Since our start in April 2011, we have added 75 different commercial resources into supporting end-markets, and have established dedicated, focused market teams," he explains.

Olson believes distributors are trailing behind in their ability to give customers what they value. He concedes distributors are investing heavily in value-added services but maintains they do not have the capabilities that customers expect.

"There is not enough capability in supply chain planning, transport management, customer relationship management, customer segmentation, channel partner strategies, or commercial excellence. They need to bridge the divide of where they are and where they need to be," he says.

Corcoran says second-quarter gross operating profit in North America was up 4.7% at €187.3m, based on constant exchange rates. Latin America grew solidly with gross operating profit rising by 5.2% to €42.9m.

Polen says sales at EMCO Chemical Distributors are up by approximately 6-8% this year and is forecasting them to reach about $320m in 2012, up from just over $297m in 2011.

Jeff O'Neill, senior vice president at Harcros Chemicals says sales are expected to be "significantly ahead" of last year's $425m.

For O'Neill, one of the challenges faced by distributors in recent years is the cost of complying with government regulation that, in most cases, should not apply to the distribution industry. He cites, as an example, the use of inherently safer technology - "a well meaning legislation that is being applied in a sub-optimal fashion".

He points out that a distributor cannot tell its supplier what products it should be manufacturing, or indeed tell users how to replace their product. "Distributors have been caught up in the same legal proposals. There are business activities in the supply chain that are not fully understood by the regulators," O'Neill states.

Distributors are cautiously optimistic, predicting moderate growth over the next few years. There is no doubt shale gas will remain the bright spot and the resulting stimulus will trickle down and have a positive effect on peripheral businesses and economies, providing further opportunities for distributors in North America and globally as the region's exports rise.

Mexico is regaining its competitive edge. Many US companies such as automotive majors Ford and Chrysler have set up operations in the country or, like electronics manufacturer Siemens, are moving production back from China. Several factors have combined to make Latin America's second-largest economy attractive: the value of the peso versus the dollar, convenient logistics from the US as well as a plentiful workforce with growing skills.

Armando Santacruz, CEO of Mexican specialty chemical distributor Pochteca, is upbeat about opportunities there. "There is increasing investment in Mexico, which exports more manufacturing goods (excluding agricultural products) than the rest of Latin American together," he says.

Rising health and safety standards are providing US and multi-national companies with more local options of top quality supply chain companies who have world-class standards, says Santacruz. As government regulations become more stringent, an increasing number of family-run chemical distributors are finding it too complex to operate, providing many acquisition opportunities.

"Mexico is experiencing a shifting business model from a mish-mash of distributors, loosely compliant, to having distributors that comply with global, world-class standards," says Santacruz. He says this is attracting suppliers and customers who are seeking a reliable base in the country, enabling them to outsource more to distributors and allowing them to concentrate on their core competency of manufacturing.

Santacruz cites Shell Lubricants as an example. In December 2010, Pochteca took over Shell's lubricants distribution business, becoming Shell's master distributor for the country. The lubricants business completed Pochteca's existing chemical portfolio. Santacruz says that Pochteca has been working to grow its business in blends and solvents, particularly speciality blends where margins are much more reliable than pure solvents.

The company has also been investing in its labs to provide new solutions and applications for customers, and has developed customised stock and packing programmes.

Santacruz reveals that he is seeking further acquisitions and is currently negotiating with several parties. "Our balance sheet is extremely attractive and our debt-to-EBITDA [earnings before interest, tax, depreciation and amortisation] ratio is very safe at 1:1," he states. He adds that an announcement could be made by the end of this year.

Pochteca, which has operations in Brazil, Costa Rica, El Salvador and Guatemala, is estimating EBITDA to reach Ps217m ($16.6m, €13.0m) in 2012, against Ps195m in 2011.

Santacruz says the Mexican market has grown by 4.5% in the first half of this year. He sees a bright future for manufacturing there because of its increased competitiveness and believes that once the US economy starts to bounce back, Mexico will see a very strong rebound too.

By: Elaine Burridge
+44 20 8652 3214

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