Market outlook: Chemical logistics sector battles plummeting margins

15 July 2013 10:37  [Source: ICB]

The chemicals logistics sector, especially parts of it reliant on Europe, is suffering from plummeting profit margins as it is battered by a combination of lower demand and changing intercontinental chemicals trading patterns.

With Europe's economy and chemicals industry stagnating, a resurgent US economy - buoyed by shale gas - has created a difficult situation for logistics players transporting dry bulk and chemicals between the two regions.

Chinese shipping containers

A key part of InterBulk's growth strategy is to increase the penetration of dry bulk transport outside its traditional markets

UK-headquartered Suttons Group has seen its US to Europe deep-sea margins drop by 40-50% over the past 18 months to two years. This has been driven by an imbalance in trade between the regions as the resurgent US sucks in more cargoes, while demand for US cargoes into Europe has dwindled.

According to John Sutton, who took over as CEO of family-owned Suttons Group in May 2013, during the past six to nine months, tank operators have seen more tanks flowing into the US, with fewer exports, as its economy has been slightly stronger than Europe's.

"We've had to transport some empty, but the major impact has been on the spot market rates. US export spot rates have declined significantly over the past year, creating a lot of price pressure."

However, Sutton hopes that as shale gas-based production grows in the US, exports should grow dramatically and help to balance the market.

On top of this phenomenon, chemicals logistics groups have also had to deal with the negative impact on chemical volumes and margins of the global financial crisis. Both the US and Europe are still operating well below pre-crisis levels, although Asia and China have continued to grow.

Europe is still a difficult market for chemicals logistics players. Graeme Rooney, managing director of Suttons' international division, says: "We're all familiar with the decline in chemical manufacturing in Europe and the shift to the Middle and Far East. That has played out in most of the supply chain activity that sits around it."

WINNING EXTRA BUSINESS

Sutton says the group has managed to maintain utilisation rates within Europe and the UK by winning extra pieces of business. Six months ago, utilisation rates dipped to low levels of around 74-75%. Suttons Group targets 79-80% rates and is now achieving those, he says, although margins are down on three to four years ago.

Profits have been squeezed by the cost of international sea freight, while trucking costs have remained fairly stable.

Sutton says: "Shipping lines have been successful in holding their rates at a sustainable level. They've taken out supply by parking up some ships and slow steaming, which adds transport time and cuts fuel costs. They've also changed routes to lengthen journeys and cut out various canals."

Profit margins are thin for Suttons' chemicals operations, which turned over around £150m ($224m, €171m), producing a profit of about £8m for the 2012/13 fiscal year.

To drive growth, the company is trying to grab some of the action in Asia and the Middle East. At the core of its international business is the operation of a fleet of around 5,000 ISO tanks, which go intermodally (using different forms of transport) around the world.

Thus far the company strategy has been to utilise third-party transport to move the tanks in the global business, but now Sutton is planning to acquire transport assets in some markets to ensure better customer service.

Sutton says the company is in an advanced stage of negotiation for an acquisition in China, and expects to finalise a deal perhaps in July or August.

"We're looking at acquisitions in China to operate our own fleet over there. We believe we need physical assets on the ground to support customers. In Asia, customers are keen for you to operate your own vehicles."

This means Suttons Group is seeking an acquisition in China that will let it add infrastructure in products and services such as warehousing and general cargo, with a focus on chemicals. The company is already one of the largest international chemical transporters in China, shifting more than 2,500 loads each month.

With the Middle East and southeast Asia having strong long-term growth prospects, Suttons has been active in trying to strengthen its position in these regions. The group conducted a study on India, but decided to continue with its existing local agent because of the difficulty in operating in that market as a wholly foreign-owned entity.

JOINT VENTURE SIGNED

In September 2012, the group signed a joint venture known as Suttons Arabia with locally owned storage and logistics group Arabian Chemical Terminal.

Sutton says: "It's important there to have a local partner who knows the markets, can help you navigate the local bureaucracy and who has very strong local contacts."

The company also purchased three vehicles based in Saudi Arabia to fulfil a contract with Saudi Chevron.

According to Rooney, in Asia and the Middle East there is quite a strong move towards regionalisation, especially in supplying the Chinese market.

He adds: "There is a lot of M&A going on in Asia - it has to be one of our key strategies in order to be able to offer local presence as well as international reach. The day will come in the next couple of years whereby if you don't have those capabilities then you'll probably be run out of town."

In the UK market, Suttons hopes to expand its existing business through acquisitions in chemicals, food or gas to take part in consolidation and strengthen its position.

Despite a declining market for chemicals from existing customers in its key UK market, Suttons has managed to expand by winning new contracts from companies such as Total, Air Liquide and BOC. The company plans to add 40 general purpose road tankers in 2014 to its fleet of 300 tractors and 500 road tankers.

INTERBULK CHALLENGE

For global chemicals logistics group InterBulk, trading has been affected by weak demand in Europe.

In April, the group warned investors that its dry bulk business was being affected by weak trading conditions and temporary polymer plant shutdowns. Margins at its liquid bulk (tank containers) division were also being hit by lower than normal utilisation rates because of overcapacity in the market.

For the six months to 31 March 2013, InterBulk suffered a 65% slump in pre-tax profits to £886,000 as sales slipped 6% to £132.7m.

CEO Koert van Wissen says: "We saw reduced activity in Europe between October and December, although there has been recovery in the first quarter of 2013. European export markets have seen good demand, but margins have been affected by low prices and by stable to increasing costs, so there is a challenge there."

He says there is overcapacity in tank containers of around 10%. In the past year there has been investment by some - including InterBulk - to increase fleet size, plus there are some newcomers in Europe, China and Korea. This has created a short-term over­supply of tank containers, which he expects to be absorbed by the market in the next one or two years.

"Because of oversupply and the emphasis on cost in the chemical industry, we lost some margin points in the total market. [January to March] is improving as we've seen better demand in Europe and the rest of the world, so there is some recovery from the end of 2012; however, we're still trading below pre-crisis levels."

A key part of the company's growth strategy is to increase the penetration of dry bulk transport outside InterBulk's traditional markets and boost the change to intermodal transport.

"Outside Europe they're aware of the change to intermodal to reduce congestion, increase sustainability and reduce cost. They all see the advantages of these solutions. I believe this change will continue in the coming years," says van Wissen.

InterBulk does 30% of its business in Asia, having started up in 1993 in Singapore. In June 2011, China's state-controlled logistics group Sinotrans acquired 35% of its shares.

"It is our largest shareholder and is a very important strategic partner in China. We can access their logistics network with a large trucking fleet and licences for hazardous cargo. Sinotrans now has access to our international network."

Van Wissen believes that in the long term, the sector will have to adjust to the growth of low-cost production in the Middle East and the US, which will mean more imports of polymers and chemicals into Europe.

"We see this change coming - it's already happened in the Middle East - and we want to be part of this supply chain."


By: Will Beacham
+44 20 8652 3214



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