Asia's distribution challenges provide opportunities for logistics experts

Tough but lucrative

29 May 2009 00:00  [Source: ICB]

Complex challenges confronting Asia's chemical distribution and logistics sector require some smart people - and good incentives

Nobody said it was going to be easy, and from an individual's perspective, long may the hurdles in Asia remain complicated, allowing logistics and distribution experts to command big salaries for tackling the problems presented.

It's the variety of difficulties, requiring expertise in a particular country and product - and even a specific region of a country - that strikes you first of all.

Take China as the most obvious and important of examples. Whereas its coastal and Eastern regions have developed world-class chemical, gas and liquids storage and excellent ports, it's the country's huge hinterland where the challenges - and also the opportunities - are the greatest.

"China's transportation system has improved markedly in the last decade, but distribution costs remain a barrier to setting up in the hinterland," explains Dragonomics, the Beijing-based independent advisory and research firm specializing in China's economy, in its online publication, the China Economic Quarterly.

"Logistics costs account for 20% of average goods prices in China, compared with 10% in the US, according to the US Department of Commerce," it adds

But through a colossal yuan (CNY) 4 trillion ($584bn) stimulus package, announced by China's government last November, infrastructure is to be greatly improved in Western China, perhaps bringing closer the dream of a billion-plus consumers of modern-day goods.

GOING WEST

The global economic crisis, leading to the stimulus package, has offered further incentives to build 21st century expressways and state-of-the-art rail and air links.

How will that growth be distributed, though? "We have long been skeptical of the exaggerated claims made for the consuming power of China's supposed 'rising urban middle class,'" Dragonomics says. Eventually, rapid urbanization will boost consumption and ease the country's heavy dependence on investment exports, it adds.

"[But] research by MasterCard [the US-based credit card company] suggests that multinational, consumer-goods companies require at least a concentration of 200,000 'consumption' households [those earning more than $5,000 (€3,595) a year] to establish a viable market."

Most of China's second and third-tier cities, which are mainly in the Western and Northern regions of the country, have markets well below this critical mass.

This hasn't stopped big interest in China's latent chemical demand. Thai polymer producers are, for instance, eyeing the prospect of moving cargoes by road via Laos into the less-developed Southern provinces of China.

LOOK BEFORE YOU LEAP

But the danger is you can go in all gung ho, believing what might just turn out to be the myth of a billion-plus consumers. "This has happened to several developed-world oil products, chemical storage, and distribution companies," says a US consultant based in Beijing.

"Sometimes what happens is investments are made on the assumption of markets being liberalized to enable more foreign competition. Regulations are then not relaxed at the pace you expect."

When you look at some of the growth forecasts - for example, for storage capacity - you can understand why these mistakes happen.

"In the oil storage terminal sector, China owned 33.7m m3 of capacity in 2007 in key coastal areas. We expect this to rise to 41m m3 by 2012," says Joie Xu, consultant with Shanghai-based CBI Research & Consulting.

The strict regulatory environment means that most of the major storage operators for crude, gasoline and diesel are state-owned enterprises (SOEs), adds Xu. The more liberalized liquid chemical storage sector is expected to see capacity grow from 6.3m m3 in 2007 to 9.6m m3 - again in the big coastal regions.

LION'S SHARE

"East China accounts for the biggest part of the coastal market share because large volumes of liquid chemicals, such as aromatics, are imported to feed the downstream chemical fiber and plastics industries," says Xu.

Liberalization has led to a competitive environment and the ability to rapidly build storage tank capacity. Big nationwide specialist distribution and logistics players in China include Netherlands-based Vopak, Norway's Odfjell and Germany-based Oiltanking, with petrochemical producers such as South Korea's Samsung-Total Petrochemicals and Hong Kong-based Titan Petrochemical providing their own facilities.

Growth forecasts for the inland storage-terminal market are a lot harder to come by because of all the uncertainties. But capacity will have to rise in provinces such as Chongqing, in Southwest China, where several new petrochemical complexes are being built.

Adding to the complexity and the cost of moving dangerous chemicals West to East, and vice versa, are strict regulations for shipping on the Yangtze River - one of China's best logistics assets. Improved rail links will be used to move increased volumes of hazardous chemicals once a major wave of petrochemical plant construction has finished in northwestern China.

But there could be few opportunities for foreign investors due to a highly restricted railway transportation licensing system, warns Xu. "Transportation by rail is also often delayed because priority is given to moving food and other more important resources," she says.

Only the SOEs have so far been able to establish direct rail links from petrochemical plants to the main rail networks.

THE CART BEFORE THE HORSES

Anybody who has visited India knows exactly what the local petrochemical executive means when he says: "We've put the cart before the horses."

Strong growth in chemicals and polymer demand has occurred before decent nationwide centralized distribution and logistics have been put in place. There are big and very important exceptions, most notably Reliance Industries.

Eight years ago, officials from the Indian government were talking enthusiastically about Chemicals and Petrochemical Investment Regions. None of the investment hubs, including shared distribution, logistics and utilities have been built because of political opposition.

The contrast with Singapore's Jurong Island complex could not be greater - and also with the strong state backing that the Thai industry has received at Mab Ta Phut. Finally, though, the economic crisis has created a new set of challenges affecting every country.

Exports of finished goods from Asia to the US and the Americas have fallen dramatically since the global economy entered recession. This is sometimes resulting in repositioning costs if you want to move a cargo of polymers from the West to the East.

Ship owners are also apparently also playing games to try and achieve barely reasonable returns in very weak gas and liquid chemicals markets.

"You might book a vessel to, say, leave Rotterdam carrying benzene to Asia on May 5, but the ship you need doesn't show up until the 10th because the owner has taken another extra shipment beforehand," says an Asian liquids and gases trader.

See John Richardson's Asian Chemical Connections blog

ICIS Copyright © Reed Business Information 2009

Author: John Richardson
+65 6780 4359

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