Brenntag adjusts to China environment rules

31 May 2018 11:30 Source:ICIS Chemical Business

The world’s largest distributor, Brenntag, is transferring its China warehouse operations to two new sites following the government’s drive to move chemical-related activities into chemical parks.

Existing warehouses in Shanghai and Tianjin will move to new locations which will be fully operational by 2020-2021, according to CEO Steve Holland.

“There is some pressure in China relating to the government’s crackdown on environmentally unacceptable behaviour, with a number of Chinese and other companies being closed down. We see a determination by the government to put most chemical-related activities into chemical parks,” said Holland.

Holland

He said the company supports this move and, following the transfer, all Brenntag facilities in China will be in chemical parks. Warehouses are transitioning from existing locations into the chemical parks as the new facilities come on line.

Brenntag has seen little disruption in China from the environmental shutdowns. Holland says suppliers in the lower tiers may find it more challenging as the stricter environmental laws are implemented, adding: “We haven’t had any major issues relating to our supply lines or our customers.”

In 2016 Brenntag took full ownership of the Zhong Yung joint venture with the former partner now chairing Brenntag’s entire China business. This business is performing strongly. Holland said China has been a good experience for Brenntag, though he is aware this has not always been the case for other companies.

GLOBAL GROWTH STRATEGY

Brenntag’s growth strategy is focused on growing its North American and European business both organically and by add-on acquisition, particularly in specialty chemicals as the company aims to grow this segment within its full-line business. In Asia-Pacific, on the other hand, acquisitions are more important than organic growth.

In early May the company closed the deal announced in December last year to buy a 65% stake in Raj Petro Specialties. “We are delighted about this as it will significantly increase our presence in the Indian market,” said Holland.

Headquartered in Mumbai and Chennai, it distributes own-blended brands of petroleum-related products in India, Asia-Pacific plus Africa and the Middle East. Brenntag will buy the remaining 35% after five years.

Brenntag is sticking to its long-term target of €200-300m spend on acquisitions per year. Closing deals is not always a smooth process and last year the company announced five in just four days during December. As well as the Raj Petro agreement, it acquired UK food ingredients groups Kluman and Balter and A1 Cake Mixes plus Colombia’s Conquimica and Portugal’s Quimitécnica.com.

According to Holland: “Acquisitions don’t always follow in straight lines. December 2017 demonstrates how there are multiple negotiations going on at any one time, so it may be a little lumpy from one year to the next. We have a number of active discussions under way this year and we stick to our guidance range for M&A.”

US TURNAROUND

The company’s North American business took a big hit from the end of 2015 after oil collapsed to under $30/bbl. This reduced demand for oil and gas exploration and production-related chemicals. As oil heads steadily upwards, this business is recovering. “We had a couple of years when we were significantly affected by the oil and gas slowdown in North America. That has reversed – it is improving significantly as the oil price strengthens. As investment increases in that sector, we don’t have that drag, so we see a fairly broad-based organic growth here.”

Overall industrial demand has also turned around from negative territory 12 months ago and that is reflected in good organic growth across almost all customer segments.

However, steep falls in the value of the US dollar brought as reported sales and profits down significantly.

Latin American still has its challenges, with double-figure drops in sales and profits made worse by the dollar devaluation. According to Holland: “Clearly, Latin America is a more volatile environment. But it has got through a serious period of volatility we saw towards the start of last year and the year before. It is less pronounced now, especially in Brazil, though overall it is quite a volatile environment.”

Holland pointed out that for the first time in a number of years there is a degree of synchronisation with GDP growth in Europe, Asia-Pacific and North America. “It’s been quite a few years since we had North America and Europe in sync and that bodes well for organic growth.”

PREPARED FOR BREXIT

For Brenntag, the UK is very much part of its European operation and will remain so irrespective of what form Brexit takes. Holland insists the group is fully committed to the UK for capital investment or potential acquisitions, adding: “The UK is a highly sophisticated end market and my sense is that the vast majority of other businesses see the country in the same light. It seems to me that the UK will remain an important destination for most major manufacturers in the world.”

He says Brenntag will deal with any differences in tariffs, duties or regulations following Brexit as and when they occur. He points out that most manufacturers and distributors are already dealing successfully with companies which are outside of the EU.

“We have not had any significant increase in enquiries from customers about how to deal with any disruptions to supply chains post-Brexit. I’d like to think that people buy from Brenntag not just because it is a UK company but also as a [globally] renowned company so they can rest assured, we will maintain supplies.”

Brenntag allocates around €150-160m/year for capital expenditure on new and existing infrastructure. Holland says it will be flexible in responding to industry trends such as the US ethane-based start-ups. “We are adept at altering our supply chain to accommodate different sources. New production has to find a home, so if there are new sources, we’d like to take advantage of them, though we do have long-standing relationships which we’d continue to support.”

INDUSTRY TRENDS

Asked about industry trends, Holland says he expects to see more companies wishing to outsource their supply chain and even minor processing such as mixing and blending. Brenntag has seen increasing demand from customers wanting a more service-based offering to deliver a partly processed product.

Holland believes the circular economy is extremely complimentary to Brenntag’s business model. Its industrial business packs thousands of tonnes of product into returnable containers. “So, we offer a large recycling service as part of our business model. We see a number of manufacturers questioning why they should use one-trip containers when they could use a distributor which could offer them the security of quality, assurance and safety in refillable containers.”

Digitisation is a major buzzword for 2018 across the industry. With BASF and Covestro joining others on China’s Alibaba platform, there are also significant opportunities for the distribution sector. Brenntag created a digital start-up last year which transferred to a digital park in Amsterdam at the end of 2017. It is trialling a number of digital options with Brenntag’s customers and the company expects to offer new digital options towards the end of 2018.

Holland says: “At the moment quite a number of companies are promoting digital marketplaces and options. But these may just be a more sophisticated website rather than the full digital service we’d like to see. Millennials use digital marketplaces and expect to see search capabilities plus track and trace. It wouldn’t be too surprising to see these sort of features coming into the B2B sector.”

By Will Beacham