Asian Chemicals End-User Supply Chain Changes
Preserving credit and navigating erratic chemical markets are the keys for survival in 2009. But could the economic changes be so profound that they require a long-term change in Asian supply chain strategies?
HOW THE world has changed. Just a few short months ago, back in August 2008, McKinsey conducted a survey on changes in global supply chain trends over the previous five years.
"Executives point to the greater complexity of products and services, higher energy prices and increasing financial volatility as top factors," wrote the global management consultancy. Now the pressing issues for everybody down every supply chain include the credit crisis, much weaker and harder-to-read demand and the collapse in crude prices that has a deep - perhaps even permanent - effect on buying behavior.
The more complex products and services that have been developed over the past five years still exist, of course, but the problem now is to get the kind of price premiums essential to pay back research and development, marketing and sales costs.
"Customers increasingly want cheap, cheap, cheap, but my job is to persuade them that if you only buy a low-grade polymer, you might end up paying more in the long run through poor performance," says a Southeast Asia-based sales executive with a global polyolefin producer.
And perhaps the biggest single change for Asia - one that might require a long-term reorientation of its economies toward greater regional self-sufficiency - is the collapse of exports of finished goods to the West. "Over the past decade following the Asian financial crisis, Asian countries set up policies that were more export-driven," says Tejas Parekh, export manager for Connell Brothers, the Asia-Pacific specialty chemical distribution company.
Chemical companies need to focus more on price performance than ever before and watch closely for signs of an economic rebound, Connell advises. But the multitrillion dollar question is whether the changes in the world economy taking place during this downturn will last for a generation.
IT'S NOT ABOUT THE COST PER TONNE
"I don't care that much any more about how much I pay per tonne for my polyethylene (PE) and polypropylene (PP). What matters now is stretching my credit as far as possible," says the purchasing manager at a medium-sized Asia-Pacific plastics processor.
He is buying from more suppliers than before the crisis, "because in this way, if you add all the available credit this increased number of suppliers offer, this helps to partially compensate for my overall reduction in credit." Western PE and PP producers are demanding quicker payment and have reduced their volumes of credit, whereas at least the Middle East suppliers are only asking for more prompt settlements, he adds.
The processor's own customers - often big confectionary manufacturers with major market muscle - are also taking longer to settle their bills. Another reason to buy from more raw material providers is to reduce the risk of bankruptcies. "If you only depend on a small number of suppliers and one of these goes bust, you face serious business disruption," he says.
Reduced demand means it also makes sense to buy more resin locally, either from domestic companies (therefore also avoiding any currency risk) or from Western or Middle East companies that have stored product in bonded warehouses in, say, Shanghai or Singapore. "Because demand is weaker, I can often no longer justify buying a full container-load of polymer from Saudi Arabia - the only size of delivery that makes economic sense. Instead, I am increasingly buying the odd few tonnes from just down the road."
There are even more reasons for not purchasing deep-sea cargoes. Extreme price volatility means that the price of a converter's resin could have changed four or five times before it arrives. The polymer could have fallen so steeply by the time it is delivered that the processor's customer demands a discount on packaging and wrapping material.
And if you are trying to stretch your credit as far as possible, you want to minimize the time from your cash outlay to when you receive payment from customers. The quicker delivery times from Asian, compared with deep-sea suppliers could help.
The credit crisis has become so serious for small and medium-sized enterprises that even good firms could be forced under, not because they are badly managed but because they make a minor miscalculation on purchasing raw materials versus sales. A few hundred thousand dollars over a credit limit and a bank might be forced to withdraw financing as it struggles to reduce loan exposure.
"As for the type of credit being used, I would like cash-on-delivery from my customers but am not often in a position to achieve this," the processor adds. "The open account approach, where customers pay on the receipt of goods, is too risky as it doesn't have legal safeguards." So letters of credit, which provide legal protection, have become more popular during a period when supply is reduced.
MORE INFORMATION NEEDED
This has led to the expansion of business analyst teams. There's a need for more information on how chemical pricing markets function and where are heading. "We've employed more people because every $5.00/tonne I can save on my propylene glycol (PG) costs can make all the difference," says a Singapore-based regional procurement director of a consumer products company. Petrochemical companies, in response, also seem to be employing more analysts.
A further motive to build up Asian market-monitoring and sales teams is that big new capacities are being brought on stream by companies such as Saudi chemical giant SABIC and the Petro Rabigh joint venture between state oil company Saudi Aramco/Japan's Sumitomo Chemical in the Middle East. Such is the need to conserve credit that senior executives in the companies that buy basic chemicals are making all the major purchasing decisions. They are also, for the first time since they were junior business analysts, closely tracking market trends.
"Your sales story has to be exceptionally convincing as you are now talking to very experienced customers," adds the polyolefin producer sales executive.
The producers are under the added pressure that this is a buyers' market because of the capacity additions. After years of end-users being squeezed by tight upstream supply and demand balances, it could be pay-back time for the next three to four years.
JUST HOW LONG WILL IT LAST?
There is no space here to go into details on arguments about why the world economy could be undergoing long-term changes. But in brief, if Western housing and equity markets take decades to recover, Asia will have to become much more reliant on its own demand. China has already begun the process of attempting to reduce its exposure to exports.
"But as with the US, it lacks a good health care system. Making people spend more to make up for lost overseas trade could take a generation," says a US-born Beijing-based consultant.
There are many other reasons to believe why supply chains could become more local over the long term - not least the emergence of a global emissions cap-and-trade and/or tax system. Companies might also have to get used to more modest sales growth expectations in a world economy where growth could be constantly capped by scarce oil supply.
Investment in boosting supply chain efficiency could, as a result, become a long-term requirement - difficult with budgets likely to stay under pressure. "The big task now is convincing our senior management that the economy might have changed for good. Let's hope this is not the case, but we should at the very least build this possibility into our planning," says an analyst with a second global polyolefin producer.
HOW THE world has changed. Just a few short months ago, back in August 2008, McKinsey conducted a survey on changes in global supply chain trends over the previous five years.
"Executives point to the greater complexity of products and services, higher energy prices and increasing financial volatility as top factors," wrote the global management consultancy. Now the pressing issues for everybody down every supply chain include the credit crisis, much weaker and harder-to-read demand and the collapse in crude prices that has a deep - perhaps even permanent - effect on buying behavior.
The more complex products and services that have been developed over the past five years still exist, of course, but the problem now is to get the kind of price premiums essential to pay back research and development, marketing and sales costs.
"Customers increasingly want cheap, cheap, cheap, but my job is to persuade them that if you only buy a low-grade polymer, you might end up paying more in the long run through poor performance," says a Southeast Asia-based sales executive with a global polyolefin producer.
And perhaps the biggest single change for Asia - one that might require a long-term reorientation of its economies toward greater regional self-sufficiency - is the collapse of exports of finished goods to the West. "Over the past decade following the Asian financial crisis, Asian countries set up policies that were more export-driven," says Tejas Parekh, export manager for Connell Brothers, the Asia-Pacific specialty chemical distribution company.
Chemical companies need to focus more on price performance than ever before and watch closely for signs of an economic rebound, Connell advises. But the multitrillion dollar question is whether the changes in the world economy taking place during this downturn will last for a generation.
IT'S NOT ABOUT THE COST PER TONNE
"I don't care that much any more about how much I pay per tonne for my polyethylene (PE) and polypropylene (PP). What matters now is stretching my credit as far as possible," says the purchasing manager at a medium-sized Asia-Pacific plastics processor.
He is buying from more suppliers than before the crisis, "because in this way, if you add all the available credit this increased number of suppliers offer, this helps to partially compensate for my overall reduction in credit." Western PE and PP producers are demanding quicker payment and have reduced their volumes of credit, whereas at least the Middle East suppliers are only asking for more prompt settlements, he adds.
The processor's own customers - often big confectionary manufacturers with major market muscle - are also taking longer to settle their bills. Another reason to buy from more raw material providers is to reduce the risk of bankruptcies. "If you only depend on a small number of suppliers and one of these goes bust, you face serious business disruption," he says.
Reduced demand means it also makes sense to buy more resin locally, either from domestic companies (therefore also avoiding any currency risk) or from Western or Middle East companies that have stored product in bonded warehouses in, say, Shanghai or Singapore. "Because demand is weaker, I can often no longer justify buying a full container-load of polymer from Saudi Arabia - the only size of delivery that makes economic sense. Instead, I am increasingly buying the odd few tonnes from just down the road."
There are even more reasons for not purchasing deep-sea cargoes. Extreme price volatility means that the price of a converter's resin could have changed four or five times before it arrives. The polymer could have fallen so steeply by the time it is delivered that the processor's customer demands a discount on packaging and wrapping material.
And if you are trying to stretch your credit as far as possible, you want to minimize the time from your cash outlay to when you receive payment from customers. The quicker delivery times from Asian, compared with deep-sea suppliers could help.
The credit crisis has become so serious for small and medium-sized enterprises that even good firms could be forced under, not because they are badly managed but because they make a minor miscalculation on purchasing raw materials versus sales. A few hundred thousand dollars over a credit limit and a bank might be forced to withdraw financing as it struggles to reduce loan exposure.
"As for the type of credit being used, I would like cash-on-delivery from my customers but am not often in a position to achieve this," the processor adds. "The open account approach, where customers pay on the receipt of goods, is too risky as it doesn't have legal safeguards." So letters of credit, which provide legal protection, have become more popular during a period when supply is reduced.
MORE INFORMATION NEEDED
This has led to the expansion of business analyst teams. There's a need for more information on how chemical pricing markets function and where are heading. "We've employed more people because every $5.00/tonne I can save on my propylene glycol (PG) costs can make all the difference," says a Singapore-based regional procurement director of a consumer products company. Petrochemical companies, in response, also seem to be employing more analysts.
A further motive to build up Asian market-monitoring and sales teams is that big new capacities are being brought on stream by companies such as Saudi chemical giant SABIC and the Petro Rabigh joint venture between state oil company Saudi Aramco/Japan's Sumitomo Chemical in the Middle East. Such is the need to conserve credit that senior executives in the companies that buy basic chemicals are making all the major purchasing decisions. They are also, for the first time since they were junior business analysts, closely tracking market trends.
"Your sales story has to be exceptionally convincing as you are now talking to very experienced customers," adds the polyolefin producer sales executive.
The producers are under the added pressure that this is a buyers' market because of the capacity additions. After years of end-users being squeezed by tight upstream supply and demand balances, it could be pay-back time for the next three to four years.
JUST HOW LONG WILL IT LAST?
There is no space here to go into details on arguments about why the world economy could be undergoing long-term changes. But in brief, if Western housing and equity markets take decades to recover, Asia will have to become much more reliant on its own demand. China has already begun the process of attempting to reduce its exposure to exports.
"But as with the US, it lacks a good health care system. Making people spend more to make up for lost overseas trade could take a generation," says a US-born Beijing-based consultant.
There are many other reasons to believe why supply chains could become more local over the long term - not least the emergence of a global emissions cap-and-trade and/or tax system. Companies might also have to get used to more modest sales growth expectations in a world economy where growth could be constantly capped by scarce oil supply.
Investment in boosting supply chain efficiency could, as a result, become a long-term requirement - difficult with budgets likely to stay under pressure. "The big task now is convincing our senior management that the economy might have changed for good. Let's hope this is not the case, but we should at the very least build this possibility into our planning," says an analyst with a second global polyolefin producer.
quoted from: www.ICIS.com
