The big fish thrive in a market made for distributors
Image courtesy of Quimica Anastacio
Conducting interviews for the 2021 edition of this Latin America Petrochemicals and Chemicals report, one of the common themes has been the performance of the international chemical distributors in the region. The superlatives used to describe sales in a year where supply chain issues have persisted poses the question, why is Latam so suited to the chemical distribution business model?
“The complexity of the region in terms of distances is a great advantage for distributors,” stated German Torres, regional president – Essentials Latin America for Brenntag, noting that with the exceptions of Brazil and Mexico, Latin America does not have a very strong industrialized base, so a significant amount of product must come from other regions in the world. “Dependency on imports implies a need for logistics, storage, technical and value-added services.”
Torres observed that international manufacturers want to sell in Latin America, but do not necessarily want a physical presence in the region because, from a macro standpoint, Latam is not stable and currencies are volatile. “They are thus reliant on distributors’ capabilities and knowledge in the region to move forward and consolidate the products they offer the market. Small and medium sized companies which are growing in local markets also need the reach and network that distributors offer.”
Eugenio Manzano, executive director of Pochteca, remarked that the participation of distributors in the chemical supply chain is increasing as customers recognize that purchasing from a distributor can reduce total cost of ownership and manufacturers recognize that going to market through distribution can reduce their cost to serve several segments. “At the same time, we believe that chemical distribution is still very fragmented. In a recent count of distributors in the countries where we are present, we counted more than 1,400,” he added.
Manzano went on to explain that customers and suppliers are reducing the number of channel partners, choosing those that add value beyond the product with technical solutions, inventory management systems, blending, environmental services and logistics. “Increased regulation and economies of scale required to compete successfully imply that the segment will continue to consolidate and institutionalize over the next several years.”
Such a context favors the larger players, whose market share increased during the pandemic as their liquidity and storage capacity were able to weather supply chain disruptions and demand volatility. Jan Krueder, CEO of Química Anastacio, revealed that a 70% drop in the durable market (including paints, rubbers, plastics and lubricants) during Q2 2020 caused the company to rent extra warehouse space. As lockdowns were enforced across the globe, commodity prices also decreased, prompting distributors to get rid of stock quickly and buy back at a cheaper price.
Química Anastacio took the decision to go to market and start buying at the lower commodity prices, related Krueder, which benefited the company as it had a large inventory when demand rebounded and could supply the increased demand where others could not. “Smaller companies are struggling due to a lack of warehousing or liquidity, which creates the opportunity for bigger players to increase their presence in the market or team up with other players to continue successful business,” he said, reflecting that consolidation was already becoming a reality, but supply chain disruptions and logistical challenges have made it now even more appealing and necessary.
Jorge Buckup, Univar Solutions’ president for Latin America, echoed the sentiment that disruptions had played into the hands of the larger distributors: “This presented opportunities for those companies that were prepared and had inventory like Univar Solutions to be able to supply the robust demand that has reached pre-pandemic levels.”
Demand for chemical products in Brazil, Latin America’s largest market, has also been bolstered by low interest rates. In August 2020, Brazil cut its benchmark interest rate to an all-time low of 2% in an effort to boost its economy. Rodrigo Gutierrez, CEO of GTM Holdings, explained that Latin America has always had an issue with high interest rates, which created the scenario where people were putting their money in the bank rather than investing. Gutierrez elaborated how this scenario has changed: “As there are now substantial floods of money streaming in, net interest rates have decreased significantly, encouraging more spending and investment and creating more opportunities in Latin America. This has caused the market to invest in new equipment and infrastructure, which has increased the demand for chemical products substantially.”
Maintaining business continuity during political upheaval
On July 28th, 2021, Pedro Castillo, the former schoolteacher and union leader, became the 63rd president of Peru. The election of Castillo’s Perú Libre party is the latest victory by Latin America’s left wing, in a region that has become accustomed to political upheaval. Far from being an outlier, Castillo’s rise to power follows a trend that has been seen in Mexico (with Andrés Manuel López Obrador gaining power in 2018) and Argentina (with Alberto Fernández winning the 2020 election) in recent years. As of October 2021, Brazil’s former president Luiz Inácio Lula da Silva (Lula), comfortably leads current president Bolsonaro in the country’s opinion polls ahead of the 2022 general election.
In the case of Peru, there is debate as to whether Pedro Castillo’s victory could mirror the Ollanta Humala presidency in 2011, who rose to power on the back of anti-establishment rhetoric, but soon cooperated with market actors when faced with economic reality.
“Regarding politics, my experience in Latin America is ‘the dog that barks loudest doesn’t always bite’,” reflected Peter Staartjes, CEO of Andino/Andikem, the multinational logistics and distribution company which supplies chemicals such as sulfuric acid to Peru’s chemical industry.
One of the privately run domestic players operating in Peru’s chemical industry is Químicos Goicochea, a diversified distributor of products including caustic soda and sodium cyanide. Today, the company provides chemicals for the water treatment, homecare, personal care, paint, veterinary, foods, textiles, PVC and plasticizers industries, with commercial premises, warehouses and offices in the north (Trujillo) and south (Arequipa) as well as three sites in Lima.
Jaime Villanueva, Químicos Goicochea’s commercial manager, spoke of the potentially negative impact Pedro Castillo’s regime could have on the country’s business climate: “If the government is not careful, the anti-business message they are portraying will cause international companies to leave,” he warned. “The left aims to protect domestic companies from price dumping and give them priority. An overly protected company becomes inefficient and prices skyrocket internally,” continued Villanueva, who is concerned about the governments’ protectionist rhetoric.
One of the challenges the new government faces is developing a working relationship between Peru’s large industrial projects (including its mining pipeline of over US$30 billion) and local communities who feel they have not seen their fair share of the wealth created after years of private sector development. “I am mildly bullish that all players will find a middle ground and things will continue to move forward as usual,” added Staartjes.
Abundant natural resources combined with high commodity prices offer Latin American nations such as Peru a roadmap to bounce back from the hardship inflicted by the pandemic, and the hope is that the economic reality of the current situation will not be lost on governments that have risen to power with a mandate for change. For this change to be successful, collaboration should be prioritized.
“The left aims to protect domestic companies from price dumping and give them priority. However, an overly protected company becomes inefficient and prices skyrocket internally. It is our opinion that this is not the right path.”
Jaime Villanueva, Commercial Manager, Químicos Goicochea