Distribution and Trading
Latam, a distribution market par excellence
Distributors exist to add value to their suppliers and customers, by either solving problems or avoiding that problems appear in the first place. By this logic, the more problems there are, the more opportunities to add value. This is probably why, in the Latin American region, with its vast geographical span, incohesive regulations, currency constraints, logistical hurdles, and many other problems, the third-party chemical distribution market is so popular. Brazil is naturally the biggest chemical distribution market in the region, since the chemical industry is also the largest in the southern hemisphere, but the distribution model – or the share of chemical sales from through a distributor – is biggest in Argentina, arguably one of the most problematic countries in the region. “In Argentina, distribution, as a percentage of what chemical companies sell, is twice the size of that in Mexico or Brazil. Here, large producers prefer to sell through distributors rather than going straight to customers who may not be able to pay them given the country’s economic turbulence,” explained Adrián Schwartz, president at Grupo Simpa, Argentina’s largest distributor in the plastics value chain, covering half of the distribution market and representing players like Dow for polyethylene, Petrocuyo for polypropylene, and Pampa Energia for polystyrene.
The region’s distribution market is mostly represented by commodities, according to a recent report by Verified Market Research, and supported by qualitative data from GBR’s conversations with leaders in the region. For example, Brenntag, the world’s largest distributor by sales, serves a larger share of basic chemicals. Brenntag underwent a company transformation between its specialty (Brenntag Specialties) and commodity (Brenntag Essentials) business in the last two years, seperating the two entities.
Global players like Brenntag, Univar, Tricon Energy, Manuchar, Omya, or GTM Caldic mix with an abundance of local players like Anastacio or Pochteca, the sector displaying high levels of fragmentation, which matches the region’s deep idiosyncrasies. “The last mile is different in every place we operate,” commented Germán Torres, president at Brenntag Essentials Latin America, which operates in 17 out of the 21 countries in the region.
Cultural, economic, but also regulatory aspects paint a highly heterogenous region, split into many local clusters, that chemical producers find it difficult to access. Moreover, unlike the European Economic Area, or the newly created African Continental Free Trade Area, connecting the respective continents through a unison free trade agreement, the Latin American region does not have a pan-regional regulatory structure, even though there are various alliances that cover parts of the region, most notably the Mercosur (Southern Common Market) pact between Argentina, Brazil, Paraguay and Uruguay as principal signatories. “Latin America does not compare to a place like Europe, where you can cross borders unhindered,” emphasized Torres.
Gaps in intra-regional trade have created opportunities for smaller players. Reuse Trading, a Belgian trader in industrial chemicals and oleochemicals that had built a presence in the African markets, has recently expanded to Latin America, starting with smaller countries like the Dominican Republic, and quickly working its way through to Brazil, Colombia, and Peru. For those wondering what a Belgian trader with expertise in in Africa is doing selling products from Colombia to Peru, Tomas Steppe, managing director, explained that there were surprising gaps in the trade between countries in the region: “Sometimes, it can be easier to import lower-cost chemicals from China, India, or Europe. But I strongly believe that neighboring countries can develop better if they trade with each other. For example, there are 54 different countries in Africa, but once you cross the border from one to another, you will find many similarities and common ground, including complementary business interests. Reuse Trading seeks to facilitate that in Latam too,” he said.
Well-acclimatized to tougher markets from payment issues, to safety, thanks to its experience in Africa, Reuse Trading found the venture to Latam much easier, though Steppe was quick to note the convoluted tariffs between different Latam countries.
The other feature that marks the distribution model apart in Latam is that it favors a higher control of the value chain. Adding a step (or more) in the value chain, be this through the classic logistics or packaging or through more specialized services like blending or micronization, goes a long way in the region. “Whereas in developed markets, one can outsource much of the supply chain to specialist companies, this is not the case for most emerging countries,” argued Philippe Huybrechs, the CEO of Antwerp-headquartered Manuchar, a global distributor.
Instead of focusing on the southeast of the country (where the state of São Paulo is located) like other distributors, Manuchar tackled the under-served north and south of the country, investing in its own assets to better control the supply chain and lower its total cost per metric ton. Today, Latin America represents 50% of Manuchar’s revenues.
One company that has taken vertical integration to the next level is Andino Holdings, a player that has grown tremendously since it was formed almost a decade ago, developing four integrated pillars: procurement, shipping, storage, and last-mile delivery. This has allowed Andino to capitalize on the opportunities created across the different segments of the value chain in the timeliest manner, whether it was by importing high volumes of ethanol for sanitizers from the US into Mexico during the pandemic, or establishing a foothold in containerized product sourcing from Europe, US, and Latam when freight rates from Asia went through the roof. The market certainly appreciates the risk-mitigation in the end-to-end offer, said Peter Staartjes, the CEO of Andino Holdings: “Our customers like the fact that we can manage procurement from either of our offices in Houston and The Hague, that we have reliable and on-time ship deliveries with competitive freight rates and that we can move their products through our own facilities for subsequent packaging and delivery via our regional Andikems. They need only to contact one person to manage their product procurement or distribution needs, regardless of origin or destination.”
The pandemic provided plenty of challenges to the distribution sector, but also opportunities to stand out and come closer to their customers. Química Anastacio, a Brazilian-based distributor with a presence in 18 individually managed market segments, took advantage of the purchasing opportunities during the pandemic at a time when the market was shut down and few were buying. The risk was high, but it paid off, allowing Anastacio to supply customers with affordable product. Now, the distributor is again standing up for its customers, offering credit solutions in a cash-tight market.
Though the pandemic is in the rear-view mirror, the down-cycle in the commodity markets is again challenging chemical producers. This transpires to the distribution sector; here, players have the double challenge of managing both their own dipping margins, as well as showing up for their customers. After all, the role of the distributor is to deal with its customers’ problems. But they cannot lose track of their own.
“Our role as distributors is to continue delivering safe and reliable supply to meet demand. Doing this day after day is not as easy as it sounds.”
Jorge Buckup, President Latin America, Univar Solutions
Between costs and growth imperatives
In the middle of suppliers and buyers, distributors, and, to a lesser extent, traders, tend to mirror the dynamics pertaining to these two markets. This “when you jump, I jump” relationship has meant that distributors have followed the opportunities provided by Brazil’s scale, Mexico’s nearshoring, or Central America’s niche markets. Recently, it has also meant that when producers fall and commodity prices shrink to 20-year lows, distributors are left with expensive stock, which they are forced to get rid of at lower prices. To make up for lower profits, they need bigger volumes. But to grow, one needs to invest. The current environment pits sound cost prudence against the sector’s instinctive growth drive.
Both chemical companies and their distribution partners concede that 2022 was a great year, with many companies recording record performance at the culmination of a pandemic-influenced super-cycle. All good things coming to an end, and the industry and its extended value chain broadly accepted that a correction is to follow. “After two stellar years at Brenntag, we expected the market to correct itself, though we thought it would be a softer return-to-normal. It turned out extremely difficult in the first part of the year,” said Germán Torres, president, at Brenntag Essentials Latin America.
Distributors find themselves trapped between large inventories and languid offtakers. In this context, they have to strike a delicate balance between having enough and not too much stock, like Mark Phillips, chief operating officer at Tulstar, said. Tulstar is an Oklahoma- based distributor of transformer oils for the power industry, as well as base and processed oils, refrigerant gases, propellants, personal care chemicals and plastics additives.
On the other hand, traders have a better chance to react faster, and have been generally less affected by the decline in prices. Reuse Trading expects to double its Latam business this year, registering bigger volumes, albeit at lower margins. Brazilian trading company Anastacio Overseas has increased its volumes by 35% in the first half of 2023, compared to H1 2022. Meanwhile, its distributor sister, Química Anastacio, has managed a 15% increase in volumes compared to last year, though revenues are lower.
To increase volumes (and therefore to capture a bigger share of the market), distributors must continue investing – this is the philosophy adopted by most players in the market. How they spend, however, differs broadly. One direction has been to take further floor of the region. The distribution model is, by virtue of its nature, an expandable business at lower capex compared to producers, which has allowed distributors originating from different parts of Latam to grow territorially and replicate the successes achieved in one market into the next.
To offset a low investment mood in its native Chile, Grupo Reno, one of the largest distributors of solvents in Chile, has progressively expanded to Argentina and Peru, and this year it has opened new operations in Paraguay. Next year, it plans to expand to Colombia. “In recent months, we had a few of our big customers closing production in the country. Because Chile is an open economy, some manufacturers prefer to import rather than produce locally, which is a big challenge to distributors. The situation is complex, but we have been able to maintain a stable growth by developing new segments and managing bigger volumes,” commented Claudio Gorichon CEO at Grupo Reno.
While some focused on opening platforms in new countries, others looked at improving their operational efficiencies, leveraging previous investments, or adding more higher-value products to their portfolios. The boldest are also actively on the hunt for acquisitions. Manuchar, for example, recently acquired two companies in Brazil, Plury Química and Comoquimica, growing its footprint in specialty chemicals and ingredients for the human nutrition market. The company won’t stop there, and its executives hinted we can expect more acquisitions in the future. Univar also completed two acquisitions in the region, most recently of specialty chemicals distributor ChemSol, with a presence in Costa Rica, Guatemala, El Salvador, Panama, and Honduras. Last year, Univar also consolidated its presence in Brazil after acquiring Sweetmix, a Brazilian distributor of food ingredients and CASE products.
After organically expanding in Argentina and Mexico, Química Anastacio has also been rumored to be looking for an acquisition opportunity in 2024, which would be the first in the company’s history. Even for a privately-owned, completely debt-free company like Anastacio, an acquisition is an appealing option to jump-start/ skip the usually longer trajectories of growth that organic expansion grants. CEO Jan Krueder confirmed the rumors: “We are indeed considering a potential acquisition in 2024 that would speed up and simplify our expansion on the Pacific side. Buying an SME with an established presence, with an up-and-running team, existent customer base, consolidated tax system, etc. would be an interesting drive forward, so we are open to the potential.”
Valued at US$22 billion in 2021 and projected to reach US$34 billion by 2030 according to Verified Market Research, the Latam chemical distribution sector remains on the right track for continued growth, though the difficult market will filter out the less competitive players. What strategies will pay off the most, it remains to be seen. But larger players, with a bigger grip of different markets, seem to be better positioned against market turbulence. On the other hand, agility, which tends to come in smaller packages, is prized above all else in a challenging market like this. The risks are there, but, as Germán Torres of Brenntag said: “if you know how to calculate and navigate the risks, if you put resources in the right places, Latin America is a place where one can grow faster than in most others in the world.”
Image courtesy of Vopak