by Sarah Townsend
The good news is over and the petrochemicals industry is facing a “new normal”, the head of the Middle East’s largest independent distributor, Petrochem, says bleakly.
Yogesh Mehta, who has led the company’s 25 years of spectacular growth to become number one in the region, says “tight margins, low oil prices, a glut of supply and aggression from everywhere” are here to stay.
Petrochem had been working with gross margins of between 8 and 9% and net margins of about 4% until 2014. Net margins have now dropped to as low as 2%.
The billion dollar company, which exports more than 700,000 metric tonnes (MT) of products worldwide, still has a “healthy cash flow, deep pockets and a reputation for quality”, but Mehta admits the past two years have been tough.
“Our business is very challenged at this time. In the past two years, the landscape of the global chemicals industry has changed. Partly because in China — the factory of the world — there is a big oversupply situation and demand has gone down. Margins are lower, there is more competition — my manufacturers now want to do my [distribution] business in addition to their own — and, actually, this is a very hostile environment,” he tells RPME’s sister publication Arabian Business.
The fall in oil prices from above $100 a barrel to barely $50 also have not helped. And Mehta does not see it picking up any time soon. “It has deeply affected our business and I believe low oil prices are here to stay,” he says.
“Normally, our business is cyclical: a seven-year ‘good’ cycle, followed by one difficult year, then it comes back. But I think we are still in the middle of this dark night. We are in a chemical recession that could last until the third quarter of next year, and really, I think the good news is over for the petrochemicals industry.”
These are strong words from the man who recently completed a fourth expansion of Petrochem’s terminal in Jebel Ali Free Zone, and who told local media in February last year that the chemicals industry had turned a corner and was set to stabilise in the ensuing months.
Today, though, he says: “We haven’t seen anything like this before. People have to understand the new normal and businesses must improvise and change accordingly.”
If there was any doubt over Mehta’s conviction in his own words, he is putting his money where his mouth is and preparing to oversee Petrochem’s biggest structural transformation since the Indian businessman founded the company in Dubai in 1995.
For the first time, Petrochem is planning to expand into chemicals manufacturing. It is in talks with two interested parties, Mehta reveals, and hopes to have entered into a joint venture by the end of next year.
The plan is to team up with a specialist chemicals manufacturing company — Mehta declines to reveal which product area he is targeting — and Petrochem would take over their distribution arm. It would start operating in the Middle East and expand in years to come, but the joint venture partner could be a world player, not necessarily a Middle East firm. The deal would reduce operating costs for both parties, Mehta says, as it would cut out the middle man in the form of hefty supply and distribution contracts on which each company relies and prevent Petrochem from having to store products for a long time, “which reduces our profitability when there is price volatility in the market”.
“It would be a case of a manufacturing company wanting to get into distribution and we want to get into manufacturing. At the moment we do nil — only blending and distribution — but we want to produce chemicals and then resell, instead of buying from somebody else,” Mehta says.
A joint venture also would reduce Petrochem’s freight costs. “Our business relies on a hub and spoke operation. We don’t want to manufacture for the sake of it; we want to produce products [and] we know have a demand here,” he says.
“If you manufacture in the Middle East — that is, producing chemicals in your own backyard — you can reduce freight costs and transit time to the customer rather than spending a lot of money transporting goods.
“Goods coming from China have a $70 per tonne freight value; by producing here the freight value shrinks to $10-15 per tonne. Therein lies a small delta, which is why we need to produce.”
Petrochem plans to invest about $100mn in capital expenditure required to restructure the business and an additional $150mn of equity directly into the joint venture. An estimated 40% of this would come from bank financing and Mehta says he is in talks with several banks “who are very keen”.
While he hopes a deal will be signed by the end of 2016, the new venture will require a two-to-three-year gestation period. “It won’t happen with a magic wand,” he states.
At the same time, the company plans to halve the number of products it distributes from 85 to 45 over the next two years to adjust to the tougher climate.
“There are many chemicals that don’t make money for us and we want to provide better services for our customers.”
One such group of chemicals is aromatics used to manufacture a large range of consumer products.
“This was our bread and butter business. But it was not making money for us and we have gradually phased it out as we restructure the business,” says Mehta.
Over the coming years, Mehta’s son Rohan will play a bigger role in Petrochem’s management. With a BA in Business from the University of Mumbai, he has spent four years working for chemical refineries in Texas and says he brings to Petrochem experience of the “upstream” end of the oil and gas sector. Also speaking to Arabian Business, he describes Petrochem as a “chemicals supermarket” and is looking forward to getting more involved with the business.
In the meantime, however, he is working to grow his events management company Raging Tiger, which organises concerts, balls, Bollywood evenings and other upmarket events across the UAE.
The company has staged 11 events in the 18 months since it launched and has another four planned between now and the end of March. Mehta Junior intends to hand over greater control of Raging Tiger as he spends more time with Petrochem, but says he will not seek to sell it until at least after Dubai Expo 2020.
His father explains: “We need to fatten up ‘the Tiger’ – it’s just a baby at present.”
With the planned move into chemicals manufacturing and a young Mehta on board to help take the company into the future, Petrochem is positioning itself for ever more growth and prosperity, even if, as its founder says, the “good times are gone”.
