Logistical failures and long supply chains in the Middle East are hurting petrochemical manufacturers and act as a barrier to international markets.
As an industry, current regional attention is focused on production, production, production. Sure, companies can ramp up quantities, but what about getting them from A to B? Petrochemicals are, after all, destined for the market.
For too long logistics has been left merely as an afterthought. This must change. If the petrochemicals industry is to continue to expand, shortfalls in logistics must be addressed.
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“Logistics is the biggest issue facing the petrochemicals industry. Every part of the logistics sector is weak – trucking, freight-forwarding, shipping, ports,” says George Fraize, head of logistics for Oman based Octal Petrochemicals.
“There is going to be an exploding amount of petrochemicals cargo entering the market in 2011, but insufficient transportation facilities and logistics providers to deal with it at all, unless action is taken,” adds Fraize.
Places to go
Logistical considerations are quickly clambering-up the ladder of importance for petrochemical producers, driving employees who are heads of logistics higher up in the company hierarchy.
“The importance of logistics globally has risen to the point where it is equal – if not more important – than conversion/manufacturing. This is true both on the outbound as well as on the inbound logistics,” says Frank Luijckx, Dow’s director of logisics for India, the Middle East and Africa. “For the Middle East this is even more to the point due to the fragmentation of the market.”
Fraize encapsulates the issue succinctly. “You basically have a region that has developed a huge liquid and solid chemicals business, but without having the rquired logistics infrastructure in place to handle it all.”
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In the absence of developed and coordinated infrastructure, transporting products to the market is not only problematic, but also incredibly expensive.
In fact, logistics represent the second most significant cost after production.
“Commodity based products are fighting in the same market as retailers, as they need their products in shops. So, from a shipping perspective, when approached by a company with a light cargo, offering to pay a good price to ship their products, in opposition to petrochemicals that are heavy – it is clear which cargo the owner is going to choose – the ones with most profitability,” says Anthony Elwine, general manager – chemicals, Maersk Logistics.
“Being based in the Middle East, there is a lot of cargo coming through from China, India and Vietnam bound for Europe – this means that the petrochemical industry is competing for limited space on those vessels,” adds Elwine.
Petrochemicals companies must work to solve such issues since doing so presents the biggest opportunity for cost reduction.
Middle East conundrum
Operating in the Middle East does present its own particular set of challenges to logistics providers – geography and the lack of existing infrastructure add to the conundrum.
Supply chains are prolonged in the Middle East, largely as a result of the substantial distances to markets.
“Another challenge is the lack of available storage and distribution facilities dedicated to the requirements of the petrochemical industry as well as 3PL providers that have the competency to handle a broad spectrum of chemicals in a sustainable way,” says Luijckx.
Freight operators too have been witness to the increasing demands. “Certainly there has been a movement towards ships that comply with hazardous cargo regulations so that they can carry petrochemicals in the Middle East,” says Iain Cain, acting CEO of Gulf Navigation.
“The destinations that petrochemicals are headed to have shifted somewhat – the Far East is now a focus, rather than it just being the US or Europe. That makes transportation needs far more expensive,” explains Cain.
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Location, location, location
Given the geography of the Middle East, choosing the perfect location is key and can make all the difference in gaining a competitive edge over competitors.
Petrochemical manufacturers have to ask – what is the quickest way to get my products to the international market? And, is this a cost-effective and reliable business model?
In setting up business, Octal’s location in Oman was strategic.
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“By 2011 there will be a surplus of petrochemical and polymer products in the Middle East, so Salalah will allow us to play that market to our advantage. Being located outside the Strait of Hormuz also gives us a four-day advantage on shipping times,” says Nicholas Barakat, managing director of Octal.
The port in Salalah is managed and operationally run by APM Terminals, a giant in the terminal management business worldwide, and one that has a proven track record operating in the Middle East.
“We want to be able to grow our exports significantly, and being next to an extremely efficient and fast growing port for transhipment is a major advantage,” explains Barakat.
The port in Salalah provides a perfect example of the extent to which dedicated business infrastructure can aid the petrochemicals industry in getting products to market as efficiently as possible.
Major shipping lines Maersk and APL have also helped by adding more port calls this year, and container throughput traffic is expanding considerably.
“The quick logistical turnaround appealed to our very export focused management team. Deliveries of APET sheet from Salalah can be made to virtually any port in the world within 12 to 18 days.”
The 3PL solution
For many companies, the remedy to their logistical headache has been the increasing prevalence of 3PL providers.
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Specialisation is the key – simply employ a company who really knows what they are doing.
“Our business is based on our ability to focus on the production of our goods so that they are of the best quality. Logistics keeps us moving and can be outsourced to service providers who can do it better than we can,” explains Fraize.
“They manage everything for you – your relationship with your suppliers, customers and ports. They also subcontract parts of their own work, such as to different transportation companies. They manage all of the negotiations, and at the end of the day they consolidate all of these activities into one invoice. This gives you much more traceability and visibility. It basically ensures accountability, which is always good for business,” adds Fraize.
Such specialist logistics companies are popping-up all over the Middle East, but that is not to say that there are still no shortages. In the case of Octal and Oman, there are 3PL providers in place, only they still lack sufficient resources to cope with demand.
Pivotal to logistics providers is their ability to improve the efficiency and effectiveness of supply chains.
Currently it takes around 35 to 40 days to supply a product to the end user, shipping companies are seeking to reduce this time through constantly reviewing the market and the opportunities that it offers.
The way ahead
An abundance of new petrochemicals production facilities are coming on-stream in the Middle East, with even more additional capacity projected in the coming years.
At the same time local demand for products is increasing at a healthy rate. This leaves the region well-positioned to be a major provider for not only existing markets, but also for other growing markets, particularly in India and China.
Inevitably, providing a cost-effective service is central to 3PL providers. Every company wants a low price, but high performance.
“Sustainability is on everybody’s minds these days. This is certainly true for logistics professionals as well,” says Luijckx. “It ranges from using energy efficient transport, to reducing the amount of transportation required, through to creating smart supply chain designs.”
“Looking into the future and the potential developments in the region, it is almost impossible to not reach the conclusion that significant changes need to take place. Whether these are increasing the number of ports, available containers, distribution centres, hazardous material storage or ships,” concludes Luijckx.
