Regional Hub

After Shanghai, Singapore is the world’s largest transhipment hub, with over 30.9 million TEU (twenty-feet equivalent units) of cargo capacity handled in 2019. For companies like SABIC, Singapore and Malaysia transhipment hubs manage 75% of the company’s product volume in Asia.

Asia remains the most important export market for Singapore’s chemical industry. China accounted for 14% of Singapore’s chemical exports in 2018, while Korea, Japan, Indonesia, Thailand, Malaysia and India together represented 34%. ASEAN (Association of Southeast Asian Nations) is seen as one of the next growth opportunities for the industry, with countries like Vietnam and Cambodia growing at over 7% GDP before the pandemic. The rise of middle-classes, together with higher disposable incomes and fast industrialization create opportunities in both consumer and industrial markets.

Singapore is perfectly positioned to tap into the region’s multi-billion market, not just by virtue of its focal geographical location, but also thanks to the country’s open trade policies, transparent rule of law, pro-business tax system, and ease of doing business. Setting up a new business in Singapore takes 1.5 days, according to the World Bank Group.

In 2020, Singapore launched its variable capital company (VCC) scheme to allow for an easier injection and withdrawal of funds, as well as easy segregation of assets for tax purposes, to attract more businesses to place their funds in the country. Such policies have earned Singapore the nickname of “The Switzerland of Asia,” turning the country into a magnet for FDI. According to the World Investment Report 2020, Singapore is the world’s fifth-largest recipient of FDI inflows, after giants like the US and China.

Exploring foreign grounds

While developing ASEAN countries present tremendous opportunities for chemical suppliers, these are often fragmented markets that require a high level of local knowledge. “In many Southeast Asian markets there are many local heroes that are fast developing, yet they are not known in the West,” explained Laurent Nataf, CEO and president Asia Pacific of Belgium-based distributor, Azelis.

To reach these smaller customers, distributors with an intimate knowledge of cultural aspects like local food habits, but also the capacity to innovate around these requirements, play an essential bridging role between large MNCs and local players.

Founded in Singapore in 1963, Jebsen and Jessen Ingredients calls Southeast Asia its home turf. CEO Siew Tin Lim renders that having “boots on the ground” in countries like Myanmar, a last frontier in the chemical distribution space, is paramount: “China and Southeast Asia are some of the most complex regions in the world, with diverse cultures and business practices. As distributors, we have to be able to nimbly assess the ground and leverage our local knowledge and networks.”

Some local distributors are stepping outside of their well-known territories. Linkers Far East (LFE), a marketer with a footprint in South Asia, the Middle East, and North Africa, is taking to the African continent in a bid to diversify the business. Shamsher Zaman, managing director at LFE, is confident that the company’s 40 years of experience and reputation in the market will grant its future success in countries like Nigeria, Kenya, and Tanzania: “LFE works as an extended arm for our suppliers in Asia. With our branch offices and staff present on the ground, we have up-to-date intelligence and market reports which provide great value addition to our principals to market their chemicals and polymers through us,” Zaman said.

Though the pandemic brought business travel to a halt, limiting international ventures, this has not stopped some players from setting foot in new markets. German distributor HELM Asia, operating from a Singaporean regional head office, established a new distribution company in Thailand in 2020, to strengthen its position in ASEAN and respond to one of its partner’s needs for a local distributor in the country: “Despite encumbering travel restrictions and various logistical disruptions, we successfully obtained the necessary approvals and permits, as well as hiring the team and setting up local logistics infrastructure, all done remotely and in less than eight months. The quick turnaround proved that, while we think long-term, we can act fast and adapt in the most difficult of times,” said Daniel Loh, managing director and Head of Asia, HELM Asia.

In the consulting space, Paul Kau, EHS technical director for Asia at Golder, observed that service providers show greater understanding and readiness to tap into new geographies via the use of technology: “Partly accelerated by the pandemic, the execution of EHS provisions, for instance, has become flatter, more virtualized, and global. Together with the realization that work can be done virtually and without shaking hands, the thirst for better smart tech, data transfer and digital solution platform options will only continue to catapult our industry post-COVID.”

Both local know-how and the confident use of technology have allowed Singaporean chemical suppliers, distributors and service providers to serve fragmented or remote markets. The national trade agency, Enterprise Singapore, helped 1,600 SMEs in 2020 to grow overseas, particularly in Southeast Asia and China.

(More) Open trade

Compensating for a small domestic market and a limited workforce, Singapore is one of the most open economies in the world, engaging in Free Trade Agreements (FTAs) with over 20 countries. Its biggest trading partners are China (13.8% of total exports), followed by the US, Europe and Southeast Asia. Nevertheless, when counted as a whole, 71% of Singapore’s trade is intra-Asian.

Further consolidating its intra-Asian trade framework, in November 2020, Singapore signed the Regional Comprehensive Economic Partnership (RCEP) between ASEAN’s 11 member states and five dialogue partners - Australia, China, Japan, South Korea and New Zealand- somewhat controversially excluding India, who opted out.

Because RCEP adds onto a web of FTAs that the ASEAN bloc had already established with Korea, China, Australia and New Zealand, some commentators have questioned the added value of the new agreement. Tim Philippi, executive director at the Singaporean-German Chamber of Industry and Commerce (SGC) sees it as a modern trade pact, though “not as comprehensive and progressive as most of the EU trade agreements with Asian partners, like Korea, Japan, Singapore or Vietnam.”

Ow Kai Onn, vice president and Head of chemicals and materials at the EDB, however, is optimistic about the possibilities it can bring, judging from the impact of past trade agreements. The Singapore-India FTA signed in 2004 increased the value of plastic and rubber exports from S$117 million to S$1.15 billion between 2004 and 2017. Curiously, RCEP excludes India.

Even without India, RCEP covers a market of two billion people and represents 30% of all global trade. More interestingly, the new FTA sees ASEAN acting together in this signatory, strengthening the region’s role as a fast-growing economic powerhouse. Paul Nai, general manager at Lubrizol Southeast Asia, a company that has been in Singapore since 1984, believes RCEP motivates stronger geopolitical relations: “RCEP will make ASEAN more of a unified, single market: over 650 million people, many of who are young and very aspirational, drive both volume and quality. This is a market that can grow fast.”

Fortifying intra-Asian trade can also be read as a strategy to cushion against unpredictable trade inhibitors, like the pandemic or tariff wars. The WTO predicted that world trade would decline between 13% to 32% in 2020, on account of the pandemic. But even before the pandemic, the tariffs imposed by China and the US did not forgive the chemical industry, weighting significantly on price margins.

As the biggest single market for chemicals, China acts as a center of gravity for chemical producers. LyondellBasell acquired 50% in the Bora cracker and PE and PP project in China in 2020, reflecting a “producing for China, in China” approach. This “China for China” strategy has every chance to grow given the immense consumption market in China, but China can no longer win over manufacturers on a low-cost advantage. In fact, more producers are checking opportunities in Southeast Asia, which is more cost competitive.

Another factor that will contribute to a bigger shift from China to Southeast Asia is the chilling effect of Chinese policies. KPMG reported that more manufacturers are looking at alternatives in the region to ringfence China. Chemical Specialties Limited (CSL), a contract manufacturing provider based in Singapore, saw many of its MNC clients with production in China considering outsourcing their production to Singapore to avoid the up-to-25% US tax on imported Chinese goods. Johnson Lai, vice president at CSL, noted that even domestic Chinese manufacturers look at Singapore as an alternative production base to bypass US fees: “Singapore is becoming an intersection not just for West-East chains, but also for East-West flows,” said Lai.

China inspires caution also as a consumption market. Canadian-based Nauticol Energy, which is building one of the world’s largest methanol facilities, had every reason to take a China-first approach, as the country is the largest consumer of methanol. However, it decided to diversify its global blue methanol supply to Southeast Asia, partnering with Singaporean trader Fortrec who will be in charge of distribution: “To mitigate disruption risks, we proposed Nauticol a diversification strategy that sees half of the product sent to China, and the other half dispersed to different countries, including South Korea, Japan, Taiwan and Southeast Asia. Another argument for this broader portfolio approach is that China is very price-sensitive, which may be a barrier to the blue methanol ESG premium. Other countries in the region are more prepared to pay for a premium, enabling higher margins,” said Michael Lambert, CFO at Fortrec.

The past 20 years marked big shifts in Asian chemical trade flows. Where it once mostly imported chemicals from Europe and Japan, China is now sending its own chemicals overseas. Singapore and Shanghai are two of Asia’s key international hubs, one with greater hold in Southeast Asia, the other in Northern Asia, but, while one asserts greater individualism, the other vouches to stay open.

Image courtesy of Cameron Venti on Unsplash and Neste