Trade and Distribution
Stronger links
Singapore’s astounding economic ascent to become one of the richest countries in the world has much to do with its establishment as a central trading hub perfectly located at the heart of Asia. In the 19th century, Singapore was already a significant trading node for spices, rubber, tin, and oil. Today, 30% of all Asian trade passes through its shores, the small island being home to the world’s biggest transhipment hub and the second largest port after Shanghai’s. Following up on this legacy, trade continues to be put at the forefront of its growth strategy. As part of the government’s Trade 2030 plan, Singapore aims to increase its export value from its current S$805 billion (2020) to S$1 trillion by 2030.
Even more important than growing its own exports is the country’s goal to double its offshore trading value from US$1 trillion to US$2 trillion over that same period: “Singapore’s economic weight lies not just in the volume of the products we make and export, but also in how deeply and widely we are plugged into the global trade flows,” said Lee Pak Sing, assistant chief executive at Enterprise Singapore (ESG), the national agency responsible for trade.
To plug itself deeper into international trade flows, as Pak Sing said, Singapore is working together with investors to help them expand in R&D, sustainability, innovation and digitalization; areas that would make the country an indispensable partner for value-adding co-creation, rather than a simple platform for buying and selling.
According to ESG, about 400 companies are using Singapore as an offshore trading hub. Singapore is often the first choice for both chemical traders and distributors, chiefly because these players follow their customers who have also made a base here. For American multinational 3M, the country acts as the Southeast Asian hub for six markets in the region. Since 1966, 3M has invested over S$1 billion in the country and employs over 1,800 people, operating three facilities. By contrast, food ingredients producer Tate and Lyle chose Singapore as the HQ of its “growth markets,” a string of growing territories stretching across Asia, the Middle East, Africa and Latin America, even though the company does not produce in Singapore; instead, it was the city’s excellence in research and highly skilled scientists, engineers, and other professionals that convinced Tate and Lyle to pick Singapore.
Besides being close to their customers, who are equally committed to investing in the island, traders and distributors also relish the easy access to APAC, a region that hosts blockbuster economies lincluding China, India, Japan, Australia, and Southeast Asia, the latter being set to become the fourth biggest economic force in the world. Rather than relying solely on its innate geographical advantage – as Singapore is only eight hours flight away to the further capital cities in the region and under two weeks’ shipping time to any of the major regional ports – the country also worked hard to create an environment of few fiscal and cultural barriers. Singapore has forged strong alliances both East and West, building an identity as the intersection of multiple influences, all the while remaining conspicuously true to itself; independent and mostly politically neutral. Both its cultural heterogeneity and its thorough trade agreements have been critical for traders and distributors operating in the country.
Arguably the most important relationship is the double love affair Singapore has entered with both Western countries and China. A smart move in which Singapore construed a dual identity as both a proud Southeast Asian nation with a strong Chinese and Malay inheritance and a Western-like free-market economy is by introducing English alongside the mother tongue (Mandarin, by majority) in 1987. At a more visibly pragmatic level, Singapore is an unfailing actor in the biggest and most important trade agreements, either on its own or as an ASEAN member (see infographic). Recently, Singapore signalled it wants to join the new Indo-Pacific Economic Framework (IPEF), a coalition led by Joe Biden. At the same, Singapore supports China to enter the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), an 11-countries alliance that stretches from Singapore and Japan across the other half of the Pacific to Canada and Mexico – but it excludes, so far, China.
Most recently, Singapore has worked on coalitions specifically focused on the digital economy, once again, leaning both east and west. In June this year, Singapore’s bilateral digital economy agreement (UKSDEA) with the UK entered into force, sealed with three MoUs on relevant themes like securing end-to-end digital payments and customer protection. At the same time, Singapore entered two MoUs with China to promote cooperation in green development and the digital economy. Meanwhile, Southeast Asia e-commerce is fast-developing, having reached a gross merchandise value of US$120 billion, according to the latest e-Conomy SEA 2021 report. A proper digital infrastructure is thought to be a great opportunity for specialty chemical distributors, in particular, to access a widely fragmented market. “If prior to the pandemic about 4% of all consumer sales were channeled online, now over 20% of consumer sales are realized via e-commerce platforms,” said Kevin McGuigan, VP and MD at 3M Southeast Asia.
55% of petrochemical buyers and 82% of specialty chemicals buyers surveyed in Europe by McKinsey said that they would be willing to adopt digital channels. In a fragmented marketplace like Asia, a digital go-to-market approach that aggregates products by application makes even more sense, reducing lead time and allowing for better product tracking. Tradeasia International Group, a 20-year old chemical trader based out of Singapore, has started off with a single digital portal and developed multiple B2B chemical marketplaces dedicated to different verticals for the trading of polymers (Plastradeasia.com), fertilizers (Fertradeasia.com), rubbers (Rubbertradeasia.com) and the circular economy (Scraptradeasia.com), just in the last year. The country portals have helped Tradeasia to enter different global markets both for sourcing and marketing, introducing the trader to suppliers and customers worldwide: “What we see today is really a second wave in the development of B2B Chemical Marketplaces as the chemical industry is getting more evolved in adopting digital marketplaces. While customers on these marketplaces may not have adopted digital payment methods, they certainly have started looking for distributor led platforms wherein they can buy a whole range of their requirements in one location.”
“More than ever, it is essential to be close to the market and have our feet on the ground to be able to react immediately when our support is needed. While demand is certainly there, supply challenges from raw material shortages to semiconductors, but also other materials, are a big challenge. The sentiment is that it will not be resolved in the short term and is likely to persist throughout 2022.”
Michael Goh, Managing Director, SICK Singapore & Southeast Asia
Troubled waters
Even before the pandemic, Singapore’s economy had slowed down due to global trade disruptions. For the small country dependent on exchanges of products not necessarily manufactured within its borders, the rhetoric on localization is worrying, as trade routes are ruptured and remodelled. Furthermore, market conditions for traders have become increasingly unsteady. Many of the world’s largest chemical traders, like Integra Petrochemicals, began in Singapore before achieving global success, and many other younger players rose to success with impressive speed. In just over a decade, independent trader Kempar Energy is trading 600,000 million tons/year, and expects to reach a 2022 revenue of US$400 million. However, entering this market is becoming more difficult: “If I had to start Kempar Energy today with the resources I did 10 years ago, it would be a lot more difficult to get a loan signed off,” confessed Nikunj Parekh, the founder of Kempar Energy.
Parekh explained that the financial environment for trading companies has suffered considerably in the past few years, affecting those that lacked a large paid-up capital: “After the pandemic and the commodity crash in 2020, a lot of the traditional commodity financing banks either pulled out or became increasingly risk-averse, to the extent that they would only finance the ‘big boys’ of trading like Trafigura, Glencore, or Vitol. In this environment, new players do not stand a chance.”
According to the Monetary Authority of Singapore, the country’s banking sector has a total asset size of almost US$2 trillion, and this has grown continuously over the past two decades, from under US$1 trillion in 2004. Despite Singapore’s growing position as a financial hub, traders have lost some of the trust of the lenders after the biggest trading firm on the continent, Hin Leong Trading, left creditors and liquidators with billions in debt, not recouped to this day. This is thought to be the biggest legal case in living memory in Singapore, according to Reuters. “After the incident with oil trader Hin Leong Trading owning billions to 20 major banks, international financing turned incredibly cautious towards traders. This was a big blow for most mid-size companies like us,” said Venkatesh Raman, managing director of American trader Chemium International.
Chemium closed its Asian operation in Singapore and now only trades under its American and Swiss entities because of the difficulties around financing in Singapore. However, Raman noted that hedge funds are now looking with more interest at the petrochemical industry: “I can tell you for sure that money is in the market, but the market can be your friend or your enemy,” he said, adding: “Singapore is evolving as a financial market also as a consequence of banks reshoring their HQ from Hong Kong, and a lot of Russian money is either moving to Dubai or Singapore.”
Some banks have moved or think of moving their base to Singapore as a backup alternative to Hong Kong, which has been losing its status as a preferred financial hub ever since the 2019 national security law, and even more so under the tight zero-Covid measures under mainland China’s policy.
Image courtesy of Pexels
“The Sino-American trade tension and rising labor costs in China during the pandemic can also induce an outflow of investments to ASEAN. Whereas a mature market like Singapore is slowly getting back to pre-pandemic demand levels, emerging countries like Vietnam, the Philippines and Indonesia have not only already recovered to 2019 levels but are also seeing bigger FDI flows.”
Zhang Xi, Vice President, Southeast Asia and Managing Director, Air Liquide Singapore
Singaporean traders know well that the traditional trading business model is fraught with risks. Even though they have been reaping higher margins as a result of higher commodity prices, securing orders and paying for logistics have intensified the risk burden. Freight prices have doubled and tripled for some routes, and the entry barriers have become higher as it is increadingly difficult to secure a shipment except for large orders. “Although we face a period of heightened instability, this is one of the best times to ramp up our margins. One challenge, however, is the cost of shipping: Freight prices from Southeast Asia to Bangladesh used to be under US$1,000 per ocean freight (for dangerous goods). Today, the freight is more than double or triple,” said Kelvin Smith, the founder of Absotech, a local trader.
Like others, Absotech has diversified its revenue generation by adding a proprietary blend formulation business, whereby the products are sold directly into end markets including oil and gas, construction, and agriculture. Stabler prices, higher margins, and higher entry barriers that deter competition have been the key considerations for the trader. Bigger traders are also vertically integrating both upstream and downstream. Backward integrating its trading business, Integra Petrochemicals is now trading more products from its Chinese shareholder producer, QXTD; moreover, the giant trader also acquired 50% of a European distributor and is growing its distribution business considerably. Commenting on the move, Integra’s CEO Gina Fyffe said: “We are not a typical distributor, but believe it comes down to efficient supply chain management from manufacturer to customer. Handling the distribution allows us to have better control over inventory because we can directly handle the trucks and barges on one side and the production and shipping on the other.”
German distributor HELM has also recently announced a new JV with SPCI Group, a Malaysian/Singaporean chemical producer with a large foothold in Southeast Asia. The trend to cut the value chain, traders integrating with distributors, and distributors with manufacturing, is an unsurprising protective reaction to the instability seen in the markets.
Image courtesy of Pexels
CONCLUDING THOUGHT
“The pandemic drove e-commerce, and we have seen a 2-5% growth in the demand for related logistics solutions. Learning points include understanding the demands and expectations, being able to meet the speed of delivery at the lowest possible cost, and the need to increase warehouse capacity. Taking these into consideration, we are working out strategies to ride the e-commerce boom, which we expect to continue.”
Tobias Bartz, CEO and Chairman, Rhenus Group