Regionalization
The double opportunity of backward integration and regional distribution
SEA benefits from being seen as a single yet diverse market which brings two crucial opportunities: The first is the opportunity of backwards integration. For example, through JVs like the BASF-Petronas Chemical (BPC), Malaysia’s upstream resources were married with BASF’s product capability and global markets, to create a competitive producer of acrylic monomers, oxo alcohols, and aroma ingredients. Malaysia and Indonesia bring opportunities not only to integrate into the classic petrochemical value chain but also in oleochemicals, the two nations accounting for over 80% of palm oil production globally. Thailand also brings a bio-feedstock advantage through the sugar-to-ethanol and sugar-to-polymers value chain, as the world’s third biggest sugar producer after Brazil and India.
Besides obvious cost and supply chain advantages, backward integration comes with the added benefit of supply chain transparency, as KLK OLEO, the oleochemical division under the Kuala Lumpur Kepong Bhd (KLK), one of the largest plantation companies in Malaysia, explained: “From a purely commercial perspective, our vertical integrated model is less important because we procure raw materials at market prices, but from a sustainability perspective, being able to provide end-to-end traceability is an indisputable advantage as many of our large customers like to ascertain the provenience of their products,”said Lee Jia Zhang, Chief Operating Officer at KLK.
But the biggest opportunity that SEA brings is to supply the entire region. This can only be realized by establishing robust logistics and distribution channels. Singapore has proven how, with a very small local market, a country can become one of the top petrochemical centers as long as it is well-connected to its export markets. Singapore is the biggest transshipment hub in the world, utilizing to the most its geographical positioning, trade relations, and port capabilities. But Malaysia shares these assets too, and its largest port, Port Klang, does not lag far behind Singapore, as the second largest port in the region and the 12th largest in the world, with a container throughput of 13.7 million TEUs in 2021. In the Straits of Malacca, the busiest shipping lane in the world, crossed yearly by 100,000 ships, Port Klang is growing its transshipment capabilities, acting as a distribution hub for imports and exports into the region. On the East side of Malaysia, Kuantan Port also enjoys strategic positioning within the fastest shipping route to China through the South China Sea.
Logistics companies are seizing the opportunity of regional distribution from Malaysia. Three German players - Steinweg Logistics, Leschaco, and Talke Logistics - have invested in local facilities in the country. Incorporated in 1991, Steinweg became the first LME (London Metal Exchange) approved player to operate in Johor Port and Port Klang Free Zone. Leschaco recently opened its brand-new 120,000 ft2 warehouse for chemicals and dangerous goods (DGs), while Talke is building an 18,000 m2 facility with a total capacity of 26,000 pellets within Port Klang: “Strategically located within the port, the warehouse will serve the regional distribution of chemicals coming from the US, Europe, the Middle East, and, to some extent, China, into the domestic market and the wider region, including India, Australia, and Far East countries,” commented Vijaya Kumar Puspowanam, managing director at Talke Logistics Malaysia.
Subramaniam Karuppiah, the general manager of Port Klang Authority (PKA), the statutory body representing Malaysia’s biggest port, highlighted the role of the ports in binding the relationship between Southeast Asian nations: “Malaysia is interdependent with its water and land neighbors, including Singapore, Thailand, Indonesia, the Philippines, and the pandemic has shown us we cannot work in silos. We need to give up the old, manual and isolated ways, and embrace more collaborations because trade is globalized,” he said.
A fragmented market is weaker in a globally fragmenting world
When Indonesia, the world’s biggest palm oil producer, imposed a tax on palm oil exports, it shocked the global palm oil market, creating cost disparities of up to US$500 between local Indonesian buyers and foreign buyers (importers), explained Datuk LC Saw, president of Evyap Sabun Malaysia, one of the largest oleochemical producers in the region: “This government-driven difference in the price of feedstocks between Indonesia and Malaysia is a challenge for our country. As a result, raw materials supply to make oleochemicals is more limited in Malaysia compared to Indonesia,” he said.
With the crisis in Ukraine ongoing, a continually sour relationship between China and the US, and the pandemic all disrupting global supply chains that were once thought unbreakable, the world has become a riskier place for globalized investment. Manufacturers are looking to safeguard their supply chains by producing regionally, and, ideally, away from any political spats. Southeast Asia has long been recognized as a politically neutral and stable region, on top of being cost-competitive. This has made it a logical choice for the shift to “in the region, for the region” manufacturing.
Global trade will grow at a slower average rate than GDP in the next nine years, found a study by the Boston Consulting Group (BCG). While trade between the EU and Russia will shrink by US$262 billion between 2023 and 2031, and trade between US and China will decrease by $63 billion through 2031, ASEAN will increase its trade with a China, Japan, and the EU, emerging as the main beneficiary of the redrawn trade map. BCG projects ASEAN trade to be boosted by more than US$1 trillion through 2031, with ASEAN exports surging by nearly 90%, against a global trade of less than 30%.
“In the region, for the region” investments are expected to continue. Covestro has made multiple investments at its Map Ta Phut site in Thailand in the last few years, having recently completed the first Naphthalene-Diisocyanate (NDI) plant outside of Europe, and is currently pursuing two main expansions: double-digit investment to increase capacity in engineering plastics, including the capability of recycling of polycarbonate, and, announced this year, to expand specialty films production, which will be the most advanced specialty film facility of Covestro in Asia. “Thailand has been sitting in the sweet spot over the past few years, in between the energy crisis, geopolitical issues in Europe, and strict COVID measures in China. Different governments and multinationals are looking to diversify their operations within APAC, a strategy that has become known as ‘China Plus One,’” said Timo Slawinski, managing director at Covestro Thailand.
Japanese company AGC recently announced its largest-ever investment in new soda ash capacity in Thailand. Tremco Construction Products Group (CPG), a leader in construction-related products like sealants and coatings, is investing in a second factory in Kuala Lumpur, Malaysia, from where it will supply to APAC and beyond. To protect this advantage of being seen as a location of regionalized production, Southeast Asian countries must direct their policies towards collaboration for mutual benefits; there is a risk that, by looking inward at the development of secure domestic supply chains, countries in the region end up being seen as protectionist and insulating themselves. To provide a refuge against the trend of global fragmentation, Southeast Asia itself must become more consolidated.
“Thermax's internationalization strategy involves expanding its presence in key markets worldwide through organic growth and strategic acquisitions. The company has established presence in 90 + countries with 14 manufacturing facilities across the globe, including a manufacturing plant in Indonesia specifically catering to the Southeast Asian market.”
Dinesh Badgandi, Head of International Business Group, Industrial Product Group, Thermax Limited
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