Logistics: Strengthening the supply chain

13 June 2008
Petrochemicals developers are addressing infrastructure issues ranging from weak processes and materials shortages to transport capacity, but a lack of skilled manpower is likely to slow progress.

The oil-fuelled growth that the Middle East has enjoyed over the past few years is not without its negative side-effects. While the benefits of the boom are self-evident, it has only recently become apparent just how much strain rapid economic growth is putting on the region’s infrastructure.

In the petrochemicals industry, as in other industrial sectors, every element of the supply chain is being stretched, from the availability of materials and labour to the capacity of transport facilities and the effectiveness of logistics processes. With supply chain costs accounting for 15-40 per cent of the total costs of petrochemicals products, it is an issue that cannot be ignored.

Port capacity in the region, particularly the Gulf, is being pushed to the limit. “The infrastructure does not exist to handle the volumes,” says Anthony Elwine, global head of petrochemicals at Denmark-based Maersk Logistics. “The big producers are starting to get worried.”

Spare capacity

In the UAE, the ports of Abu Dhabi and Jebel Ali in Dubai are beginning to struggle with demand. In Saudi Arabia, while the Red Sea port of Jeddah still has spare capacity, facilities in the Gulf hubs of Damman and Jubail are being squeezed.

With volumes traded at these ports expected to increase by 50-70 per cent over the next five years, immediate measures are necessary to ensure they do not lose business.

“Saudi Arabia needs more ports,” says Aamir Aka, director of Argon Consulting, a Bahrain-based specialist in supply chain management. “Ships are taking three days to unload, and customs and excise processes are slow.

“Yanbu [an emerging industrial centre] is 300 kilometres from Jeddah and the internal logistics are a nightmare. There is no railway and the trucking companies do not have enough trucks.”

Shipping capacity is coming under similar pressure. “The bulk shipping market has been tight in recent years and is still tight,” says Barrie Bain, managing director of Fertecon, a London-based fertiliser consultant.

Although container availability in the Gulf market as a whole is still in surplus, it is running short at specific ports such as Damman, Jubail and Qatar. “There is already a shortage of containers in certain ports and when more production capacity comes on stream in the next 12 months it will exacerbate the problem,” says Elwine.

Costs are also increasing. Oil prices are pushing up the cost of shipping and freight costs are rising.

While exact freight costs are difficult to measure given the variety of prices paid for individual vessels plying different routes, the upward trend is unmistakable.

Westbound freight costs are expected to double by 2010 and eastbound costs could increase by as much as twentyfold, according to an industry source - and this does not take into account the possibility of continued oil price increases.

Onward transport costs once the ships have docked are also rising, with manufacturing plants in China - a key market for Gulf
petrochemicals - moving further inland to avoid high land and labour prices at the coast.

The low value of petrochemicals in proportion to their weight, compared with finished products such as electronic and white goods, puts producers at a disadvantage when it comes to competing for limited capacity.

“If you have a petrochemicals company wanting to move goods at the same time as a retail or electronics company with a light cargo that is prepared to pay a premium, simple economics say that the business will go to the retailer,” says Elwine.

Poorly developed supply chain and logistics processes are also putting petrochemicals producers at a disadvantage. “Most of the petrochemicals industry is running with stocks in excess of 60 days, which severely affects their working capital and cash-to-order cycles,” says Elwine.

“None of the petrochemicals companies we know are using IT tools to track where their containers are. If they took a leaf out of a retailer’s book, they would see quite quickly that they are way behind the times.

“If you want to differentiate yourself [in the market], that is the level of detail you have to go to,” he adds.

Such is the competitive advantage that cheap Middle East ethane feedstock gives the region’s producers over those elsewhere in the world, that these issues have not yet become critical. But increasing transportation costs, improving service levels in the global industry and increasing competition between the region’s different producers means companies are gradually focusing on improving their supply chain management processes.

In an effort to overcome the limitations of existing port and shipping capacity, the biggest Gulf petrochemicals producers are starting to build their own infrastructure.

Petrochemicals firms Saudi Basic Industries Corporation (Sabic) and Rabigh Refining & Petrochemical Company, also of Saudi Arabia, are looking at building their own port facilities and Iran has its own petrochemicals shipping firm.

Producers are also beginning to address their supply chain issues. “There is a realisation that supply chain and logistics are key not only to the development of petrochemicals but also to economic development,” says Aka.

“A huge amount of investment is now going into logistics in terms of both infrastructure and processes.”

“Producers in the region are very aware of the issue and are putting in place corrective measures,” says the Qatar-based petrochemicals head of one European oil major.

One of the key problems is a lack of integration throughout the supply chain. Apart from exceptional cases where producers have access to their own port and shipping infrastructure, the links between production, transportation and distribution are poorly developed.

In some cases, the failure of producers to communicate effectively with shipping lines or, better still, to build an ongoing relationship with a specific operator rather than deal with them on a transaction-by-transaction basis, has meant that any delays to facilities coming on stream have resulted in ships sailing empty.

This is starting to change. “Petrochemicals producers are learning from their mistakes,” says Elwine. “Now they are engaging terminal operators, carriers and other logistics service providers to help get their product out.”

Logistics management processes are also being improved. “Companies like Sabic are looking at building central warehousing facilities and are beginning to introduce logistics best practice,” says Aka.

The kingdom is trying to address the problem by setting up partnerships between the major state hydrocarbons firms and the country’s leading technical universities such as King Fahd University of Petroleum & Minerals in Dhahran.

But in Saudi Arabia and elsewhere in the region, it will be a lengthy process. “The first part of recovery is the acceptance that there is a problem,” says Aka.

“[Petrochemicals producers] are no longer in denial about the logistics issues they face,” he adds. “But how quickly they can resolve them depends on how quickly the manpower question can be resolved.”

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