Brenntag Views on the Global Market
March 11, 2021
Logistics crisis to persist into Q3 as availability trumps pricing – Brenntag CEO
Author: Will Beacham
BARCELONA (ICIS)–The global logistics crisis is expected to last at least until the third quarter of 2021, and is making availability of product more important than price, according to the CEO of Brenntag, the world’s largest distributor.
Global chemical supply chains are under intense pressure thanks to the US Gulf polar storm, which knocked out a significant proportion of production capacity there, and ongoing problems with shortages of shipping containers plus road transport delays.
The supply crunch has led to record-breaking prices and panic buying by some consumer industries which are desperate to maintain security of supply. Apart from the US storm damage, planned and unplanned outages elsewhere are adding to the problems.
In an interview with ICIS, Brenntag CEO Christian Kohlpaintner, said he expects the shipping logistics disruption to last at least until the third quarter of the year, though Brenntag itself has been able to maintain supplies to customers.
“Logistics costs and container prices are sky-rocketing by three to four times and we don’t see any relief over the next one or two quarters. It’s the China to Europe route but it’s the same everywhere – colleagues in Asia have been talking to shipping companies which indicated this will last well into Q3.”
Across many customer industries, maintaining security of supply has become most important. ICIS has reported that some downstream users may have to close production facilities because of a lack of feedstocks.
The problem is particularly acute for the US auto supply chain, which is running short of polyurethane (PU) feedstocks.
According to Kohlpaintner: “Today it is not product price which is decisive, it is product availability which is decisive. We have to behave very responsibly in times of shortages and maintain supply to the market, to fulfil contractual obligations.”
ICIS analysis shows that around 20% of US chemical capacity is still offline following February’s Gulf polar storm. Although plants are gradually restarting the disruption is expected to last for weeks or even months.
Kohlpaintner said Brenntag has been hit in the US by the storm with some of its facilities not operational for four to five days. “We could not ship to customers because of the polar storm. Now there are shortages in the market clearly visible which we are trying to navigate.”
US supply chains are constrained right now, he added, and it will take time to get product lines restarted and replenished.
Despite the ongoing logistics problems, Kohlpaintner said Brenntag’s size and reach means it has been able to maintain supplies to customers.
“Fortunately, for the time being we have not interrupted supplies to our customers. This is the strength of Brenntag with multiple supply chains and the ability to operate independently.”
He pointed out that strong competition to get reservations for space on containers is driving pricing up. The company is also experiencing short notice cancellations from shippers which means it has had to increase the use of air freight for critical products.
He said a key learning from the pandemic was the importance of maintaining these relationships. “The industry behaves very rationally and logically – it values long term relationships and that is the way it should be.”
He pointed out that the supply shortages have been made more challenging because underlying demand is good in almost all industries.
In 2020 Brenntag only announced three acquisitions with a total enterprise value of €46m, yet the company sets aside €200m-250m/year for mergers & acquisitions (M&A) activity.
Kohlpaintner said the company is maintaining that €200m-250m guidance, but pointed out it is an average figure.
He added: “Last year was a challenge for M&A with Covid. The sector was very quiet for four to five months starting in March until September, then it quickly picked up again.”
Since the CEO took over at the start of 2020 he has sharpened its M&A focus on emerging markets, especially Asia and China in particular. He also targeting larger acquisitions, which give a meaningful boost to operating earnings.
The acquisition of China’s Zhongbai Xingye in January 2021 fits all these criteria, and is seen as the first step in this direction
Zhongbai Xingye distributes food ingredients and had annual sales of €146m in the 12 months to June 2020. Brenntag will first acquire a 67% stake, with an enterprise value of around €90m, in the first half of 2021. It plans to boost this to 100% by the end of 2024.
Kohlpaintner said: “The M&A market is now very vibrant and active. It’s a good time to sell for people who want to – multiples are very high, and people like us who want to act as consolidators are looking for opportunities.”
WORKING CAPITAL CONTROL
Kohlpaintner was unhappy with the way working capital had been employed, identifying a decline in the last half-decade years. He asked managers to improve focus on working capital and gave the CFO a clear role in managing it.
“Brenntag is very decentralised with local business and customer proximity a key strength. However we can ask housekeeping questions about inventory levels, and whether to keep slow-moving product lines – this is what we did in 2020.”
Trading conditions in 2020 allowed inventory to be kept under control: “We had massive volume declines in 2020, especially in the second quarter, then gradually recovering. But volumes were still well below 2019 and in this situation you can harvest working capital which had been tied up in inventory.”
CAUTION FOR 2021
In this week’s full year 2020 financial results, Brenntag gave 2021 earnings guidance of €1.08-1.18bn operating earnings before interest, tax, depreciation and amortisation (EBITDA) compared with €1.06bn last year. The guidance assumes an uplift from its Project Brenntag initiative, M&A contribution and stable exchange rates.
Kohlpaintner commented: “The first half is not yet clear – we have the impact of strained supply chains and we still have Covid shutdowns everywhere. I am more optimistic for H2 on the recovery.”
PROJECT BRENNTAG UPDATE
The CEO said Project Brenntag, which aims to boost profitability, is progressing to plan. Reporting for the two new divisions – Brenntag Essentials and Brenntag Specialties – will begin in the first quarter of 2021.
Of the 100 sites targeted for closure, 30 had been closed in 2020 while 200 out of 1,300 headcount reduction was achieved. The project gave a €15m contribution to operating earnings in 2020, which should rise to €220m/year from 2023.
CHEMONDIS TIE UP
Kohlpaintner sees the value in developing digital sales channels, and in October 2020 Brenntag signed a deal to put its brand on the CheMondis online marketplace. It also has its own digital sales channel, Brenntag Connect.
This is a pilot project, said Kohlpaintner: “It’s early days – we have agreed to put a booth on their marketplace. We want to understand how this additional channel to market will work. It’s clear that digital sales channels will gain importance so you will hear me talk more about this including Brenntag Connect.”