By Sarah Townsend
Petrochem founder does not mince his words as he warns that the current dire situation of the petrochemicals industry is here to stay, and reveals his dramatic plans to restructure in a bid to remain one of the region’s biggest players
The good news is over and the petrochemicals industry is facing a “new normal”, the head of the Middle East’s largest independent distributor, Petrochem, says bleakly.
Yogesh Mehta, who has led the company’s 25 years of spectacular growth to become number one in the region, says “tight margins, low oil prices, a glut of supply and aggression from everywhere” are here to stay.
Petrochem had been working with gross margins of between 8 and 9 percent and net margins of about 4 percent until 2014. Net margins have now dropped to as low as 2 percent.
The billion dollar company, which exports more than 700,000 metric tonnes (MT) of products worldwide, still has a “healthy cash flow, deep pockets and a reputation for quality”, but Mehta admits the past two years have been tough.
“Our business is very challenged at this time. In the past two years, the landscape of the global chemicals industry has changed. Partly because in China — the factory of the world — there is a big oversupply situation and demand has gone down,”he tells Arabian Business.
“Margins are lower, there is more competition — my manufacturers now want to do my [distribution] business in addition to their own — and, actually, this is a very hostile environment.”
The fall in oil prices from above $100 a barrel to barely $50 also have not helped. And Mehta does not see it picking up any time soon. “It has deeply affected our business and I believe low oil prices are here to stay,” he says.
“Normally, our business is cyclical: a seven-year ‘good’ cycle, followed by one difficult year, then it comes back. But I think we are still in the middle of this dark night. We are in a chemical recession that could last until the third quarter of next year, and really, I think the good news is over for the petrochemicals industry.”
These are strong words from the man who recently completed a fourth expansion of Petrochem’s terminal in Jebel Ali Free Zone, and who told local media in February that the chemicals industry had turned a corner and was set to stabilise in the ensuing months.
Today, though, he says: “We haven’t seen anything like this before. People have to understand the new normal and businesses must improvise and change accordingly.”
If there was any doubt over Mehta’s conviction in his own words, he is putting his money where his mouth is and preparing to oversee Petrochem’s biggest structural transformation since the Indian businessman founded the company in Dubai in 1990.
For the first time, Petrochem is planning to expand into chemicals manufacturing. It is in talks with two interested parties, Mehta reveals, and hopes to have entered into a joint venture by the end of next year.
The plan is to team up with a specialist chemicals manufacturing company — Mehta declines to reveal which product area he is targeting — and Petrochem would take over their distribution arm. It would start operating in the Middle East and expand in years to come, but the joint venture partner could be a world player, not necessarily a Middle East firm.
The deal would reduce operating costs for both parties, Mehta says, as it would cut out the middle man in the form of hefty supply and distribution contracts on which each company relies and prevent Petrochem from having to store products for a long time, “which reduces our profitability when there is price volatility in the market”.
“It would be a case of a manufacturing company wanting to get into distribution and we want to get into manufacturing. At the moment we do nil — only blending and distribution — but we want to produce chemicals and then resell, instead of buying from somebody else,” Mehta says.
A joint venture also would reduce Petrochem’s freight costs. “Our business relies on a hub and spoke operation. We don’t want to manufacture for the sake of it; we want to produce products [and] we know have a demand here,” he says.
“If you manufacture in the Middle East — that is, producing chemicals in your own backyard — you can reduce freight costs and transit time to the customer rather than spending a lot of money transporting goods.
“Goods coming from China have a $70 per tonne freight value; by producing here the freight value shrinks to $10-15 per tonne. Therein lies a small delta, which is why we need to produce.”
Petrochem plans to invest about $100m in capital expenditure required to restructure the business and an additional $150m of equity directly into the joint venture.
An estimated 40 percent of this would come from bank financing and Mehta says he is in talks with several banks “who are very keen”.
“We enjoy very good relationships with the banks; we have a reputation for quality and professionalism and have never had a default of any kind.”
While he hopes a deal will be signed by the end of 2016, the new venture will require a two-to-three-year gestation period. “It won’t happen with a magic wand,” he states.
At the same time, the company plans to halve the number of products it distributes from 85 to 45 over the next two years to adjust to the tougher climate. “There are many chemicals that don’t make money for us and we want to provide better services for our customers.”
One such group of chemicals is aromatics, which are derived from crude oil and used to manufacture a large range of consumer products. “This was our bread and butter business,” says Mehta. “But it was not making money for us and we have gradually phased it out as we restructure the business.”
He insists the company has not made any redundancies — “the kneejerk reaction when the industry is suffering” — reasoning that if you let people go, you let experience go, too.
However, he regrets not making strategic changes to the company three or four years ago. “We could have saved money and by now would have been ready to fight this new landscape and actually be competitive in it. We delayed our thinking process but now we’ve woken up.”
If this year’s results are an indication, it seems they have woken up. The company has so far performed 17 percent better this year than last, Mehta says. Revenues in the 2014 financial year were about $1bn compared to $850m in 2013. It is not good enough for Mehta, though. In an interview with Arabian Business in 2013 he said the aim was to become a $3bn business by 2015 — a target he has missed.
“It is by far impossible, and I think it remains a distant dream,” he concedes. “The value of the product has gone down by about 30-35 percent, and as oil prices go down the price of downstream chemicals goes down too — what was $1,000 per tonne is now $700 per tonne.
“To achieve that high turnover you need higher prices, which we just don’t have now.”
Petrochem has offices in Dubai, London, Egypt and Antwerp, plus office and distribution facilities in Singapore and China and its flagship terminal in the Jebel Ali free zone, which handles more than 180 different types of chemicals.
Mehta says Saudi Arabia, Egypt and India are the company’s biggest markets. However, the Indian distribution business was scaled back to about 20 percent three years ago to minimise the “huge” currency risk that ate into margins. Petrochem’s second terminal in Egypt remains a solid market for the company, he says.
Meanwhile, the worst hit markets are in Africa, especially Ghana and Nigeria, mostly due to depreciating currencies.
The UAE remains one of Petrochem’s most lucrative markets, but again Mehta is gloomy about the future.
“You can see for yourself this country has become recessive. The retail is suffering, the real estate has come down, the stock market is performing poorly — these are all signs of negative growth,” he says.
“I think we are overbuilt here. We all need to relax and calm down a little bit, anticipate lower margins and a normal life.
“Dubai is a great city and the UAE is a land of opportunity — it made [Petrochem] what it is today. But, you know, you have to be clever and move with the times. The big mistake people are making is to remember 2008 as a big debacle that eased in six months, and presume that the problem we have now - that began in 2014 - is going to correct itself in the same way. I’m telling you it is not going to end. The whole world has got a problem and we need to attune ourselves to it.
“Look at which countries are growing today? China was growing at 11 percent, now it’s 4.5 percent, or less, and the BRICS [Brazil, Russia, India, China and South Africa] countries have not grown as much as they were supposed to, and Brazil in particular has crashed.
“There is that domino effect for the non-performance of the rest of the world that will affect our private homes. I think the good days are gone.”
To illustrate his point, Mehta recalls business meetings before the crisis of 2008: “People were saying things like, ‘oh, we haven’t made a million here, what’s going on?’ People got too greedy. Too greedy and unreal. It’s better to invest small and invest clever and not expect quick returns. Let’s live more modestly and we will be fine.”
Mehta’s plan for an initial public offering (IPO) in India by 2015, revealed in Arabian Business two years ago, also have been delayed until at least 2020.
“We found we would has to move those goalposts because the company isn’t ready yet,” he says. “I think it will be 2020 before it makes any sense to draw value from the company. The market does not support it right now.”
Over the coming years, Mehta’s son Rohan will play a bigger role in Petrochem’s management. With a BA in Business from Northeastern University in Boston, US, he has spent two years working for chemical refineries in Texas and says he brings to Petrochem experience of the “upstream” end of the oil and gas sector.
Also speaking to Arabian Business, he describes Petrochem as a “chemicals supermarket” and is looking forward to getting more involved with the business. In the meantime, however, he is working to grow his events management company Raging Tiger, which organises concerts, balls, Bollywood evenings and other upmarket events across the UAE.
The company has staged 11 events in the 18 months since it launched and has another four planned between now and the end of March.
Mehta Junior intends to hand over greater control of Raging Tiger as he spends more time with Petrochem, but says he will not seek to sell it until at least after Dubai Expo 2020.
His father explains: “We need to fatten up ‘the Tiger’ - it’s just a baby at present.”
With the planned move into chemicals manufacturing and a young Mehta on board to help take the company into the future, Petrochem is positioning itself for ever more growth and prosperity, even if, as its founder says, the “good times are gone”.
This has been one of the most refreshing and honest articles in a VERY long time.
Thank you Mr. Mehta for enlightening the actual situation.
Greed is exactly what has consumed the global economy and the people responsible are still reluctant to let it go.
Companies, industries and sectors definitely need to revise their margins which is the only way to stabilize the market. Or else we are looking at an extremely long term slogging behavior to achieve the impossible, aimlessly.
Kudos Mr. Yogesh Mehta........
No nonsense, completely transparent & absolutely unpretentious interview.....well done!!